Insurers with unwanted runoff blocks of business should consider the latest guidance from insurance regulators on potential transactional structures that could mitigate this issue. On May 13, the Restructuring Mechanisms (E) Working Group (Working Group) of the National Association of Insurance Commissioners (NAIC) issued a revised white paper titled "Restructuring Mechanisms" along with a best-practices document. The materials cover potential commutation, insurance business transfer (IBT) and corporate division (CD) transactions that could allow an insurer to shed runoff blocks of business without necessarily seeking policyholder approval in every instance. The revised white paper discusses relevant statutes permitting various of these kinds of transactions in Arkansas, Illinois, Oklahoma, Rhode Island, Vermont, Arizona, Colorado, Connecticut, Iowa, Michigan and Pennsylvania. Among other things, the white paper draws parallels and contrasts between these statutes and their UK-law analogs, solvent schemes of arrangements and Part VII transfers.
Comments from interested parties on these restructuring materials may be made until June 14.
The revised white paper makes six recommendations.
- There should be a standard set of financial principles by which
to judge a commutation, IBT or CD transaction.
- In the case of a restructuring transaction involving a personal
lines block or life block, guaranty fund coverage should continue.
The Working Group recommends that language proposed by the National
Conference of Insurance Guaranty Funds (NCIGF) on this point be
added to the NAIC Property and Casualty Insurance Guaranty
Association Model Act.
- The Working Group notes a suggestion from stakeholders that an
independent expert be required in any restructuring. In response,
the Working Group writes, "While independent experts can be of
value, the mere fact that someone is employed by an insurance
department does not mean that their skill set is not sufficient for
certain transactions. Depending upon the transaction, department
staff with a deep understanding of the insurer might provide more
protection for consumers than a newly hired individual without a
history with the insurer."
- The NAIC's National Treatment and Coordination (E) Working
Group should "consider whether any changes should be made to
the licensure process for companies resulting from restructuring
transactions of runoff blocks. A streamlined process that still
ensures appropriate regulatory oversight (and any licensure
necessary to preserve guaranty association coverage) may be
appropriate in limited circumstances. However, care needs to be
taken to ensure that the licensing process is robust and rigorous.
... "
- The Statutory Accounting Principles (E) Working Group should
determine the appropriate accounting (including financial reporting
and risk-based capital (RBC) calculations) for an IBT or CD
transaction that uses a protected cell. This should be done before
the NAIC undertakes planned updates to the Protected Cell Model
Act.
- States are "strongly" discouraged from using an IBT or CD transaction for long-term care (LTC) insurance. If a state does wish to pursue an IBT or CD transaction involving LTC insurance, the state "should bring such a proposed transaction to all of the licensed states first and generally such transactions should only be utilized to the extent the NAIC develops a national solution for such transaction."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
