If a proposed new law is enacted, Oklahoma would become the first US state to allow the blanket transfer or novation of insurance business from one company to another, without requiring specific policyholder consent1. What are the opportunities for insurers with longstanding run off liabilities? What are the mechanics of the process, and how would this affect its application?

New run off solutions are emerging at an accelerating pace (see ‘What you can and can’t do now’ for the options currently available, what kind of business they apply to, and an overview of the possibilities and restrictions). All are valuable options. So far, however, none have been able to offer the scope of the UK’s ‘Part VII Transfer’2, through which an insurer can transfer its business or a portfolio of business to another party through a court supervised process. As a result of the Part VII transfer, discontinued insurance business (or active insurance risks that may become incompatible with the issuing company’s business plans) can be separated and sold to a third party or separated to pave the way for closure3.

Clean release

Oklahoma’s Insurance Business Transfer Bill (Senate Bill 1101 – full text is available here) is a game-changer for the US by seeking to usher in provisions modeled on the UK Part VII Transfer process.

The proposed ‘Oklahoma Act’ had its initial reading in the first week of February 2018 (progress can be monitored here) and has been referred to the Oklahoma state senate’s Retirement and Insurance Committee. The legislation provides the “basis and procedures for the transfer and statutory novation of policies from a transferring insurer to an assuming insurer by way of an Insurance Business Transfer without the affirmative consent of policyholders or reinsureds.” The novation is affected by court order (Act Section 2).

The potential benefits

If passed, the legislation would represent a watershed for US insurance regulation, allowing companies domiciled in Oklahoma to shed active and discontinued risks from their balance sheets, including such problematic coverage as long-term care and disability. On top of savings in management time, the group gains more freedom in allocating capital.

How it works

So how would the legislation work? Here is a quick overview:

1. Requires that the novation is subject to regulatory and court approval. As such, it allows for a “statutory novation with respect to all policyholders or reinsureds and their respective polices and reinsurance agreements…providing that the transferring insurers shall have no further rights, obligations or liabilities with respect to such policies…[releasing] the transferring insurers from any and all obligations or liabilities under the policies…”

2. Allows transfer to an Oklahoma-domiciled insurer, which “may be a protected cell company established pursuant to the Oklahoma Captive Insurance Company Act”

3. Defines very broadly the policies of insurance that are subject to its provisions as “a policy, contract or certificate of insurance or a contract of reinsurance…and shall include property, casualty, life, health, long term care, accident, surety, title and annuity business”

4. Makes no delineation between the types of eligible insurance coverage. The Oklahoma Act appears to include both live or active contracts as well as discontinued or ‘run off’ insurance

5. Introduces an Application Procedure by which the Insurance Business Transfer Plan is filed with the Oklahoma regulator for review.  The application may contain, among other items, “evidence of approval or non-objection of the transfer from the chief insurance regulator of the state of the transferring insurer’s domicile”

6. Does not require, but may allow for, the application to be supplemented by an independent expert’s opinion. However, the department’s review of the applications shall include “a review of the independent expert report”

7. Requires that the department “shall authorize the submission of the Plan to the Court unless it finds that the Insurance Business Transfer would have a material adverse impact on the interests of policyholders or claimants…”

8. Requires that the applicant give notice of its application for approval of the Insurance Business Transfer Plan to the effected policyholders within fifteen days of its receipt of a scheduling order from the court and a sixty-day comment period for those effected policyholders

9. The court shall enter an implementation order if it “finds that the implementation of the Insurance Business Transfer Plan would not materially adversely affect the interest of policyholders…that are part of the subject business…”

10. Authorizes the transfer of property “including, but not limited to the outwards reinsurance…notwithstanding any non-assignment provisions in any such reinsurance contracts”

Watch this space

This is a ground-breaking move, though legislative review is in its early stages. We will provide updates on developments and their implications. For now, the fact that this legislation has been introduced shows that legislators and regulators want solutions to the longstanding drain of legacy business and provide solutions for live carriers with portfolios of active business that may become incompatible with their mission. It will be interesting to see how this legislation is received in Oklahoma and, if regulators in other states, including those that are the home to larger numbers of insurers, follow the lead.

What you can and can’t do now

At present, the US has no similar type of broad transfer process to the UK Part VII transfer; though the proposed Oklahoma legislation could change that.

What options are available now, to what kind of business do they apply and what are the restrictions?

1. Rhode Island
The regulations supporting the Rhode Island Commutation Plan Statute (‘Voluntary Restructuring of Solvent Insurers’) were amended in 2015, allowing for the insurance business transfers “for the sole purpose of entering into a voluntary restructuring under this chapter.” Not only does the former Rhode Island Insurance Regulation 684 require that the insurance business transfer process be followed by a Rhode Island Commutation Plan, the only business covered by this transfer provision is commercial insurance, which has been in “run off” for at least 60 months. (Entire companies with liabilities eligible for closure can move their domicile to Rhode Island (with regulatory approval) and implement a commutation plan without being subject to the 60 month requirement of 230-RICR-20-45-6.)

2. Vermont
In 2014, Vermont passed its Legacy Insurance Management Act (LIMA). LIMA allows a non-admitted insurer to transfer its discontinued commercial business to a third-party company, with Vermont regulatory but without required court approval.  Personal lines covers are excluded and policyholders can opt out of the transfer process.

3. Connecticut and Pennsylvania
Connecticut’s Division Statute and Pennsylvania’s Association Transactions Act allow companies domiciled in those two states to divide their business, again with regulatory, but without required court, approval.

Who is RunOff Re.Solve?

Traditional solutions to problematic insurance and reinsurance issues – whether they include adverse development from active underwriting or legacy or run off exposures – such as sale or reinsurance – can leave huge amounts of value on the table. Today’s more innovative solutions can secure finality from the expense and distraction associated with active and legacy liabilities, and release more funds to all affected stakeholders. However, they require specialized knowledge and experience in execution.

This is where RunOff Re.Solve comes in. We solve problems. As needed, we identify, assess, and resolve exposure, organizational, regulatory, and capital issues facing the insurance industry.

From the first, and to date, only successful Rhode Island commutation plan to the recent settlements of liabilities at Westmoreland and Rockwood, we have pioneered innovative approaches to accelerated closure. We will continue to be at the forefront of implementing solutions for active and legacy carriers.

Alongside the specialist knowledge, we have the tenacity, legal, and relationship skills to deliver these capital releasing solutions for our clients. The more complex and seemingly intractable the problem, the more you should talk to us.

Andrew Rothseid
Principal
RunOff Re.Solve LLC

1. While consent is not required, policyholder interests would be protected through full court oversight.
2. Part VII of the UK Financial Services and Markets Act 2000
3. Through a Solvent Scheme of Arrangement under Part 26 of the UK Companies Act 2006
4. Now known as Rhode Island Title 230, Chapter 20, Subchapter 35, Part 6 cited as 230-RICR-20-45-6

Feel free to talk to us

We would be pleased to speak or meet with you to discuss the issues raised here or other aspects of run off and capital management.

Who We Are

Andrew Rothseid, Principal of RunOff Re.Solve, designs and executes solutions that provide insurers, reinsurers, cedents, policyholders, and regulators with legal and financial finality from run off captive and legacy liabilities. To find out more, please visit http://runoffresolve.com/