September 2015 newsletter from Run Off & Restructuring

September 2015 newsletter from Run Off & Restructuring
Welcome to the Run Off & Restructuring September 2015 newsletter

In this issue: Monte Carlo report; European run-off survey; Rhode Island business transfer regulations; Rescue Re appeal; and more…

Monte Carlo run-off seminar report

PwC released its ninth annual survey of European run-off in Monte Carlo, followed by a panel discussion, chaired by PwC’s Andy Ward, between Stuart Diffey from Zurich Insurance, Paul Corver from R&Q, Arndt Gossmann fromDARAG and Neil Wasserman from White Mountain Solutions. Ward began by asking the panel how their own experience had been in run-off over the last year. Diffey said he was still seeing lots of business in the UK with an increasing number of medical malpractice portfolios for sale as well as captives. Corver said that although the PRA is closed for business this year, R&Q have a lot of business in the pipeline including ‘lots in the captive fraternity.’ From a US perspective, Wasserman was seeing a decrease in the number of mid sized transactions, but an increase in the amount of workers’ compensation run-off portfolio transactions.

In reference to the disappointing lower priority being given at board level to run-off found in the survey results, compared to last year, the panel had a range of explanations. As far as Gossmann (pictured, right) was concerned, for many of the huge number of non-life companies in Europe, the implementation of Solvency II has brought with it ‘a huge amount of complexity and management time – more than had been thought’ with a subsequent down grading of the importance of run-off in the short term.

Corver pointed to what he felt remained the fundamental difference between UK and Continental Europe: ‘The UK had a shock 20 years ago, including with Lloyd’s, with the subsequent insolvencies and run-off. Europe is still behind.’

AWardWard (pictured, left) asked the panel what they felt the current mega deals in the live market would mean for run-off. Wasserman expected they would definitely lead to transactions, especially as there were ‘less reputational concerns for these new big companies.’ Corver agreed but felt there would be a time lag: ‘There will inevitably be an analysis of books but way down the line – Chubb, Ace and XLCatlin will all have legacy business but it will take some time to come through and be dealt with because the focus is on the amalgamation and management of the new business.’ Gossmann added that ‘it is all about redeploying capital after the deal is done,’ and that run-off will play a part in this.

In response to the question as to whether there was room in the market for more run-off acquirers Gossmann was unequivocal: ‘There is no  room for more competitors!’ Wasserman pointed out that although there was clearly a lot of capital interested in legacy business at the moment – including venture capital, private equity and hedge funds etc – ‘do people really want to deal with someone who has never done a deal before?’ Corver (pictured, right) agreed that ‘new capital needs the right expertise,’ while Diffey said he would prefer to see stronger existing players.

In the discussion round-up the panel were asked what they expected and would like to see happening in the run-off sector over the next year. Wasserman anticipated opportunities to arise from cyber risk while Diffey said he hoped to see the Rhode Island initiative bear fruit: ‘I would like to see Rhode Island put through a Part VII equivalent – there is more momentum with this initiative and everyone is keen to see it work,’ he stressed. Gossmann expected to see a significant shift towards larger transactions in Europe emanating from the larger players cleaning up their companies for 1/1/16 – ‘we will see a lot more fast and clear cut decisions’ – while Corver expressed the hope that the priority for run-off at board level would be up next year.

Appeal for partners to fund Rescue Re

Arndt Gossmann, CEO of DARAG, used the Monte Carlo run-off seminar to issue a plea for partners to join Rescue Re, an initiative to support a rescue boat for refugees in distress in the Mediterranean. He invited the re/insurance community to help fund the operation of the Phoenix, a search and rescue vessel run by the Migrant Offshore Aid Station (MOAS) based in Malta.

While the Phoenix usually patrols the sea between Libya and Malta in the summer months, the Rescue Re initiative would fund its continued operation through the winter months as well. Gossmann stressed that the project is a non-political, humanitarian effort purely aimed at avoiding deaths at sea, and that just a couple of partners would be enough to get the project off the ground.

More disposals likely in European run-off

The European run-off market has grown to about €247 billion, up by around €5 billion on the previous year, with the largest increase in the UK and Ireland. So says the ninth annual PwC Survey of Discontinued Insurance Business in Europe*, produced in conjunction with IRLA. It also finds mergers and acquisitions are set to increase, with 68 per cent of Continental European respondents expecting to see more than ten disposal transactions in Europe over the next two years. The majority of portfolio disposals, say 81 per cent of respondents, are likely to be between €10 million and €100 million.

Preparing for Solvency II was felt to be the biggest challenge facing Continental European re/insurers with run-off business. The proportion of organisations that classify some business written since 2010 as run-off has risen from 22 per cent in the seventh edition of the survey to 37 per cent in this ninth edition. Respondents identified the top three key objectives of their strategic run-off plans as being: 1) orderly run-off, 2) releasing capital, and 3) managing claim volatility.

Among those considering exit strategies, insurance business transfers appear to be the most popular option with 60 per cent of organisations in the UK and Ireland, and 57 per cent of organisations in Continental Europe, having looked at the transfer option. Respondents thought the greatest number of disposals were likely to take place in the UK and Ireland, with Germany the second most active area.

*Unlocking Value in Run-off – PwC Survey of Discontinued Insurance Business in Europe – Ninth edition

Rhode Island transfers could transform US market

Luann PetrellisLuann Petrellis of Ernst & Young* explains what insurers and reinsurers need to know about the insurance business transfer regulations just enacted in the State of Rhode Island

Since 18 August 2015, insurers face a significantly changed landscape in the massive commercial insurance run-off market in the United States. Newly enacted amendments to Insurance Regulation 68 in the State of Rhode Island (RI) have the potential to invigorate and transform the US market. Similar run-off legislation had just that effect on the UK run-off market over the last several decades.

Specifically, the new regulations provide expanded options for the management of run-off liabilities and, for the first time, bring finality to legacy liabilities. This article will outline the high-level impacts of the changes for insurers and reinsurers, including both the challenges and opportunities, and highlight a few effective steps they can take to ensure those firms considering the use of the new restructuring options establish a foundation for success.

A challenging landscape

The new regulation reflects the significant and longstanding challenges facing companies with commercial run-off business, including:

  • Access to exit mechanisms
  • Maintaining reputation
  • Capital constraints
  • Operational costs
  • Adverse loss development
  • Adverse impact to a company’s rating
  • Lack of skilled resources

In response to these challenges, larger insurance groups are rethinking organisational structures with a view to maximising the efficiency of capital deployed. However, both smaller property and casualty companies and large international insurance groups face a continual need to optimise capital deployments, as well as to efficiently manage run-off liabilities. Thus, the market is clearly ready to consider new tools and approaches to address the challenges of run-off businesses. These new RI regulations present an opportunity for firms to adopt such approaches.

Pursuant to Rhode Island Gen. Laws Section 27-14.5, the RI Department of Business Regulation has amended Insurance Regulation 68, providing for ‘Insurance Business Transfers’ (IBT), which are defined as the ‘transfer of liabilities and assets in accordance with the procedures delineated in this Regulation.’ The amendments provide a carefully monitored, transparent process for the transfer of some or all of a company’s commercial run-off liabilities to a newly formed or re-domesticated RI company through a department-approved and court sanctioned novation process, which brings finality to the legacy exposures of the transferring company.

The IBT also provides an effective restructuring tool for insurers or reinsurers. IBTs can be used to:

  • Combine similar business from two or more subsidiaries, putting all into a single company.
  • Transfer business between third parties.
  • Separate out different books of business and place them into separate companies.

As a public policy matter, the amendments fill a huge void in the current regulatory environment for run-off business and are beneficial to all parties involved in the IBT transaction. The transferring and assuming companies receive value relative to their long term interests and finality through the statutory novation effected by the court order. The policyholders and/or reinsureds in the transferring business benefit from the focused management of the assuming company and the oversight of the RI Department of Insurance (RI DOI).

Currently, the assumption and novation regulations in the US are restrictive and significantly limit the options available to owners of run-off companies to pay their obligations to policyholders and terminate their exposure to future liability. As a consequence, capital is trapped and unable to be deployed for more beneficial purposes. The importance of the IBT transaction is the ability to provide a fair solution that balances the needs of all the company’s stakeholders. The RI amendments allow companies with run-off business to distance themselves from these liabilities in a fully transparent manner, while also providing security to policyholders. The key is a closely monitored transfer process that must be reviewed and approved by the RI DOI as well as judicial authorities.

Consistent with the strong policyholder protections in US law, the amendments include provisions that address policyholder concerns. For instance, the statute has specific notice requirements for policyholders and other specified parties. Also, the IBT approval process requires:

  • Extensive disclosure of financial information of the assuming company.
  • An expert report that will evaluate the impact to transferring policyholders and non-transferring policyholders.
  • An independent evaluation by the RI DOI.

Most importantly from the standpoint of policyholder protection, there is complete judicial review of the IBT plan. Before the transaction will be approved, the assuming company must present evidence to the court that the transfer does not have a material adverse effect on policyholders.  Any party who feels adversely affected by the transfer can make a representation to the court for consideration. Once approved, the assuming company is subject to the continuing authority of the Rhode Island Insurance Department.

Lessons learned from the UK

A similar process [known as Part VII transfers] has been available in the United Kingdom for many years and has resulted in hundreds of successful transfers of business. Building upon the UK process, the RI amendments permit more efficient management of transferred books of business, and allow dedicated capital and focused solutions to be applied to run-off liabilities. While providing a reasonable framework for transfers of insurance business, the amendments also provide sufficient safeguards for policyholder protection resulting in fair outcomes for all involved parties.

How it works

The IBT process is initiated by the assuming company submitting an IBT plan to the RI DOI for approval. The requirements, as stipulated by the regulation, include an expert report that opines on the potential impact to various groups of policyholders and an approval of the transfer by the domiciliary state of the transferring company. Once the RI DOI has approved the plan, the assuming company may file a petition with the Providence County Superior Court for approval of the transfer. The assuming company must comply with the broad notice requirements set forth in the statute, which include notifying all policyholders at their last known address.

Once approved by the court, the IBT results in a DOI-approved and court-sanctioned novation of the transferred policies, releasing the transferring company from liability under the transferred policies. While loss portfolio transfers and reinsurance provide some economic finality, the IBT will provide economic and legal finality to the transferring company.

Good planning and project management of an IBT are essential to navigating certain risks and potential stumbling blocks in the process. Early contemplation of potential obstacles can make a significant difference. For companies promoting the transfer, the objective must be to minimise risk of objection and to achieve regulatory and court approval of the transaction. Therefore, companies should invest time identifying potential challenges that may be raised by various parties. Once these have been identified, companies should devise a strategy to address potential objections.

Effective approaches are likely to include:

  • A communication plan designed to clearly define the business being transferred, the purpose of the transfer and the impact on potential objectors. The communication plan must also flesh out as early as possible the concerns of potential objectors which can then be addressed, if necessary, on a one-to-one basis.
  • A strategy for addressing the concerns of and engaging potential objectors to secure their support, which may include amendments to operational and/or capitalisation plans.
  • A contingency plan for dealing with key objectors, who are unlikely to support the transfer, which may include commutation, novation or exclusion from the transfer.

How the RI IBT differs from Vermont’s Legacy Insurance Management Act (LIMA)

While all the differences between the IBT and Vermont’s LIMA are beyond the scope of this article, it is important to point out some key distinctions between the two transfer processes.

The LIMA approval process is solely regulatory. The approval of the transfer is effected by the Final Order of the Vermont Insurance Commissioner. In contrast, the RI IBT process requires an independent review and approval of the RI Insurance Department as well as review and approval by the Superior Court for Providence County, RI.

Unlike the IBT, which is broad in scope, a LIMA transfer is restricted to closed blocks of non-admitted commercial property and casualty insurance business. Also, under LIMA, to be considered a ‘closed block’, all such business is required to have been expired for not less than 60 months and have no active premiums yet to be paid. The requirement that qualifying reinsurance must have no active unpaid premium outstanding may create a practical impediment against including reinsurance in the transfer, in light of the possible long tail of premium payments under some contracts. Under the IBT there is no requirement that there be no active premiums to be paid, avoiding the potential problem of disqualifying reinsurance from the transfer.

The IBT process impacts a court-ordered novation of all transferring policies and reinsurance agreements providing the potential for economic and legal finality for the transferring company.  The Final Order issued pursuant to LIMA effects a statutory novation of only those policies and reinsurance agreements in the closed block that have not been excluded from the transfer by opt out or otherwise, significantly limiting the ability of the LIMA transfer to provide finality.

Bottom line

The experience of the UK run-off market has proven that a well-designed IBT process can be an effective restructuring tool for insurers and reinsurers, while still providing adequate protections for policyholders. Now, for the first time, US insurers can achieve finality with respect to their run-off businesses, which will help them address challenges related to the optimal use of deployed capital.

* The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or the global EY organisation. Luann Petrellis provides insurance advisory services in connection with the RI Amendments to Insurance Regulation 68 for Ernst & Young LLP in New York. She can be reached at

A Guide to Part VII Transfers
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Available from the end of October 2015 at a price of £95.
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Asbestos: The Future Risk

Hard copy with free PDF £39.99
PDF format only £14.99

“A wide ranging and well informed piece of work which covers virtually everything you need to know about the risks still to come from asbestos claims on the insurance market”
John Winter, Ruxley Ventures

Click here for list of contents and sample pages

News in brief – click on the headlines to read stories in full

Rise in US asbestos payments

Fresh appointments at DARAG

Insurers face last minute Solvency II requirements

Deafness claims rise again

California insurance regulator joins Locke Lord

Professional indemnity specialists join Carter Perry Bailey

Rhode Island to allow transfers prior to commutation plan

RiiG launches Claims Academy

Ben Baker to head IRLA Academy

Independent scheme approved

Three senior hires at DARAG

ILS market to double in five years

IRLA to stage mock Joint Settlement Meeting

Dubai to host new run-off event

Fracking – Risks and Rewards

A special report from Run Off & Restructuring
Click here to read the review in the latest issue of AIRROC Matters

Fracking FCA game-changing energy revolution or a risk-filled dash for gas? Fracking, the controversial technique of hydraulic fracturing to extract shale gas, has become one of the most divisive issues of the 21st century.

Fracking: Risks & Rewards takes a detailed look at the issues and hype surrounding the fracking industry. What does hydraulic fracturing really involve and what are the risks arising from shale gas exploitation? Are the proposed economic benefits realistic? What regulations apply to fracking activities and are they sufficiently stringent? Who is responsible and who will pay in the event of an accident?

Hard copy with free PDF £39.99
PDF format only £14.99

View full contents list and sample pages HERE.

Diary dates

24 September
AIRROC Regional Education Day
Chicago, Il, USA

1 October
IRLA Mock Joint Settlement Meeting
City Grange, 8/14 Coopers Row, London EC3N 8BQ

7 October
Understanding Non-Life Re/Insurer Financials & Key Ratios
Central London

18-21 October
AIRROC NJ Commutations & Networking Forum 2015
New Brunswick, NJ, USA

11 November
UAE Run-Off Forum
DIFC Congress Centre, Dubai

24 November
IRLA Academy – Mergers & Acquisitions
Imparando, 55 Commercial Road, London E1 1LP

For details of more upcoming events

The Run Off & Restructuring Yearbook & Directory 2016 is coming soon!

To read the 2015 edition including feature articles click here.

The 2015 edition contains articles on exit strategies, asbestos liabilities, model validation for Solvency II and the potential risks of fracking, plus features on recent developments in the US and in Continental Europe

To read the Yearbook & Directory as an e-magazine click the cover image.

To search the Online Directory of Service Providers at click here