What if an insurer wanted to separate legacy from live business by transferring it into a new entity, but didn’t want to go all the way to commutation? A proposed amendment to the Rhode Island Statute could make this possible.
In 2011, the Rhode Island Statute was successfully used to close a former captive insurer owned by Verizon Communications, GTE REinsurance Company Limited. However, while the Statute’s potential for eliminating the deadweight of legacy is considerable and unparalleled within the US, the sole focus on commutation has limited its scope and subsequent deployment.
The Statute has continued to evolve, most notably through amendments allowing insurers and reinsurers to move blocks of commercial insurance business into Rhode Island (‘Regulation 68’), though still “for the sole purpose of entering into a voluntary restructuring”; in other words, a full commutation plan.
The findings from Insurance Insider’s latest Legacy Barometer Survey would suggest that the restricted scope of the Rhode Island insurance business transfer (IBT) process may be impeding the state’s development as a center of excellence for run off transactions. It certainly limits the opportunities to remove commercial legacy portfolios from the balance sheet of active (re)insurers and allow (re)insurers to focus on live business without the drag of run off. Potentially, the credibility of the Statute could also be diminished if a (re)insurer were to take advantage of the IBT, but then left the portfolio in limbo by delaying moves towards commutation, perhaps indefinitely.
Expanding IBT opportunities
Now, in what appears to be an effort to expand the scope and use of the IBT process, amendments have been introduced (House Bill 8163), which would remove the statutory stipulation that the entity into which eligible commercial liabilities are transferred has been formed or reactivated for the sole purpose of entering into a voluntary restructuring. If enacted, this would bring the IBT process into line with the transfer without commutation option, which is available in the UK through ‘Part VII Transfer’ and is now a key part of the capital management toolkit.
By expanding the definition of voluntary restructuring, the Bill would also make it possible to use the Rhode Island process for “enhancing organization and maximizing efficiencies”, while allowing “the transfer of assets and liabilities to or from an insurer”. To this point, the amendments in the Bill would allow for the creation of protected cell entities, which are frequently used in securitized transactions – for instance, insurance linked securities (ILS).
On May 8, 2018, House Bill 8163 was referred to the House Corporations Committee for further study. The Bill may be subject to amendment as it passes through the legislative process. Yet, even if enacted in modified form, it would represent an important expansion of the Rhode Island Statute and a major step forward in the development of legacy solutions within the US.
Who is RunOff Re.Solve?
Traditional solutions to legacy issues – such as sale or reinsurance – are the industry’s default solutions but can leave value on the table. Today’s more innovative solutions can secure finality from the expense and distraction associated with legacy liabilities and release more funds to all affected stakeholders. However, they require specialized knowledge and experience in execution that is generally not available within brokers or reinsurers.
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 of insolvent insurance exposures at Westmoreland Casualty and Rockwood Insurance, we have pioneered innovative approaches to accelerated closure. 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.
RunOff Re.Solve LLC