CBL Insurance liquidators have a High Court order that Danish insurer Alpha Insurance A/S repay EUR 25 million received just seven days before CBL was put into interim liquidation in 2018. Alpha itself followed CBL into liquidation several months later.
Alpha’s attempt to avoid repayment saw Alpha’s lawyers attempting legal somersaults around business concepts of what is a debt.
CBL’s EUR 25 million clawback relied on Companies Act rules requiring all payments made in a six month period prior to liquidation be repaid, unless the recipient can prove the company now in liquidation was solvent when making payment.
There was no dispute that CBL Insurance was insolvent when it paid across the EUR 25 million, part of a rescue deal to prop up the then failing Danish insurer. CBL needed Alpha to stay alive, otherwise CBL was at risk of being dragged under. It had provided reinsurance cover for Alpha’s insured risks.
The Reserve Bank, as insurance industry regulator for New Zealand insurers, was raising concerns about CBL’s solvency as far back as 2016.
Alpha’s argument in the High Court that it could not be forced to repay the EUR 25 million centred on legal definitions of insolvency and in particular what amounted to a ‘debt due’ in the context of the insurance industry. At law, a business is insolvent if it cannot ‘pay its due debts.’
Insurers are typically cash rich. Customers pay premiums upfront. Claims come later. The number of claims and the amount claimed in respect of annual premiums are not known for months, and in many cases years. Payments ‘due’ on a claim can take a long time to come home to roost.
Alpha Insurance said CBL had ample liquid assets at the time it paid across EUR 25 million. It could pay its debts. Potential future claims were no more than contingent debts, not ‘debts due,’ Alpha said.
Justice Becroft ruled actuarial assessments of future claims must be taken into account by insurance companies in assessing the ability to meet ‘due debts.’
Reserve Bank regulations require insurers to hold a capital buffer against potential future claims; a ‘solvency ratio’ determined by an assessment of the insurer’s potential future claims.
Potential liability for claims yet to eventuate and claims yet to be reported are calculated by actuaries using both historical trends and trends in current aggregated data. Long-range weather forecasts enjoy an exaggerated importance in the insurance industry; storm forecasts presage increased claims.
Professional accounting standards require insurers to report their outstanding claims assessment as a balance sheet liability.
Treating the actuarially assessed outstanding claims liability as a ‘due debt’ is the only way to reliably establish whether an insurer is cash flow solvent, able to pay its debts as they fall due, Justice Becroft ruled.
To decide otherwise would mean liquidation clawback rules would never apply to insolvent insurers, he said. Cash and cash equivalent assets would become the sole measure of solvency with the inevitability of future claims ignored.
re CBL insurance Ltd – High Court (8.04.24)
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