Case Study on Change in Control (Model Answers)

1. 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)

2. Task 1 Potential impact on existing policyholders • Sale of existing agency force • Who will provide the ongoing service to existing policyholders? • Will existing policyholders be swayed by agents to replace existing policies with policies from the new insurer that agents represent? • Stop writing participating policies • Participating funds may face additional constraints without new business being written. Possible adverse impact on the fund’s ability to pay future bonuses • A greater need for the insurer to have in place a proper bonus policy to ensure fair and equitable allocation Case Study on Change in Control

3. Task 1 (cont.) Potential impact on financial conditions • Guarantee from parent • 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 • 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. Case Study on Change in Control

4. Task 1 (cont.) Mix of business and business volume • Unity projected drastic increase in business volume and change in business mix • Can the Unity Merlion cope with such surge in business volume? In particular, are there adequate resources in the new business and underwriting functions? • How will the bank officers be trained to sell these new product lines? • 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? • Is the very high business volume realistic? Case Study on Change in Control

5. Task 1 (cont.) Management Expertise • New senior management team • 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 • 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? Case Study on Change in Control

6. Task 1 (cont.) Management Expertise (cont.) • Outsourcing of investment function • What are the roles and responsibilities of Unity AMC? • Are they involved in and/or responsible for setting the strategic asset allocation which requires on investment issues? • Are they responsible for ensuring compliance with regulatory requirements on investment issues? • 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? • What are control and performance monitoring measures Unity Merlion intend to adopt? • How would the supervisors ensure that an arms length relationship is in place? Case Study on Change in Control

7. Task 1 (cont.) Shareholding structure • Unity Merlion will be directly owned by Unity International Pte Ltd • 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? Case Study on Change in Control

8. Task 2 Potential impact on existing policyholders • Sale of existing agency force • 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 • 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 Case Study on Change in Control

9. 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 Case Study on Change in Control

10. Task 2 (cont.) Potential impact on existing policyholders (cont.) • Stop writing participating policies • 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 Case Study on Change in Control

11. 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 Case Study on Change in Control

12. 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 Case Study on Change in Control

13. 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 Case Study on Change in Control

14. 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 Case Study on Change in Control

15. 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 Case Study on Change in Control

16. www.iaisweb.org International Association of Insurance Supervisors (IAIS) Questions and Answers makoto.okubo@bis.org 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. Case Study on Change in Control