R.I. Gen. Laws Section 27-14.5-1 et seq and Insurance Regulation 68 (click to read)
In 2002, Rhode Island passed the Voluntary Restructuring of Solvent Insurers Act, which set forth a procedure by which commercial insurers and reinsurers in run-off, or no longer writing new business, could file a Commutation Plan that would provide for the payment of creditors’ claims, liquidate future exposure to those claims and terminate operations.
The Commutation Plan allows solvent companies that are in run-off to reach a court-ordered and department of insurance supervised agreement with all of its creditors in order to accelerate completion of the run-off, bringing certainty of payment to creditors and reducing administrative costs often associated with lengthy run-offs.
In 2004 the Rhode Island Department of Business Regulation issued Insurance Regulation 68, which set forth the procedural requirements for insurance companies applying for the implementation of a Commutation Plan pursuant to the Restructuring Act.
In 2007 the definition of “Commercial Run-off Insurer” under the statute was expanded by amendment to include companies newly formed or re-activated under Rhode Island law solely for the purpose of accepting transferred business for restructuring pursuant to the statute (See R.I. Gen. Laws § 27-14.5-1(6)). The purpose of this amendment was to expand the population of insurers that might qualify for the process.
PROCEDURAL REQUIREMENTS FOR COMMUTATION PLANS UNDER RHODE ISLAND’S RESTRUCTURING ACT
Initially, an insurer must submit to the RI DBR for review a proposed Commutation Plan extinguishing outstanding liabilities. After the Plan is reviewed by the Department and all issues are resolved, the company may apply to the Rhode Island Superior Court of Providence County for an order agreeing to classes of creditors and calling for a meeting of creditors. The Plan requires consent of at least: i) 50% of each class of creditors, and ii) the holders of 75% in value of the liabilities owed to each class of creditors. Only the claims of creditors present or voting through proxy at the meeting of creditors are counted toward determining whether the requisite majorities have been achieved.
The insurer must then provide notice of the plan to affected parties. The Restructuring Act requires that notice be given to insurance regulators, guaranty associations, reinsurers, insurance agents and to all persons known or reasonably expected to have claims against the applicant including all policyholders, at their last known address as indicated by the records of the applicant. Notice must also be given by publication in a newspaper of general circulation.
If the required vote is achieved and the Court determines the Commutation Plan would not materially adversely affect either the interests of objecting creditors or policyholders, the Court must provide an order to implement the Commutation Plan.
The Commutation Plan results in court-ordered finality to run-off that would not be possible utilizing traditional run-off options. The order binds the insurer and all of its creditors and owners, whether or not a particular creditor or owner is affected by the plan or has accepted the plan, or whether or not the creditor or owner ultimately receives money under the plan.
ADVANTAGES OF RI COMMUTATION PLANS
Provides certainty of payment to creditors of present and future claims
Avoidance of a lengthy run-off with the associated ongoing administrative costs, adverse claim development and deteriorating reinsurance collections
Accelerated release of capital to shareholders at the conclusion of the process, allowing for more efficient deployment of capital to non-run-off operations
Might attract capital to the industry, as the availability of a reasonable exit mechanism for these companies will create an active market for investment in run-off companies
Offers finality to all claims covered by the arrangement, at a cost that is potentially lower than other alternatives to run-off