The Rhode Island Insurance Business Transfer process is not the equivalent of the UK’s Part VII Transfer. Why do the critical differences risk undermining the credibility of the IBT process and how can this be resolved?
With no clear regulatory time limit for moving from portfolio transfer to eventual closure under the Rhode Island Commutation Plan Statute, the run off business transferred under the IBT process risks being left in an overly extended pre-commutation limbo. The credibility of the Statute, in general, and, specifically, the IBT process, could be undermined as a result. Could the model followed in the UK, in which there are separate pieces of legislation covering transfer and closure, provide the clarity needed to sustain credibility in this important process?
By enabling insurers and reinsurers to accelerate the closure of business in run off, the Rhode Island Commutation Statute is an extremely valuable option. The benefits include not only releasing the capital tied up in run off, but also eliminating management expense, considerable calls on administrative resources, and allowing management to focus more time on ‘live’ business opportunities.
The Statute has evolved in crucial ways since it became effective in 2004. As the developments, and how they compare to other forms of closure are crucial to the operation and effectiveness of the Statute, it is worth giving a brief history.
First incarnation 2004-2007
The Statute provides accelerated closure only for an entire eligible Rhode Island-domiciled company. This distinguished the Statute from the UK’s Scheme of Arrangement process, through which either a whole company, or a portfolio of business within a company, is eligible for closure.
Recognizing that most US property and casualty insurers are multi-line companies, with liabilities that are eligible for closure under the Statute residing on the same balance sheet as liabilities that are ineligible for closure, the Rhode Island legislature amended the Statute in 2007. The 2007 amendment expanded the definition of a “commercial run-off insurer” to include existing Rhode Island shell companies or companies created in Rhode Island to accept portfolios of eligible run off business.1
Introducing the IBT and the Statute today
In 2015, Rhode Island’s Insurance Regulation 68, which sets forth the rules and procedures for implementation of a commutation plan under the Statute, was amended to address the IBT process. This enables portfolios of eligible run off business to be transferred or novated to a newly created Rhode Island company and conform to the 2007 amendment to the Statute.
This IBT process attracted a certain amount of controversy when it was proposed. In particular, detractors – predominantly industry groups – claimed that it undermined policyholder rights and that the Rhode Island regulator lacked the statutory authority to separate and novate business in this way. As I’ve argued before, however, these claims are wide of the mark. The legislature’s 2007 amendment to the Statute gave the regulator the statutory authority required to amend Regulation 68 for the portfolio transfer or IBT process. Moreover, transfer is subject to full review and approval by the regulator in the home-state in which the business is originally domiciled and the Rhode Island regulator upon transfer. The Rhode Island Superior Court rules on the validity of the IBT process after regulatory review and considers the concerns of any policyholder or cedent. Personal lines, employer’s liability, and workers’ compensation coverages are explicitly excluded. The company into which the business is being transferred must be in sound financial condition rather than troubled, inferring that the protection within the ‘Assuming Company’ should be as strong, if not stronger, than within the ‘Transferring Company’.
However, there is a vagary in the current IBT process, which received little attention during the passage of the amendments to the Statute and Regulation 68, and subsequent industry consultations. The 2007 Statutory amendment made clear that the portfolio transfer was allowed “for the sole purpose of entering into a voluntary restructuring”2 (i.e. commutation and closure under the Statute). Yet, there are two distinct phases wrapped up in this single piece of legislation – transfer and eventual commutation – with no clear time limit or even timetable for moving from one to the other. Once the run off business is transferred, it could sit in limbo awaiting commutation, arguably, indefinitely. This anomaly could open the process up to abuse by allowing insurers to use IBT to remove the run off liabilities and associated capital demands from their balance sheets without any real intention to move on to final closure. Moreover, the resulting inference of the 2015 Amendment could be that it created a general novation process through regulation – akin to the UK’s Part VII Transfer – rather than through legislative action.
This perceived lack of clarity could impair the reputation of the Rhode Island IBT process and the courts and regulators (home-state and Rhode Island) that oversee it. The fact that there were objections by industry organizations to the IBT regulation in its original form, albeit most of which was unjustified, heightens the urgency of tackling this issue.
The UK model offers a possible solution. The two phases now wrapped up in the Regulation 68 are covered by separate pieces of legislation, oversight, and approval – separation (‘Part VII Transfer’)3 and closure (‘Solvent Scheme of Arrangement’).4 This ensures that the transferring company’s objectives are clear and the implications for policyholders at each stage of the journey are assessed specifically and separately.
This kind of legislative separation takes time, however. In the meantime, and in order to be true to the wording of the 2007 amendment to the Statute, it may be necessary to require the IBT Assuming Company to present its current concept for a commutation plan for review and scrutiny by regulators, counterparties, and the court as part of the IBT approval process.
Realizing the benefits
While the IBT and surrounding Rhode Island Commutation Statute offer important benefits for both insurers and their policyholders, these can only be achieved through a watertight and credible legislative and regulatory process. The regulatory process, including the Statute and its operation, would benefit from amendment and clarification.
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.
RunOff Re.Solve LLC
1. Although the amendment was enacted in 2007, it has only been operational since August 2015 when the amended ‘Regulation 68’ set out the terms and conditions for how the Insurance Business Transfer (IBT) process could be achieved.
2. Definition of a commercial run off insurers in the 2007 Amendment to the Rhode Island Commutation Statute Chapter 27-14.5-1.
3. Part VII of the UK Financial Services and Markets Act 2000
4. Part 26 of the UK Companies Act 2006
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/