Catholic Church Insurance (CCI) has proposed a scheme of arrangement, setting out how claims will be managed as the financially troubled insurer seeks to proceed with an “orderly” run-off.

CCI says it has written to policyholder creditors about the proposal and that the measure is a “precaution to ensure a fair, equitable and managed regime” would be implemented quickly to avoid insolvency in the event that insolvency became a possible outcome.

“The scheme is an arrangement between CCI and its policyholders that is established through a formal process,” Chair Joan Fitzpatrick told insuranceNEWS.com.au.

“The scheme is designed to agree how claims would be handled should a future deterioration in CCI’s liabilities create further pressure on CCI’s capital position and to avoid any potential insolvency occurring.”

She says CCI “at this this point does have assets to meet their liabilities as they fall due” and that the “prudent reason for setting up this scheme is because of the long-term uncertainty regarding claims”.

The insurer had announced in May it will cease issuing new or renewal policies and will voluntarily place the organisation into “run off” after it was unable to secure sufficient additional capital. It will continue to manage claims from existing policyholders using its capital reserves.

The requirement for a further capital injection arose from the continued significant number of new claims arising from historic abuse matters.

The Australian Prudential Regulation Authority (APRA) says in an email it is aware of the scheme of arrangement and continues to “closely” supervise CCI. “We have no further comment,” the APRA email says.

Schemes of arrangements are binding, court-approved agreements that allow the reorganisation of the rights and liabilities of members and creditors of a company. Such arrangements are used by insurance companies to accelerate the run-off of their business, or parts of their business, while they are still solvent.

CCI says policyholders will vote on the scheme of arrangement and that it aims to have the scheme in place by the end of October, subject to certain timelines to be agreed with advisers and the court process itself.

For the scheme to proceed CCI needs to secure support from at least 50% of shareholders.

If the scheme is approved by the court, Ms Fitzpatrick says the relevant provisions of the scheme are then only activated should CCI be faced with the possibility of an insolvency.

“By activating the scheme, the intent is to avoid any potential insolvency in the manner pre-agreed in the scheme rather than a more disorderly process,” she said.

CCI is working closely with a representative group of policyholders called a Creditors’ Committee to ensure that the scheme that is proposed has the support of policyholders.

“It is not clear what scenarios may occur if the vote is not successful, however in the absence of an approval of the scheme there are clearly higher risks regarding regulatory intervention that would create a much less preferrable outcome for policyholders,” Ms Fitzpatrick said.