Rhode Island offers insurers runoff optionsReprints
Insurers looking to restructure or exit lines of business may get help from Rhode Island, which is considering its first license application for a specialty insurer formed to take advantage of the state's unique insurance portfolio runoff law.
Rhode Island last year became the first U.S. state to allow solvent insurers and reinsurers to terminate their liabilities on blocks of commercial property/casualty business by transferring them to a state-licensed company to be wound up, either in traditional runoffs or under accelerated commutation plans.
In other states, insurers may run off discontinued business in-house, retaining the liabilities during the process. Formal, regulator-approved runoff and commutation plans generally involve financially troubled or insolvent insurers.
London-based Pro Global Insurance Solutions P.L.C. now is seeking to license ProTucket Insurance Co., which will assume runoff portfolios in protected cells and expects to complete its first deal next year, said Mory Katz, managing director of the consultant's operations in New York.
Several insurers have expressed interest in runoff options under Rhode Island's Regulation 68, including transfers to third parties such as ProTucket or to an insurer's own Rhode Island-based affiliate, market sources say.
“There's been a lot of buzz” about the law, said Carolyn Fahey, Woodbridge, Virginia-based executive director of the Association of Insurance and Reinsurance Run-Off Companies Inc., a 47-member group of mainly insurers and reinsurers.
“They have really provided a very useful tool for companies looking to restructure their operations,” Ms. Fahey said. “The U.S. market needs something like that.”
Rhode Island originally developed Regulation 68 in 2004 to govern solvent whole-company commutation plans. To date, only one company, GTE Reinsurance Co. Ltd., has been wound up under the law.
As of August 2015, though, Regulation 68 was amended to allow any U.S. insurer or reinsurer, including U.S. units of foreign insurers, to transfer closed books of business or any “reasonably specified groups of policies” through novation — or substituting a new contract for the previous contract — to a Rhode Island-licensed insurer for runoff. These “insurance business transfers” can consist of any commercial property/casualty business except life and workers compensation, and the policies must have expirations dates at least five years before the filing date of the transfer plan.
Transfer plans have to clear several hurdles, including approvals from the transferring insurer's home state regulator and from the Rhode Island Insurance Division in Cranston, notifying policyholders and final approval from a Rhode Island state judge, who must find the plan does not adversely affect policyholders.
Companies that have completed a transfer can later adopt a commutation plan for the transferred business, but commutations require additional regulatory and court approvals and must have the support of 50% of policyholder creditors by number and 75% by claim value.
Regulation 68 is modeled on Part VII of the U.K.'s Financial Services and Markets Act 2000, which has produced hundreds of insurance business transfers to date with no financial problems, a review last year by Ernst & Young L.L.P. said.
The Rhode Island law is broader than the only similar U.S. statute, Vermont's Legacy Insurance Management Act, which allows transfers only of closed nonadmitted commercial policies and excludes reinsurance contracts with active unpaid premiums outstanding, according to Ernst & Young.
Policyholder protection is the primary issue for regulators and courts handling such transfers, and the multiple levels of review are one of Regulation 68's strengths, said Luann Petrellis, a consultant at Ernst & Young's insurance advisory practice in New York.
“There is significant up-front planning involved in these transactions,” and that planning should address any concerns regulators may have, she said.
Rhode Island regulators included the home-state approval provision in Regulation 68 to be sure all regulatory issues are covered in an insurance business transfer, said Elizabeth Kelleher Dwyer, Rhode Island's superintendent of banking and insurance.
“We are not planning on becoming a jurisdiction where you can go and dump your company,” Ms. Dwyer said. “We don't want to do anything behind the scenes. We intend to have conversations with any domestic regulator that has concerns.”
While not available to financially troubled insurers or reinsurers, Regulation 68 could provide significant benefits for active underwriters planning to restructure parts of their business or withdraw from certain lines, experts agree.
The novation of old business through a transfer relieves an insurer of ongoing liabilities, potentially freeing up capital for new business, Bala Cynwyd, Pennsylvania-based consultant RunOff Re.Solve L.L.C. said in an analysis.
A large insurance group with multiple books of business in runoff in different subsidiaries could simplify the process by consolidating the business in a Rhode Island insurer, Ernst & Young's review noted.
“The true benefit is that it increases the options available to companies with portfolios in runoff,” said Andrew Rothseid, RunOff Re.Solve's founder and principal.
The amount of business Regulation 68 brings to Rhode Island remains to be seen. Estimates of the size of the U.S. runoff market are difficult to come by, though Pro Global's Mr. Katz said business eligible for a Regulation 68 transfer is “easily in the tens of billions, possibly as much as $100 billion.”
Both Mr. Katz and Ms. Petrellis said several insurers have expressed interest in such a transfer, and Mr. Katz said he expects other third-party runoff managers to step into the Rhode Island market. While Regulation 68 has been on the books for nearly a year, such transfers take months to finalize, and many insurers may be waiting for someone else to jump in first, they suggested.
“Once somebody paves the road, then a lot of others will rush in,” Mr. Katz said.