US regulators air views on legacy business
The NAIC has been discussing proposed best practices associated with insurance business transfers and corporate divisions
Insurers with legacy blocks of business or with other motivations to enter into block transfers of business or corporate split-offs should consider a recent regulator call on so-called insurance business transfers (IBTs) and corporate divisions.
These are techniques that allow an insurer to assign a book of insurance policies to another carrier without unanimous affirmative policyholder consent (a so-called IBT) or to split into multiple distinct entities (a division). Some states have already adopted statutes allowing these types of transactions, which have invited comparison to the UK’s Part VII.
IBTs and corporate divisions are subject to state regulatory approval and, in some cases, judicial review, following a prescribed process under the respective state statutes.
The restructuring mechanisms sub-group of the restructuring mechanisms working group within the National Association of Insurance Commissioners’ (NAIC) financial committee has the task of developing best practices with respect to these kinds of transactions and also considering any needed changes to risk-based capital rules arising out of these matters.
"Robust due process” must be afforded to policyholders, claimants, reinsurers, guaranty associations, regulators and others that are affected by a transaction, in advance of any public hearing
On a May 4 video call with interested parties, the sub-group discussed “foundational principles” and proposed best practices associated with IBTs and divisions. The sub-group addressed materials, issued in late April, that set out the NAIC’s priorities governing these transactions.
The foundational principles are summarised below, along with some highlights of the call. As a general comment, it was highlighted on the call that some states already have assumption and novation statutes expressly requiring unanimous policyholder consent and therefore it might be unrealistic for such a state to relax these requirements in an IBT or division context. At the same time, the need for uniformity among state procedures governing IBTs and divisions was also emphasised by some.
The principles included that policyholders and other key stakeholders should never be left worse off. A brief discussion was held on whether the threshold should be “no worse off” or “not materially adversely affected”.
There should be a robust regulatory review process. The domiciliary state regulator should perform a review akin to that conducted in a Form A application (for a corporate acquisition) and no affected policyholder should lose guaranty fund protection as a result of a transaction.
During the call, it was highlighted the nationwide associations of guaranty funds – the National Organization of Life and Health Insurance Guaranty Associations for life and health and National Conference of Insurance Guaranty Funds for property/casualty – have been involved in this process and can be valuable resources for regulators and policyholders.
A division or IBT should not reduce coverage benefits. Specifically, if there were any “secondary market or similar mechanisms” that benefitted policyholders, state regulators should ensure the benefits remain after the division or IBT.
There was a call to use uniform NAIC valuation and accounting standards. In their review, regulators are “discouraged” from allowing permitted practices and should require applicants for an IBT or division to adhere closely to the NAIC’s statutory accounting principles.
The regulator’s ability to hire independent experts for specialised transaction review and financial testing is “essential,” they agreed. It was noted that different states have varying levels of access to expert resources.
Finally, “robust due process” must be afforded to policyholders, claimants, reinsurers, guaranty associations, regulators and others that are affected by a transaction, in advance of any public hearing. These constituencies should have access to information concerning the transaction.
The “best practices” document goes into some additional detail on each prong of the foundational principles above. The foundational principles and best practices documents were exposed for a 45-day comment period.
Daniel Rabinowitz is a partner at Kramer Levin Naftalis & Frankel