The terms they are a changin’ – the Federal Court approves a groundbreaking life insurance transfer

The Federal Court of Australia has approved an innovative transfer of life insurance policies from Integrity Life to AIA Australia that demonstrates how different life insurance products can be consolidated. 

This matter involved the transfer of Integrity’s retail business through a scheme confirmed under Part 9 of the Life Insurance Act 1995 (Cth), which is the conventional mechanism for transferring policies between life insurers. Integrity Life is in the process of winding up its business and has been transitioning its group and retail business to other life insurers over the past 12 months.

The groundbreaking element is that the terms of the Integrity policies were changed in their entirety and substituted for AIAA’s product terms. This has never been attempted before in nearly 30 years of Part 9 schemes, where there is typically no change or only minor changes to policy terms. 

The parties developed from scratch a detailed set of rules to govern the process of transferring cover across in a comprehensive and legally enforceable way that satisfied their commercial objectives, the interests of policyholders, the scrutiny of a number of expert actuaries, the interests of the regulator, APRA, and, finally, confirmation by the Federal Court. 

In approving the transfer, Justice Jackman acknowledged the complex and novel nature of this scheme and noted there is no bar to a scheme being confirmed simply because it has an adverse impact on some policyholders. Here, some policyholders would be disadvantaged by a loss or reduction of their existing benefits as well as by significant increases in premium on transfer. 

In his judgment, these impacts had to be assessed having regard to the circumstances giving rise to the scheme and the position if the scheme did not proceed. The circumstances here involved a breach of prudential capital requirements and a projected exhaustion of capital and inability to meet policyholder benefits in less than three years. The scheme was the only commercially viable way to safeguard their ongoing cover. 

The wider significance of this scheme is that it pushes the envelope for future schemes to make significant changes to policy terms and, in doing so, make policy transfers more economically viable through reducing the costs of integration and administration.