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Linda S. Kaiser, Pennsylvania's insurance commissioner from January 1995 until June 1997, approved one of the most contentious insurance company restructurings in recent years.
Under CIGNA Corp.'s liability-based restructuring, the company split its Insurance Co. of North America subsidiary in two and assigned most of INA's liabilities to the portion of the company that was merged into a separately capitalized runoff facility. The other half of INA continues to operate unencumbered by those liabilities. As a result, it has earned a higher rating from A.M. Best Co.
CIGNA's restructuring, which continues to face legal challenges, and other recent LBRs have created an industry stir over the rights of insurers, policyholders and others affected by those transactions.
A white paper that a National Assn. of Insurance Commissioners' panel released this summer suggested that regulators should approve LBRs only if the transactions protect policyholders' rights.
Ms. Kaiser participated on the NAIC task force that authored the paper. But, before the paper was completed, Ms. Kaiser, 41, resigned as Pennsylvania's commissioner to rejoin Reliance Insurance Co. in Philadelphia as a senior vp, secretary and general counsel.
In a recent interview with Senior Editor Dave Lenckus, Ms. Kaiser shared her perspective on LBRs in general and some events surrounding CIGNA's restructuring.
How should regulators balance the interests of various groups affected by an LBR, especially when some groups' interests may be at odds with others'?
By statute in Pennsylvania, the insurance commissioner is charged with considering the interests of policyholders, creditors and other members of the public community, like shareholders, producers and others who might have an interest in the transaction.
So the interests being looked at are very broad, under Pennsylvania law.
Can a regulator's decision equally balance all of those interests, or does one group always emerge with what looks like a better deal?
I don't think a regulator can favor one group. It was the role of my department (in CIGNA's reorganization) to balance all of the interests in that transaction.
This balancing of opposing interests was no different than our review of insurer mergers and other transactions that I ruled on.
In fact, that balancing applies not only to other kinds of insurer transactions but the regulatory process in general. For example, if policyholder interests were always paramount, insurers would never receive a rate increase.
How strong a voice should policyholders have in proposed LBRs?
How much say policyholders should get is a matter of public policy. The question then should be, "Who is setting the public policy?" Is it the state's regulators, legislature or judiciary?
A state could have a statutory requirement, for example, delineating how much say policyholders should have. Or, case law could set forth how much say policyholders should have.
Those requirements are the floor. Then, of course, a regulator could go beyond those minimum requirements.
What kinds of documents do you think policyholders should be allowed to review so they can assess how they would fare in an LBR?
The philosophy the department followed while I was commissioner was to encourage public access to publicly available documents. However, there are provisions in Pennsylvania law that make certain documents unavailable to the public -- for example, documents arising out of the financial examination of insurers. Those provisions do not leave the commissioner the discretion to decide to release those documents. To release them would have been in violation of the statute.
That confidentiality requirement was established in the model holding company law. Forty-nine of the 50 states are required to hold examination papers confidential and not hold them out for public dissemination or examination.
Are there any other documents that policyholders affected by an LBR should be entitled to review?
There is a right-to-know law in Pennsylvania. Policyholders, creditors and other interested persons should have access to material that is defined to be public by the law.
Wouldn't a national standard on the level of involvement that regulators should grant policyholders during an LBR regulatory review help protect the interests of all parties in such transactions?
It seems to me that it would be difficult to establish a national mandatory standard for policyholder involvement in an LBR. It would be difficult to get 55 jurisdictions to agree to a consistent standard.
And, that's not how insurance historically has been regulated.
Do you support the findings of the NAIC's white paper on LBRs?
I haven't read the final white paper. I was no longer a member of the NAIC when the white paper was voted out of committee and sent to the parent committee.
To the extent you were familiar with the paper, do you think regulators who assess LBRs in the future should follow the paper's guidelines?
The working paper was never designed to be a blueprint for regulators to follow. It was originally thought the white paper would be useful to assist regulators who have never been through a transaction of this type.
They would receive the benefit of thoughts from regulators who'd been through the process.
But, given the controversy LBRs have generated, wouldn't a blueprint be helpful to protect the interests of all parties affected by an LBR?
During the time I sat on the task force, there was no consensus by the regulators that that would be a prudent line of action.
Part of this reluctance was that the LBRs to date have been so dissimilar that it would be difficult drafting a model law that could address all the variable ways of doing an LBR.
It wasn't deemed to be an appropriate use of NAIC resources.
Will the industry likely see many more LBRs like CIGNA's?
I don't know of any other state that has a provision that permits a division like the one in the CIGNA transaction. However, there are many other ways to structure an LBR that don't require a corporate division. For example, a company could set up a whole new unit.
Wouldn't that kind of transaction be a novation requiring prior policyholder consent, a situation that many restructuring insurers would want to avoid?
Some types of LBRs may very well require policyholder consent, depending on state law. However, you should keep in mind that many insurance company transactions -- mergers of stock companies, for example -- do not require policyholder consent.
The National Conference on Insurance Guaranty Funds has created some concerns about LBRs in general with its declaration that, since INA is still active, state guaranty funds would not respond if CIGNA's runoff facility were to fail.
What is your reaction to the NCIGF's decision?
I'm unaware of anything in current law that would support the allegation by the fund that they don't have to pay their policyholder obligations in accordance with current statutory schemes. I'm unaware of any state where there is a defense to paying claims.
So, unless something exists in a state's statutory language that allows it not to pay claims, the fund would have the obligation to pay in accordance with the state statutes.
In evaluating a proposed LBR, can a regulator ever be sure that a restructured insurer's proposed runoff facility will not fail?
With as much assurance as a regulator can have in evaluating an ongoing company, a regulator can evaluate a runoff company and make an informed decision about the viability of the company.
Were you surprised by the level of opposition to CIGNA's LBR?
I wouldn't say that I or the department was surprised by the level of opposition. The parties expressed their interest very early in the process.
Knowing the level of interest led the department to hold the hearings it did.
Is Reliance considering or would it consider restructuring in the same manner CIGNA did?
No. Reliance is very comfortable with its reserve position and therefore has no need to consider any restructuring.