View source for Definition:Scheme of arrangement

📋 '''Scheme of arrangement''' is a court-supervised legal mechanism used by [[Definition:Insurance carrier | insurance carriers]] and [[Definition:Reinsurance | reinsurers]] to settle outstanding [[Definition:Claims | claims]] obligations and wind down books of business in an orderly fashion. Originating in UK corporate law, the device has become a well-established tool in the [[Definition:Insurance run-off | run-off]] market, allowing a company to propose a binding compromise with all of its creditors — typically [[Definition:Policyholder | policyholders]] and [[Definition:Cedent | cedents]] — even those who do not individually consent, provided the scheme wins the required statutory majorities and court approval. In jurisdictions outside the UK, analogous procedures exist, but the term carries particular weight in the London and Bermuda insurance markets.

⚙️ The process begins when an insurer or reinsurer in [[Definition:Insurance run-off | run-off]] petitions the court for permission to convene meetings of its creditors. The company publishes the scheme's terms, which typically offer claimants a final, discounted settlement calculated against an independent estimate of each creditor's [[Definition:Ultimate net loss | ultimate net loss]]. Creditors vote — usually organized into classes that reflect different policy types or coverage periods — and if the required majority in number and value approves the scheme, the court sanctions it, making it binding on all creditors within its scope, including dissenters. [[Definition:Actuarial analysis | Actuarial analysis]] underpins the valuation of outstanding [[Definition:Reserves | reserves]], and an independent scheme manager oversees distribution. Once the scheme is completed and all distributions made, the company can achieve a clean break from its legacy [[Definition:Liability | liabilities]].

💡 For insurers burdened by long-tail [[Definition:Exposure | exposures]] — such as [[Definition:Asbestos liability | asbestos]], environmental, or [[Definition:Latent claim | latent claims]] — a scheme of arrangement can unlock trapped [[Definition:Capital | capital]] that would otherwise sit idle for decades while claims trickle in. It gives finality to both the company and its creditors, replacing years of uncertain litigation with a structured, transparent payout. Regulators and courts scrutinize schemes closely to protect policyholders, and approval is never guaranteed; but when executed properly, the mechanism benefits the entire market by reducing uncertainty, freeing capacity, and allowing [[Definition:Run-off specialist | run-off specialists]] to manage legacy portfolios more efficiently.

'''Related concepts:'''
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* [[Definition:Insurance run-off]]
* [[Definition:Commutation]]
* [[Definition:Loss portfolio transfer (LPT)]]
* [[Definition:Solvent scheme of arrangement]]
* [[Definition:Reserving]]
* [[Definition:Legacy business]]
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