On 19 February 2019, the NAIC Financial Condition (E) Committee voted to form a Restructuring Mechanisms Working Group (the “Restructuring Working Group”) and a Restructuring Mechanisms Subgroup (the “Restructuring Subgroup”) to consider the issue of various insurance business transfer (“IBT”) laws that have been adopted, or are being considered, across the United States. These IBT laws, which generally allow insurers to transfer books or blocks of business to other insurers by operation of law (e.g., following regulatory and court approval), and often without the affirmative consent of impacted policyholders, are similar to “Part VII” transfers authorized under the UK Financial Services and Markets Act 2000.

Why it matters

Should the deployment of IBTs gain traction in the United States, they may become viable alternative structures to complex reinsurance transactions typically employed in the sale of a block of insurance business to a third party.

Widespread acceptance of IBTs may also attract greater interest from non-traditional forms of capital, such as private equity and sovereign wealth funds, seeking to acquire insurance assets, though the presence of various technical and legal issues which states will need to work through may defer the practical commercial benefits of IBTs for some period of time.

How it works

Modeled after the highly successful Part VII transfer process in the UK and EU, IBTs provide a unique mechanism for transferring and assuming insurers to absolutely transfer blocks of insurance business to another insurance company while also providing the legal finality that has not traditionally been available in the United States outside of a whole company acquisition. The IBT, once approved in accordance with the applicable IBT law, will result in a novation of the transferred contracts of insurance, resulting in the assuming insurer becoming directly liable to the policyholders of the transferring insurer and extinguishing the transferring insurer's insurance obligations or risks under the contracts.

Why the NAIC is getting involved now

An increasing number of states are adopting or considering IBT laws; the NAIC wants to get ahead of this trend to ensure uniform standards among the states for how such transfers are to be implemented.

While Connecticut, Oklahoma, Rhode Island, Vermont, Illinois, and, most recently, Michigan, among other states, have passed IBT laws or regulations, there are numerous differences in the transfer process. These differences include whether the IBT must be approved by the state’s insurance regulator and by court order; the types or classes of business that may be transferred; whether the transferring insurer is “divided” into two distinct legal entities; or whether policyholders may “opt out” of the transfer.

For example:

— Vermont’s Legacy Insurance Management Act allows non-admitted insurers to transfer discontinued commercial business to a third-party company with regulatory approval.

— Rhode Island’s “Voluntary Restructuring of Solvent Insurers Act” notably also provides a mechanism for court-sanctioned commutation of policies of commercial property and casualty insurers.

— Connecticut, Illinois, and Michigan have adopted IBT statutes allowing companies domiciled in those states to divide books of business within a company into two or more insurance companies with regulatory approval.

— Oklahoma’s IBT law, which some in the industry have called a “game changer,” as we previously reported, applies to both in-force contracts as well as discontinued or run off insurance and includes property/casualty, life, health, and any other line of insurance that the Oklahoma Insurance Commissioner finds suitable.

Areas of focus

The idea of forming the Restructuring Working Group was first raised by Rhode Island Insurance Commissioner Beth Dwyer at the Financial Condition (E) Committee’s meeting at the NAIC Fall 2018 national meetings (15-18 November 2018, San Francisco). Commissioner Dwyer expressed the need for the NAIC to understand the current framework of the various state IBT laws and work to develop uniform standards for review of IBT transactions, including such areas as minimal capital standards, actuarial guidance for determining reserve levels, protected cell requirements, proposed changes to risk-based capital (RBC) requirements, changes to the guaranty fund act, and surveillance tools. Another regulator at the NAIC Fall 2018 meeting noted that there were important constitutional questions with IBT transfers that needed to be considered by the Restructuring Working Group. In an effort to advance the issue, the NAIC Financial Condition (E) Committee voted on 19 November 2019 to create the Restructuring Working Group and the Restructuring Subgroup with the following charges:

Restructuring working group

— Prepare a white paper addressing: (a) a perceived need for restructuring statutes and alternatives that insurers are currently employing to achieve similar results; (b) existing state restructuring statutes; and (c) legal issues posed by an Order of a Court (or approval by an Insurance Department) in one state affecting the policyholders of other states.

— Review and propose changes to the Guaranty Association Model Act to ensure that policyholders that had guaranty fund protection prior to a restructuring continue to have it after the restructuring.

— Review and propose changes to the Protected Cell Companies Model Act to allow for restructuring mechanisms.

— Develop financial solvency and reporting requirements for companies in runoff.

Restructuring subgroup

— Consider the development of financial surveillance tools that are specifically designed for companies in runoff.

— Consider the need to make changes to the RBC formula to better assess the minimum surplus requirements for companies in runoff.

— Review the various restructuring mechanisms and develop:

  • minimum standards of review;
  • minimum capital requirements;
  • specific actuarial guidance in determining initial reserving levels;
  • protected cell reporting requirements; and
  • proposed accreditation standards.