Rhode Island moves to address legacy transfer uncertainties

Article from Insurance Day

Run-off insurance deals have so far failed to materialise in Rhode Island despite a new regulation – Regulation 68 – implemented in 2015, which was expected to boost the market in the US state.

Efforts to kick-start the market are under way, however, as legislators filed a bill in early May that aims to assuage the concerns of potential participants in deals that could involve the transfer billions of dollars in liabilities.

House Bill RI 8163 was filed by state representative Robert Jaquard on May 4 and is working its way through the Rhode Island state legislator.

One of the main doubts about Regulation 68, which governs the transfer of legacy liabilities, is that in its present state it is not clear whether entities created in Rhode Island to receive eligible liabilities from insurers are required to go through a commutation plan process once the deal is completed.

According to Andrew Rothseid, principal at RunOff Re.Solve, an advisory firm in Pennsylvania, the confusion stems from the fact Rhode Island’s legacy transfer legislation was adopted as part of the state’s commutation plan statute, which was modelled to a great extent on the scheme of arrangement process contained in the UK Companies Act.

The rules have been fine-tuned in the course of the years to match better the particularities of the industry, getting closer to the Part VII insurance business transfer scheme of the UK Financial Services and Markets Act.

The latest version of Regulation 68, approved in 2015, allows insurers to transfer eligible liabilities, a group that excludes some lines such as workers’ compensation, to Rhode Island-based reinsurers that have the sole purpose of taking them into their portfolios.

What it did not clarify, however, was whether the new entities created for the purpose of assuming the liabilities would have to go through a commutation plan after the transaction was completed.

Some suggest these uncertainties may have weighed on the minds of potential participants, as it would mean the whole run-off deal would have to go through two levels of court approval: one for the “insurance business transfer plan” (IBT) that is the goal of the transaction, another for the commutation plan, demanding a much greater deployment of resources.

Clarification
RI 8163 has strived to address that doubt by clearly saying a commutation plan is not required or can be performed at a later date, as participants in the transaction wish. The change was proposed even though regulators themselves did not appear to be in doubt about the matter.

Al Bottalico, an insurance expert at law firm Locke Lord in Los Angeles, says the proposed legislation may end “some of the uncertainties” surrounding the deals.

“The Rhode Island regulators have communicated to us that, in their minds, there is no need for commutation to be part of an IBT. It can take place later or not happen at all,” he says.

Rothseid says the clarification is a welcome step as it brings the Rhode Island legislation closer to market practices. “The amendments to Rhode Island’s voluntary restructuring statute acknowledge a reality in the market,” he says. “Companies appear more predisposed to transfer liabilities through a process that looks like the UK Part VII transfer than they are to conclude those liabilities through a commutation plan or scheme of arrangement process.”

Rothseid says companies that acquire portfolios of business through the portfolio transfer process appear to want to aggregate the assets and liabilities and achieve economies of scale from both the management of larger pools of assets, as well as a larger pool of similar types of liabilities. This is rather than improving their cashflow by “focusing on the elimination of eligible liabilities through a commutation plan”.

Protected Cells
The new bill also provides the legal basis for the creation of protected cells that can be employed as vehicles for the transfer of eligible liabilities. Previously, Regulation 68 did not make it totally clear they could be used, Rothseid points out. “Traditionally, protected cell entities have been recognised for securitised products such as insurance-linked securities, and not for the transfer of traditional property and casualty liabilities,” he says.

Time will tell whether the clarifications will indeed assuage the market’s concerns. But there may be a sense of urgency for Rhode Island to get its run-off sector going, as other states have made movements to get into the game.

For instance, Oklahoma has approved a bill that will provide a framework for run-off transactions that includes the possibility of transferring life and health liabilities that are not allowed to Rhode Island. The new rules will kick in on November 1.

Yet Johnathan Bank, an insurance lawyer at Locke Lord, believes it is too early to say Rhode Island has missed the boat. It is not uncommon for legacy transfer transactions to take a long time to be completed, he points out, adding some companies have shown an interest in working under the Rhode Island regime.

“Some of these transactions can involve billions of dollars, so there are a significant number of financial issues that have to be resolved. Our understanding is parties that have shown an interest remain interested,” Bank adds.

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