SUBJECT: MUNICIPAL MUTUAL INSURANCE SCHEME OF ARRANGEMENT UPDATE

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1 REPORT TO AUDIT COMMITTEE 30 JUNE 2015 Corporate Priority ALL REPORT OF: THE DIRECTOR (NE) 15/184 WARDS AFFECTED: ALL SUBJECT: MUNICIPAL MUTUAL INSURANCE SCHEME OF ARRANGEMENT UPDATE RECOMMENDATION (S): Members are recommended to note the run-off position of the former Council insurer Municipal Mutual Insurance Ltd and the potential financial liabilities. REASON FOR RECOMMENDATION (S): To appraise Members of the current financial impact to the Council now that the Scheme of Arrangement has been triggered. HIGHLIGHTED RISKS: That the Council cannot meet the potential financial liability imposed through the Scheme of Arrangement. 1. INTRODUCTION AND BACKGROUND 1.1 Municipal Mutual Insurance Ltd (MMI) is an insurance company limited by guarantee which was established by a group of local authorities on 13 March MMI suffered substantial losses between 1990 and 1992 which reduced their net assets to a level below the minimum regulatory solvency requirement. As of 30 September 1992 MMI ceased writing new business, or inviting renewal of policies. At that time MMI was the principal insurer of 90 to 95% of all local authorities in the UK.

2 1.3 In order to protect the interests of local authorities (and other public sector bodies) and allow MMI to continue to pay claims in full and achieve an orderly run-off of the company s liabilities a Scheme of Arrangement (the Scheme) was proposed under Section 425 of the Companies Act The Scheme was subsequently agreed at a meeting of scheme creditors on 5 January 1994 and became binding on all creditors. 1.4 This Council is a scheme creditor and, as such, is subject to the financial implications of the outcome of the run-off. 1.5 During the initial scheme period (prior to any trigger event) all liabilities of MMI continued to be paid and all new insurance claims reported which related to when MMI were on cover were also dealt with and where appropriate paid in full. 1.6 The Scheme is only to be triggered if the company s liabilities exceed its assets and the company Directors conclude that there is no reasonable prospect that MMI would avoid entering insolvency. 1.7 If a trigger event occurs a levy may be imposed on all scheme creditors which since 30 September 1993 have been paid in excess of 50,000. No levy will be imposed on any scheme creditor in respect of the first 50,000 paid. The raising of a percentage levy is designed to enable MMI to claw back sufficient funds to maintain a solvent run-off. However, once a levy has been imposed future payments of claims will be made at a reduced rate. 1.8 The Board of Directors of MMI announced on 13 November 2012 that they had decided to trigger the Scheme. From that date control of MMI passed to the Scheme Administrator, Ernst & Young LLP, to conduct a financial review of the company and consider the level of any levy to be imposed on the scheme creditors. 2. ASSESSMENT 2.1 It was originally believed that the running-off process would last for around twenty years. However, MMI is now in its 22 nd run-off year, and the company still receives large numbers of claims particularly in respect of abuse, asbestosis, deafness and mesothelioma. It is now anticipated that the Scheme may not close until around Mesothelioma is the most serious of a number of diseases that can arise from exposure to asbestos dust. It is an aggressive form of cancer that affects the pleura, the thin membrane that surrounds the lungs and internal organs of the chest. Once diagnosed, the condition is essentially untreatable. It has a very long latency period, and generally can take up to 40 years to manifest. The current estimates are that the number of Mesothelioma deaths in the UK will peak in 2016 with around 2,600 deaths.

3 2.3 MMI was, since 2006, party to a series of test cases designed to create certainty as to which insurer should respond to long tailed industrial disease claims where there is difficulty in determining when the injury arises. 2.4 The litigation process finally ended on 28 th March 2012 with a ruling by the Supreme Court that MMI as insurer on risk at the time of the original exposure to asbestos dust should deal with current Mesothelioma claims. Mesothelioma claims account for the majority of MMI s total liabilities, with many new cases likely to be in the pipeline and it is likely that this was the issue alone that necessitated the need to trigger the Scheme. 2.5 In reality, the Supreme Court ruling merely endorsed the historical causation approach to policy interpretation that the insurance industry was responding to prior to the MMI legal action. 2.6 Had the decision favoured MMI their liabilities would have been significantly reduced and a solvent run-off would have been more likely. Scheme Creditor Levy 2.7 The Scheme Administrator, following an actuarial review of the insurance liabilities by KPMG, determined that a levy of 15% (of the claims paid less the 50,000 deductible) was required to achieve a projected solvent run-off. 2.8 The levy rate is to be reviewed every 12 months to take account of liability trends evolving and the claims book. Due to the latent nature of the claims that MMI is still receiving and the fact that many of the trends in reporting continue to be adverse the projections are subject to substantial uncertainty. It is therefore not possible to state with any certainty that this initial levy will be the only call on scheme creditors. Post Levy Claims Process 2.9 The setting of a levy also has an impact on the future payment of claims by MMI. Payment of future claims will be at the Payment Percentage, being 100% less the levy; consequently the Initial Payment Percentage will be 85.0% with the Council bearing the cost of the other 15.0% The implementation of the levy has necessitated a revision of the claims handling process. Zurich Municipal continues to administer the claims handling on behalf of MMI, with the principal amendment being the way in which payments are made. The Council must now in the first instance pay all costs relating to the claim, with reimbursement of upto 85.0% subsequently being made by MMI. Financial Implication 2.11 Detailed beneath is a table showing the position as at the time of the last report on this subject (September 2013) and 31 March 2015:

4 September March 2015 Gross Payments 174, ,621 Levy retention (50,000) (50,000) Amount subject to Levy 124, ,621 Levy proposed 18,659 Levy paid 36,543 Outstanding claims 245,002 31,557 Total that could be subject 369, ,178 to Levy Projected levy at 15% 55,409 41, The Council had previously identified the financial risk posed with regard the trigger of the Scheme of Arrangement and established a provision of 55, ( 369, x 15%) as part of a wider contingency in respect of insurance and legal proceedings To date 36,543 of that provision has been utilised. There are five claims presently outstanding with MMI, with a combined reserve of 31,557 and any money paid would be added to the amount subject to claw back; which if settled at the reserve amount would require a levy payment from the Council of 4, This would take the levy value to 41,276. Whilst new claims may continue to arise, based on the information presently known, the contingent liability in respect of MMI has been removed from the Council s accounts and the remaining provision released back in to the General Fund provision Officers will continue to monitor the position in relation to claims volume and the levy percentage and take the relevant action as required to that circumstance. 3. IMPLICATIONS (a) Policy and Legal 3.1 The content of this report is within the Council s policy framework. (b) Financial 3.2 The financial implications are detailed with in the body of the report. (c) Legal 3.3 There are no legal implications arising from this report.

5 Nick Edwards Director Author: Martin Pedley, Asset & Risk Manger, Town Hall, Scarborough Telephone No: address: