Making the Move
Insurance business transfers are poised to take off in the United States as more states enact laws and regulations allowing the process.
- Timothy Darragh
- May 2020
- The Issue: European laws have allowed insurers to transfer old parts of their businesses to other entities to free up capital for over 20 years.
- What’s Changed: Several U.S. states have enacted laws that allow insurers to take part in business transfers.
- What to Expect: More states may be updating their regulations soon and two committees within the NAIC are working on building a model law to allow for more insurance business transfers.
After nearly 20 years of watching European insurers make better use of their capital by safely transferring off old parts of their businesses, their American counterparts appear poised to start taking advantage of regulations that would provide cleaner transfers in the United States.
Oklahoma, Rhode Island and Vermont already have state laws that allow insurance business transfers (IBTs) providing certainty and legal finality, according to the National Association of Insurance Commissioners.
Oklahoma may be first to see how insurers view the IBT process. Oklahoma Insurance Commissioner Glen Mulready signed off on its first transfer, from Providence Washington Insurance Co. to the Oklahoma-based Yosemite Insurance Co., in November. The plan now is in a public comment period before a state court. Final approval could come in May.
Without the thorough review of an insurance business transfer, the nightmare scenario would have a situation where a loss portfolio transfer is made and the reinsurance company taking the business becomes insolvent.
Odom & Sparks
More states may be updating their regulations soon, as long as they are not overwhelmed long term by the COVID-19 pandemic.
Two committees within the NAIC are working on building a model law, with the goal of getting to final approval by late this year. The National Council of Insurance Legislators passed an IBT model act at its spring meeting—one of the last mass gatherings in the industry before the COVID-19 virus shut down public meetings.
“We believe after these initial transactions there will be a lot more activity in this space,” Mory Katz, chief executive officer of ProTucket Insurance Co., said. “They're waiting for all that regulatory infrastructure to come to fruition.”
Consultancy PwC, in its most recent Global Insurance Run-off Survey, found that there appears to be an appetite to pursue transfer solutions by U.S. insurers as part of their capital management strategies.
“Participants in our survey largely agreed that the U.S. will continue to be a highly active market and also feature deals of a significant size,” it said in the report.
The PwC report estimated nonlife run-off liabilities have risen to nearly $800 billion worldwide, with the United States' share of that about $348 billion.
Without the IBT, much of that money is sitting on the sidelines because of the need to reserve for unwanted old business, said Robert Fettman, a lawyer at Debevoise & Plimpton in New York City.
“A ceding insurer transferring the liabilities to the assuming reinsurer is unlikely to have certainty that it will be able to achieve legal finality and terminate their exposure to future liability,” he said. “As a consequence, capital is trapped and unable to be deployed for more beneficial purposes.”
Without the thorough review of an IBT, the nightmare scenario would have a situation where a loss portfolio transfer is made and the reinsurance company taking the business becomes insolvent, said Michael Ridgeway, counsel at Odom &Sparks in Norman, Oklahoma. No guaranty association backs up the reinsurance company and the ceding company doesn't have any assets to pay any claims that may arise, he said.
The IBT is designed to mitigate that threat.
Estimated nonlife run-off liabilities in the United States.
Source: PwC Global Insurance Run-off Survey 2019
ProTucket became the first insurer domiciled in Rhode Island to provide insurance run-off portfolio transfer solutions under Rhode Island's Voluntary Restructuring of Solvent Insurers Law. ProTucket in 2018 obtained $35 million needed to accept insurance portfolios for runoff, as parent Pro US Holdings received the cash infusion from Swiss Reinsurance Co. Ltd. to create its first protected cell.
ProTucket also is working on an IBT now, Katz added.
The Rhode Island law, like Oklahoma's, was based on Part VII of the U.K.'s Financial Services and Markets Act, Katz said.
Since then, at least 253 insurance business transfers have taken place in the U.K. without a single insolvency, he said.
The dearth of insolvencies is in part due to the in-depth review by regulators and the courts, and the independent actuarial analysis of the book of business to be transferred, said Fettman.
“The Part VII procedures,” he said in an email, “include safeguards for appropriate reserving (including independent expert reports), policyholder/insured notice, and regulatory and judicial involvement, which are similar to those found in the IBT process.”
Many prominent insurer groups with extensive operations in the U.S., including the U.K. operations of The Hartford, AIG, Fairfax, St. Paul, Swiss Re, Zurich and Lloyd's of London, have all engaged in Part VII transfers, and are familiar with the process, Fettman said.
Regulators also have had experience with them, since some of the Part VII transfers have involved books of business covering U.S. risks in surplus lines or reinsurance that have required review, he said.
We believe after these initial transactions there will be a lot more activity in this space. They’re waiting for all that regulatory infrastructure to come to fruition.
ProTucket Insurance Co.
Before the passage of IBT and insurer division statutes, Fettman said, one of the few avenues available to U.S. insurers to transfer insurance liabilities with legal finality for the transferor was through assumption reinsurance, which seeks to substitute a new insurer for the original one under a block of insurance policies.
State and common law generally require consent of the policyowner to release the ceding insurer from liability in an assumption reinsurance transaction, Fettman said.
Obtaining the consent of potentially thousands of policyowners is an expensive and time-consuming task and often one that does not result in obtaining the consent of all policyholders, he said.
Adding to the complexity of such transactions now in the U.S., are the different state insurance departments, which would weigh in during the process, said Robert Romano, a partner specializing in business transfers at Locke Lord in New York City. Some states whose approvals are not legally required may nevertheless want to independently review a transfer of their policyholders in a transfer approved by other states, he said.
“That's where the real rub comes in,” Romano said. “This process, though subject to court approval and a hearing to entertain objections from all parties, including policyholders and regulators, is intended to bind all of these people wherever they may be despite the fact that they have not agreed.”
Using a hypothetical example of an insurer in Florida wanting to transfer a block of business to a company in Rhode Island, Romano said the whole process of the IBT is meant “to provide comfort that … the Rhode Island process—its regulatory review, analysis, safeguards and court approval—will assure that the Rhode Island company has sufficient solvency to do business and assure that policyholders are not adversely affected.
A ceding insurer transferring the liabilities to the assuming reinsurer is unlikely to have certainty that it will be able to achieve legal finality and terminate their exposure to future liability. As a consequence, capital is trapped and unable to be deployed for more beneficial purposes.
Debevoise & Plimpton
“It's very complicated legally to do these things,” he said. “That's why a court has to be involved.”
To start, the transferee insurer has to be domiciled in a state that has adopted IBT law.
According to a paper on the process in Rhode Island ProTucket filed with the NAIC, the act requires that notice of the proposed transfer be provided to policyholders, contract parties and other interested parties, including insurance regulators and guaranty funds of other states that may have interests in the IBT.
It also requires extensive disclosure of financial information of the transferee insurer; an expert report that will evaluate the impact on transferring and nontransferring policyholders and contract parties; an independent evaluation by the Rhode Island Division of Insurance Regulation; and approval by the regulator overseeing the transferor, the paper said.
“Most importantly, there is complete judicial review of the IBT plan, and before the transaction will be approved, the transferee insurer must satisfy the [Rhode Island] court that the transfer does not materially adversely affect policyholders, reinsureds or claimants,” it said.
Those who may be adversely affected can file an objection with the court, it said.
But in the end, the IBT process is designed to leave policyholders of the transferred business in the same or better shape than they were before the transfer, said Ridgeway's colleague at Odom & Sparks, John Sparks. Sparks agreed with Ridgeway that an IBT undergoes “an incredible amount of scrutiny.”
Once approved, the transferee insurer is subject to the continuing authority of the division.
Estimated nonlife run-off liabilities worldwide.
Source: PwC Global Insurance Run-off Survey 2019
Differences in Laws
There are some differences between the Rhode Island and Oklahoma laws. Rhode Island's law, which was amended two years ago to make IBTs more attractive, is limited to transfers of run-off books of business for property and casualty, according to the NAIC. The Oklahoma Act applies to active and run-off books, and covers property/casualty, life, health and other “suitable” lines, it said. Rhode Island and Oklahoma's laws were the only state IBT laws in NAIC's 2019 analysis.
A company also can seek to separate off an old line of business using a state's division statute, which requires the same technical analysis of the impact on policyholders as in an IBT, but court approval is not required, he said.
It's the legal finality of the IBT that makes the extra effort worthwhile, said Sparks.
“If you're a company wishing to transfer business and redeploy your capital,” he said, “the benefits of the finality of that justify the additional effort to make it happen.”