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U.S. insurers with unwanted runoff blocks of business should note recent action by a regulatory working group, which adopted guidance on insurance business transfers (IBTs) and corporate divisions (CDs). An IBT, generally, is a transaction allowing an insurer to transfer a block of policies to another insurer without obtaining affirmative approval of all holders of the transferred policies. A CD is a division of an insurer into two new, distinct entities, with liabilities of the original insurer being allocated between the two. The guidance, if ultimately adopted by the National Association of Insurance Commissioners (NAIC), could motivate additional states to adopt enabling legislation for these types of mechanisms, paving the way for more-efficient solutions for legacy blocks.
On December 1, the Restructuring Mechanisms Working Group (the Working Group) of the Financial (E) Committee of the NAIC adopted a white paper and a "best practices" document relating to IBTs and CDs. The version of the documents voted on by the Working Group, subject to certain minor grammatical changes to be made by staff as approved by the Working Group, is available here.
The white paper, which the Working Group notes is "not intended to establish an official position by the NAIC regarding IBTs and CDs," updates prior white papers on these topics issued by the NAIC in 1997 and 2009. The new white paper begins with historical background from the United Kingdom to explain some of the motivation for the IBT and CD statutes that have been adopted in recent years by various states of the U.S. In particular, the white paper examines Part VII transfers and solvent schemes of arrangements, two mechanisms recognized under English law allowing insurers to shed unwanted books of business. The white paper proceeds to examine commutation, IBT and CD statutes in various states, along with the small number of transactions that have been completed under these laws. The white paper concludes with a look at assumption reinsurance statutes, jurisdictional implications (e.g., the effect of a restructuring under one state's laws in another state) and guaranty fund issues. The best practices document sets forth procedures for state regulators to follow when reviewing a proposed transaction under an IBT or CD statute. These procedures include requiring a narrative description of the transaction, reviewing financial information (both historical and pro forma), stress testing, actuarial analysis and review by one or more independent experts.
The white paper and best practices document now go to the NAIC's full Financial (E) Committee for consideration.
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