Legal aspects of buying and selling an insurance business

The insurance industry provides a vital service to millions of UK consumers and businesses. Any target business is, therefore, tightly regulated by a number of bodies, and a broad legal framework is established under the Financial Services and Markets Act 2000 (FSMA).

Buyers will seek and expect to be provided with full details of compliance history, including evidence that the Consumer Duty is embedded in all company processes and policies. Sellers should be ready to disclose previous regulatory beaches and interventions by regulatory bodies. This includes any action taken by the Prudential Regulatory Authority (PRA) in relation to capital and risk management standards and supervision of the firm’s activities. It also covers any interaction with the Financial Conduct Authority (FCA).

Apart from historical compliance matters, buyers may also face regulatory scrutiny into their ethical fitness to own and manage the new entity. Regulatory due diligence will inform almost every aspect of the deal, impacting valuation, timing, and the extent of any associated indemnities or warranties.

In people-centric businesses like insurance companies, the question of staff retention following transition to new ownership will always be a priority for buyers. In the insurance sector, the issue is of added significance for two reasons.

Firstly, senior managers and others carrying out regulated activities must be approved under the UK’s Senior Managers and Certification Regime (SMCR). Approval is a rigorous, time consuming process and buyers will want to ensure that as many certified staff as possible are retained post-completion. The cost of any retention agreements or incentive schemes for key personnel should be factored into the cost of the transaction. While the SMCR scheme is subject to ongoing reform, the core requirements of high ethical standards will always remain in place.

Secondly, there is an acknowledged shortage of skilled insurance professionals in the UK market. In our experience, a substantial number of deals in the sector are driven as much by buyers seeking to acquire specialist underwriters and other top talent wholesale as they are by the value of client databases and accounts.

Compliance with strict change of control provisions under FSMA will be a consideration in most insurance sector M&As. Any deal involving the transfer of 10% or more of the shares or voting rights, or where the acquisition will result in the buyer gaining ‘significant influence’ over the target entity, will be caught by the regulations.

It is the buyer’s responsibility to submit the relevant forms to the regulators and completion of the deal will usually be held up until approval for the transaction is obtained.

The process is time consuming and cumbersome and it is often essential to obtain specialist legal advice to ensure the process is completed as swiftly as possible and to avoid unnecessary delays in progressing the deal.

Regulators will examine closely the reputation of the prospective new controller of the business, their experience, and their financial soundness. Crucially, these provisions do not apply to asset sales (the sale of a book of policies, for example). This occasionally may dictate the deal structure itself.

Extensive due diligence is essential in any M&A. Failure to commence the process early on could delay matters, adding to transaction costs as unexpected hurdles appear that require urgent attention from both buyers and sellers. Ultimately, issues that arise late in due diligence could endanger the deal entirely.

For buyers, due diligence is all about uncovering hidden legal liabilities, establishing ongoing financial obligations, including outstanding taxation matters, and getting to a position where they are comfortable with the proposed acquisition.

Ultimately, without proper due diligence, any overpricing of the target entity could remain undiscovered until it is too late. For sellers, it is essential to be deal-ready with all key documents ready to disclose on request.

Of particular note in insurance M&As are the regulatory requirements and approvals already mentioned. Another critical exercise is an assessment of the target entity’s capital adequacy and solvency status. These indicators are essential for the buyer to gauge the overall financial health of the target business, its ability to withstand unexpected losses, and its compliance with regimes such as Solvency II (or Solvency UK).

Often, the transaction value will be related directly to the target entity’s book of policies. Buyers will wish to ensure that existing policies are transferred intact after completion, and sellers should consider how to achieve this as soon as they begin to plan a sale so that any agreed timetable is realistic.

Assignment of certain types of insurance contracts must be approved by the court under Part VII of the FSMA – an expensive and time consuming process designed to minimise any adverse effect the transfer could have on customers. Because of its complexity, the Part VII process must be proactively managed early on in the transaction.

Even where Part VII does not feature, the transfer of large volumes of policies may not always be straightforward.  The intricate nature of insurance contracts and the robust consumer protection built into insurance contracts generally means they cannot always be automatically transferred by agreement between the parties to the M&A. In this way, they differ from most commercial agreements. It may, therefore, be necessary to implement additional legal protections to ensure that consumer rights are protected post completion.

We have outlined just a selection of the legal and regulatory issues that can arise when buying or selling an insurance business in the UK such as a brokerage, an intermediary, Managing General Agents, (MGAs) or specialist providers.

We advise on these and a wide range of related matters, including IT system management, UK GDPR, third party partnerships, and future claims liabilities.

The SMEs through to nationally recognised insurance firms we represent all want their deals to complete successfully and on time, with the assurance that future liabilities and regulatory compliance issues have been addressed fully. We are ready to put the time in to ensure this happens. By involving us at the earliest stage of the deal, we can help things move more quickly, always with an eye on the key legal issues that, in our experience, can slow down or even jeopardise M&As in the UK’s insurance sector.

At DMH Stallard our legal teams across all commercial practice areas work collaboratively to support your M&A transaction adding really value for money and a first-class service.

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