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Vermont Gov. Peter Shumlin is scheduled to sign a measure into law Wednesday that proponents hope could create a new niche insurance industry by providing a vehicle for transferring blocks of nonadmitted commercial insurance and reinsurance business into newly created entities in Vermont.
The mechanism established through Vermont's Legacy Insurance Management Act is being likened to so-called Part VII transfers in the United Kingdom.
LIMA “creates specialized Vermont-based insurance companies that help other companies consolidate policies and redeploy capital,” Gov. Shumlin said in his budget address this year.
“This could be the next success in our efforts to serve as a specialized global financial services destination,” Gov. Shumlin said. “Patterned after Vermont's captives sector, LIMA would add tax revenue and skilled, well-paying financial jobs.”
This kind of transaction can greatly assist the reorganization of the transferring company or group, and also streamline the process of dealing with discontinued business by focusing it in the hands of a properly established runoff specialist, said Nigel Montgomery, a partner at law firm Sidley Austin L.L.P. in London.
“Effectively, we deal with nonadmitted business, including reinsurance and any direct commercial business written in the nonadmitted market,” said Anna Petropoulos, one of the proponents of the Vermont LIMA measure and president of Brattleboro, Vt.-based runoff manager Apetrop USA Inc., a unit of London-based Apetrop Ltd.
The impetus for pursuing the mechanism was a European client who wanted to transfer a block of U.S. business to a new owner and didn't see an efficient vehicle for doing so, Ms. Petropolous said.
“You can probably do anything you want to in the U.S., but with too much labor intensity and too much legwork,” she said. “What we've created here is a streamlined regulatory process.”
Business transferred through the LIMA mechanism would be closed blocks of business with no policies having been sold for at least five years and no premium collected for five years, typically involving long-tail liabilities such as asbestos, pollution and certain other environmental exposures, Ms. Petropoulos said.
The LIMA measure, which takes effect on passage, includes a provision for requiring written notice to all policyholders and reinsurance counterparties involved in a transfer plan, giving them an opportunity to voice objections and opt out of the transfers.
The commissioner of Vermont's Department of Regulation is responsible for reviewing the solvency of the assuming company before and after the proposed transaction, as well as the assuming company's ability to comply with all requirements of policies and inward reinsurance agreements involved in the transaction, including the administration of claims. The commissioner also has the authority to examine assuming companies.
Assuming companies' boards are required to hold annual meetings in Vermont.
Once the transactions are approved, “the terminology within the bill effectively concludes a whole and final novation,” Ms. Petropoulos said.
Winning Vermont legislators' approval of the LIMA concept was “a three-year legislative journey,” Ms. Petropolous said, with U.S. insurance industry groups initially voicing opposition.
“We worked on that for the last three years with various interested parties and the insurance department,” said Matthew T. Wulf, vice president for state relations and assistant general counsel at the Reinsurance Association of America in Washington.
“While we question its ability to create a new niche industry in Vermont, we have become more comfortable with its operation and the controls,” Mr. Wulf said.
But since the measure was initially proposed, “there were changes made and clarifications made,” Mr. Wulf said. “I'm not saying it was something we advocated, but we didn't testify against it this year.”
“When the bill was first proposed, we had a significant number of concerns,” said Frank O'Brien, Boston-based vice president of state government relations at the Property Casualty Insurers Association of America. “Over the past several years, the sponsors and supporters of the bill worked hard to address those concerns, and we think that the bill that has passed the Legislature was far better than the bill that was initially proposed.”
Initially, Mr. O'Brien said, “We had some concerns with the notice provisions. We had some concerns with the reach of the bill.”
“The Department of Financial Regulation in Vermont stepped in and significantly improved the oversight of this particular type of transaction,” he said. But the bill's signing into law is just a first step, he added. Now the Vermont Department of Regulation will have to address its implementation and possibly craft some regulations related to LIMA transactions, he said.
The American Insurance Association also previously opposed the LIMA bill, but, recognizing that it was a high priority for the governor and the state, took no position this year, instead working to amend it, said Gary Henning, the AIA's vice president for state affairs for the Northeast region in Albany, N.Y. “We could see where it was going so we said, "Let's fix the bill,'” he said.
“The basic concern that we have with the legislation is that it encourages the formation of runoff companies,” Mr. Henning said.
Among the amendments the AIA found favorable were steps to limit the scope of the bill and provisions for objections to the transactions, including allowing policyholders to opt out of having their policies transferred to the new entity. For the AIA, the opt-out provision is significant, as it allows insurers to opt out of the transfer of their reinsurance agreements from a reinsurer to one of the newly formed Vermont entities.
Mr. Montgomery, who has been involved in several Part VII transfers in the United Kingdom, including the transfer of Equitas Ltd.'s business to Berkshire Hathaway Inc., said that it is common under Part VII deals for some policyholders to object.
“There were a lot of positive changes that we were able to get,” Mr. Henning said. “The bill was much improved.”
There is interest in the Vermont LIMA mechanism “from some of the biggest insurance carriers in the world,” Ms. Petropoulos said.
Sarah Veysey contributed to this story.