Locke Lord QuickStudy: What a Difference a Year Makes

At the NAIC Fall meeting in Austin, Texas, the Restructuring Mechanisms Working Group ‎‎(“Restructuring Working Group”) held its meeting on insurance business transfers (“IBTs”) and ‎corporate division statutes. The Restructuring Working Group (and its Subgroup which is working on ‎accounting and related subjects) continues to gather information on this issue. ‎

A year ago when the subject of IBT’s (and division statutes) was first introduced at the Restructuring ‎Working Group, the reaction was clearly less than positive, with a number of states first learning of the ‎initiative, and not at all receptive, with a significant number of objections articulated. The subject met ‎with a decidedly different response among the states at the meeting this week, with virtually no state ‎voicing objections (not that every state is yet on board, but at least all appear receptive to considering ‎the mechanism).‎

Also, in the meantime, the first filings for a restructuring were submitted to a court in Oklahoma to ‎commence the process of approving what may become the first such transaction under an IBT statute.‎

At the meeting, the Restructuring Working Group reiterated its plans for drafting a white paper, which ‎is one of its 2020 charges. The white paper will (1) address the perceived need for restructuring ‎statutes and the issues those statutes are designed to remedy, (2) summarize the existing state ‎restructuring statutes, (3) address the legal issues posed by an Order of a Court (or approval by an ‎Insurance Department) in one state affecting the policyholders of other states, and (4) consider the ‎impact that a restructuring might have on Guaranty Associations and policyholders that had Guaranty ‎Fund protection prior to the restructuring. ‎

The meeting included a discussion of segregated accounts, protected cells and guaranty fund ‎protection issues related to IBTs and divisions, presentations from the American Council of Life ‎Insurers (ACLI), the American Property Casualty Insurance Association (APCIA), the National ‎Conference of Insurance Guaranty Funds (NCIGF) and the Center for Economic Justice (CEJ) on some ‎of the issues before the Working Groups. In general, the comments were constructive and did not ‎display hostility to the fundamental concept of these restructuring proposals. The ACLI did not oppose ‎the general concept of IBTs or division statutes, but expressed their continuing opposition to the use ‎of these options for life, annuity and long term care business. The NCIGF expressed no opposition to ‎the restructuring options under review but indicated that guaranty laws throughout the country would ‎need to be amended to assure that no such restructuring would result in changing guaranty fund ‎coverage by removing or adding coverage by such reason. The NCIGF Indicated that it would soon ‎submit proposed draft amendments to existing law to assure this result. The CEJ expressed the view ‎that restructuring laws should require that a consumer advocate be given full access to the entire ‎submission in any restructuring and a formal role to advocate for the consumer in each of these ‎regulatory and judicial proceedings. Other that these comments, there were no major objections ‎introduced by any regulator or interested party.‎

The Restructuring Working Group also adopted its October 1 minutes, which included discussions with ‎Enstar Group and Aon Service Corporation on the various restructuring mechanisms, and the minutes ‎from its Summer National Meeting in New York.‎

As we noted in prior client alerts, U.S. reinsurers and insurers are looking for new solutions to provide ‎economic and legal finality to transfers of legacy and in some cases ongoing portions of current ‎insurance risks as a means to improve the efficient allocation of capital and management resources to ‎both legacy and on-going insurance operations. As of this date, Rhode Island, Oklahoma, Arizona, ‎Connecticut, Illinois, Iowa, Michigan, Pennsylvania and Vermont have adopted IBT or corporate ‎division statutes with varying requirements and procedures to segregate insurers’ books of business. ‎

Locke Lord will continue to monitor and report on the progress of the Restructuring Working Group ‎and Subgroup and any new developments with respect to the use of IBTs in the U.S, but a year from ‎now the discussion will also include the IBTs that have been successfully completed, because what a ‎difference a year makes!‎