Case Study on Change in Control
(Model Answers)
IAIS-ASSAL Training Seminar
Lisbon, Portugal, 27-28 April 2006
Makoto Okubo – Member of Secretariat
International Association of Insurance Supervisors (IAIS)
Task 1
Potential impact on existing policyholders
• Sale of existing agency force
o Who will provide the ongoing service to existing
policyholders?
o Will existing policyholders be swayed by agents to
replace existing policies with policies from the new
insurer that agents represent?
• Stop writing participating policies
o Participating funds may face additional constraints
without new business being written. Possible adverse
impact on the fund’s ability to pay future bonuses
o A greater need for the insurer to have in place a proper
bonus policy to ensure fair and equitable allocation
April 2006
Makoto Okubo
2
Case Study on Change in Control
Task 1 (cont.)
Potential impact on financial conditions
• Guarantee from parent
o Merlion Life’s very weak financial position has been
backed by a guarantee from Merlion Bank, which is
financially strong and under the authority’s direct
supervision. Will the sale to Unity Group weaken
Merlion Life’s financial position? How much additional
capital is needed? Will you accept a guarantee from
Unity Group?
• Substantial increase in new business
o Unity projected substantial increase in new business
and expenses. It also expects to generate higher
profits. Things may not turn out to be as projected by
Unity Group. Capital requirement may be higher with
more business written.
April 2006
Makoto Okubo
3
Case Study on Change in Control
Task 1 (cont.)
Mix of business and business volume
• Unity projected drastic increase in business
volume and change in business mix
o Can the Unity Merlion cope with such surge in business
volume? In particular, are there adequate resources in
the new business and underwriting functions?
o How will the bank officers be trained to sell these new
product lines?
o Will the new products lines, in particular, unit-linked
business be in direct competition with products such as
unit trusts that Merlion Bank is currently distributing?
How will this be resolved?
o Is the very high business volume realistic?
April 2006
Makoto Okubo
4
Case Study on Change in Control
Task 1 (cont.)
Management Expertise
• New senior management team
o Almost the entire senior management is new.
Do they have adequate knowledge of the local
regulatory requirements, industry standards and
market practices? It is important that they operate
in compliance with local requirements.
• Retention of existing staff
o To maintain business continuity and support business
growth it is important that Unity Group is able to gain
support of existing staff, particularly the middle
management that will be responsible for its day to day
operation. What measures will Unity Group put in
place to retain middle management staff?
April 2006
Makoto Okubo
5
Case Study on Change in Control
Task 1 (cont.)
Management Expertise (cont.)
• Outsourcing of investment function
o What are the roles and responsibilities of Unity AMC?
o Are they involved in and/or responsible for setting the
strategic asset allocation which requires on investment
issues?
o Are they responsible for ensuring compliance with
regulatory requirements on investment issues?
o Do they have relevant expertise? Is Unity AMC chosen
based on the merits of its investment expertise, or
because it is a sister company of Unity Merlion?
o What are control and performance monitoring
measures Unity Merlion intend to adopt?
o How would the supervisors ensure that an arms length
relationship is in place?
April 2006
Makoto Okubo
6
Case Study on Change in Control
Task 1 (cont.)
Shareholding structure
• Unity Merlion will be directly owned by Unity
International Pte Ltd
o Unity International is effectively a shell company
without financial resources, set up more for tax
purpose. Is there sufficient comfort that support from
the ultimate parent to Unity Merlion will be
forthcoming when needed?
April 2006
Makoto Okubo
7
Case Study on Change in Control
Task 2
Potential impact on existing policyholders
• Sale of existing agency force
o Existing agents could continue to serve the
policyholders if they join a broking firm or set up a new
unit in policy serving department to provide ongoing
service to existing policyholders
o Replacement of policy could be addressed by putting in
place a monitoring system on termination of policies. A
condition would be included in the agreement with
buyers of the agency force that it would co-operate with
Unity Merlion to monitor and/or draw back commission
on any replacement of policies
April 2006
Makoto Okubo
8
Case Study on Change in Control
Task 2 (cont.)
General approach
• In-depth discussions with Unity Group on the
application
• Seek clarification on all areas on concern and
where necessary, ask for mitigating measures
to be put in place
• The actual solutions will be dependent upon
what Unity Group has in their plan
• Plausible mitigating measures for some of the
concerns
April 2006
Makoto Okubo
9
Case Study on Change in Control
Task 2 (cont.)
Potential impact on existing policyholders
(cont.)
• Stop writing participating policies
o Put in place a detailed participating fund
management policy which should include a
review of how the investment and expenses
of participating fund should be managed
moving forward, to ensure that future
bonuses can be managed in a fair and
equitable manner
April 2006
Makoto Okubo
10
Case Study on Change in Control
Task 2 (cont.)
Potential impact on financial conditions
• Ask Unity Group to perform sensitivity analysis
(stress tests) on the amount of capital required,
taking account all major risks, eg. Assets, liability
and mismatching
• It is often not prudent to just relay on future profits,
which may not materialise
• It is important to have adequate capital. Guarantee
from parent should not be a substitute for capital
• Should require Unity Group to strengthen Unity
Merlion’s financial position such that it is at least
on par with other players
April 2006
Makoto Okubo
11
Case Study on Change in Control
Task 2 (cont.)
Shareholding structure
• May like to ask direct commitment from
parent, eg. letter of undertaking, that it will
provide necessary capital to support Unity
Merlion when needed
April 2006
Makoto Okubo
12
Case Study on Change in Control
Task 3
• Given that Unity Group is able to meet
your admission criteria, there is a strong
case to approve the application if Unity
Group is able to address the concerns
identified.
• You may consider imposing additional
conditions, if needed, to strengthen the
safeguards on existing policyholders’
interest and to address any residual
prudential concerns
April 2006
Makoto Okubo
13
Case Study on Change in Control
Task 3 (cont.)
Approving the acquisition could have the
following advantages
• Given the current state of Merlion Life, Unity
Group, being a leading international player with
good track record, should be able to strengthen
the overall operation and enhance the viability of
the company. This should benefit all stakeholders.
• Unity Group’s expertise in bancassurance could
help the development of the bancassurance
channel. This could increase the overall vibrancy
of the insurance market and provide wider choice
to the insuring public
April 2006
Makoto Okubo
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Case Study on Change in Control
Task 3 (cont.)
However, you may reject the application if
the concerns identified cannot be
satisfactorily addressed. In particular
• If Unity Group is not prepared to provide
additional capital support.
• If your concerns about adverse impact on
existing policyholders remain after
discussions with Unity Group
April 2006
Makoto Okubo
15
Case Study on Change in Control
International Association of Insurance
Supervisors (IAIS)
Questions and Answers
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or visit www.insurance-finance.com
This case study was originally developed by Monetary Authority of
Singapore (MAS) and modified by the IAIS to be used in regional
seminars.
April 2006
Makoto Okubo
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Case Study on Change in Control