RHODE ISLAND INSURANCE BUSINESS TRANSFERS

The Rhode Island Department of Business Regulation has approved Amendments to Insurance Regulation 68 Amendments that are effective as of August 18, 2015. The Amendments provide for “Insurance Business Transfers”, (IBT) which permit transfers of all or part of a portfolio of commercial run-off business to a RI Commercial Run-off Insurer resulting in a department approved and court sanctioned transfer of the transferred business.  This is the first U.S. legislation providing for a court sanctioned transfer of commercial insurance and reinsurance business and creates for the first time a judicial and regulatory framework and marketplace for such transfers.

The IBT is a legal mechanism by which insurance and reinsurance business is transferred from one risk-carrier to another.  The IBT applies to reinsurance of all lines of business, other than life, and insurance of all lines of business, other than life, worker’s compensation and personal lines insurance.  The policies or contracts that are the subject of an IBT must have a natural expiration which occurred more than sixty (60) months prior to the filing of the IBT Plan and be in a closed book of business or a reasonably specified group of policies.

The IBT is modeled on the UK Part VII Transfer that has been widely accepted in the UK as a useful restructuring tool.  In the UK the Part VII Transfer is an increasingly popular finality tool in the discontinued insurance sector with several hundred internal and external transfers accomplished to date.  The transfer process has been used so frequently that it is being institutionalized within the UK framework of the insurance industry.

The IBT represents a means to bring finality to run-offs while also protecting policyholders and ensuring the integrity of the regulatory process.  In practice, these transactions will take a variety of forms as the IBT evolves in the US insurance market as an important restructuring tool.  The IBT is very versatile and can be applied to a discrete portfolio or more generally to change a company’s whole business providing an opportunity for companies to reevaluate their organizational, financial and operational structures.  The new regulations will invigorate and transform the US run-off market similar to what has occurred in the UK run-off market over the last several decades resulting from the introduction of similar run-off legislation.   We expect that, over time, the IBT will also become a widely accepted business practice in the US marketplace as it has strategic importance as a restructuring tool for insurance companies while also ensuring that the interests of policyholders are protected.


How does the regulation work?

  • The main requirements for the process include 1) an expert report describing the transfer and its effect on policyholders and others; 2) policyholder notification; 3) regulatory approval from the RI Department and from the Transferring Company’s State of domicile; 4) a hearing and an opportunity to be heard; and 5) court approval.
  • Initially the Assuming Company submits an Insurance Business Transfer Plan to the RI Department for review and approval. The regulations set forth specific requirements for what must be included in the Plan, including the expert report, and also set forth objective standards of review for the RI Department.
  • Once reviewed and approved by the RI Department, the Assuming Company then files a Petition for Implementation of the Plan with the Providence County Superior Court and a motion for a scheduling order setting a hearing on the Petition.  Once a hearing date is set, the Assuming Company must notify affected parties in accordance with the notice provisions of the Restructuring Act.
  • After a 60 day Comment Period, a court hearing is held to consider approval of the Plan.  Any person who considers himself to be adversely affected can make a representation to the Court at the Approval Hearing.
  • The Assuming Company must present evidence to the court that the Plan does not materially adversely effect policyholders, reinsurers or claimants.
  • If the Court finds that the Plan should be approved, the Court will enter an order implementing a novation of the transferred policies or contracts to the Assuming Company, including reinsurance protections on the transferred business.

POTENTIAL USES FOR THE INSURANCE BUSINESS TRANSFER

  1. Combine similar business from one or more subsidiaries, putting all into a single company
    • Allows a corporate group to reduce the number of its regulated companies
    • Release capital for use elsewhere
    • Save ongoing management, regulatory and administrative costs
  2. Transfer business between third parties
    • To obtain business
    • To exit business
    • More flexible than a sale – not the whole company
  3. Separate out different books of business, putting them into separate companies
    • Separate old liabilities from new business, putting them into separate companies – useful as part of a plan to tackle old liabilities
    • More efficient capital deployment
    • Separate out liabilities that cannot be commuted
    • Separate out books of business to be sold from those to be retained

ADVANTAGES OF A RI INSURANCE BUSINESS TRANSFER

Benefits to the Transferring Company:

  • Economic and legal finality
  • Capital efficiency
  • Regulatory and Operational efficiency
  • Group restructuring
  • Corporate simplification/consolidation
  • Removal of non-core lines
  • Removal of risk of adverse loss development
  • Favorable consideration from regulator/rating agencies

Benefits to the Assuming Company:

  • Regulatory and operational efficiency
  • Potential opportunity for tax savings
  • Market presence/increased share
  • Creation of center of run-off competence
  • Profit from efficient management/exit
  • Consolidation of legacy business
  • Rational process for entry to market
  • Can structure as Protected Cell Company (read more)

FAQ’s

  • What is an Insurance Business Transfer?
    • The new amendments to Insurance Regulation 68 create the first court-sanctioned transfer of commercial insurance and reinsurance business in the United States, creating for the first time a judicial and regulatory framework and marketplace for such transfers.
    • For insurers and reinsurers, the Insurance Business Transfer provisions of Insurance Regulation 68 create a new, efficient means to transfer commercial P&C run-off insurance and reinsurance through a court sanctioned transfer.
  • What business does an Insurance Business Transfer apply to?
    • The IBT applies to reinsurance of all lines of business, other than life, and insurance of all lines of business, other than life, worker’s compensation and personal lines insurance.  The policies or contracts that are the subject of an IBT must have a natural expiration which occurred more than sixty (60) months prior to the filing of the IBT Plan and be in a closed book of business or a reasonably specified group of policies.
  • How does an Insurance Business Transfer work?
    • The IBT enables an insurer or reinsurer to transfer commercial run-off portfolios to a RI Commercial Run-off Insurer, which then assumes the obligations to policyholders. The IBT provides a way for insurance companies to divest themselves of U.S. portfolios and to continue writing new business with no further obligations under the transferred insurance policies.  The transfer is effected by obtaining a court order and policyholder’s rights are safeguarded via the court process.
    • All Insurance Business Transfers are subject to regulatory and judicial approval of the Insurance Business Transfer Plan. Any transfer that is approved by the RI Insurance Department and the Court results in a court sanctioned transfer, meaning that the legal responsibility for each transferred insurance policy or reinsurance contract is taken over by the Assuming Company resulting in economic and legal finality.
  • Which regulatory authority will oversee Insurance Business Transfers?
    • All IBT’s are subject to the review and approval of the RI Insurance Department and also require approval of the Providence County Superior Court.  The RI Insurance Department also oversees the Assuming Company’s continuing claims management and other compliance obligations.
    • IBT’s require the approval of the domiciliary state of transfer.
  • Why consider an Insurance Business Transfer?
    • An Insurance Business Transfer to an entity either within or outside of a group can re-shape a business to be best prepared for the future. While the specific motivations for each transfer will differ, there are a number of common themes which apply for both the transferring and receiving parties, including capital efficiency, lightening the regulatory/reporting burden, corporate simplification, separating old and new business and entry or exit from the market. The decision to proceed with a transfer can be a catalyst and form the cornerstone for achieving operational and financial improvements for both the Transferring and the Assuming Companies.
  • What are the benefits of the IBT for Transferring Companies? For Assuming Companies?
    • Transferring Companies that may have exited a particular market or ceased to write a certain kind of policy can divest themselves of those portions of their portfolio, freeing them from having to maintain specialists in the management of such policies or in the maintenance of policy data. Additionally, the financials of transferring companies may benefit from the finality of the court sanctioned transfer under the IBT.
    • The Assuming Company receives value relative to its long-term interests. The policyholders and/or reinsureds in the transferred policies or contracts benefit from the focused management of the specialist Assuming Company.
  • Can an Insurance Business Transfer deliver finality?
    • Transferring Companies are able to achieve an exit (i.e. finality) from either part or the whole of their business through an Insurance Business Transfer to a third party. True finality for all parties, including policyholders, can only be achieved through a Commutation Plan pursuant to the RI Voluntary Restructuring of Solvent Insurers Act. A Commutation Plan is a Court driven process which provides for the settlement of all current and future liabilities and, once effective, concludes the business that is subject to the Commutation Plan. When used in conjunction with a Commutation Plan, an Insurance Business Transfer can be a key part of the strategy for achieving complete finality, which might not have otherwise been available.