Momentum quietly continues to gather for laws governing run-off and closed books of insurance business — while critics remain concerned that policyholders could be the big losers.
Regulators are focused on two options for discontinued books of business: insurance business transfer laws, or the more arcane “division” framework.
No one is doubting the need for some action. Moody’s has estimated that life insurers have more than $420 billion worth of annuity, life insurance, long-term care and other liabilities publicly designated as “legacy” or “run-off” that are targeted for exit transactions.
The insurance industry has struggled for decades with how to handle discontinued blocks of business. The Association of Insurance & Reinsurance Run-Off Companies formed in 2004 to give insurers a forum for addressing the issues.
Insurers are especially keen these days to move on from old books of business, as ultra-low interest rates continue to make profit goals elusive. That pressure to split off divisions and be rid of old books of business is pressuring regulators to act on guidelines.
One of the historic problems with selling off a piece of an insurance company is that it requires every policyholder’s signature.
“As you might imagine, that never happens,” joked Glen Mulready, Oklahoma insurance commissioner, during the Global Insurance Symposium earlier this summer.
Oklahoma took bold action in 2018, becoming the second state after Rhode Island to pass an insurance business transfer law. The main difference is the Oklahoma law covers all lines of insurance.
The Oklahoma process closely mirrors a business transfer law passed in the United Kingdom, which has resulted in more than 300 successful transfers during the past 20 years, the Oklahoma Insurance Department said.
While IBT plans do not require individual policyholder consent, an independent expert reviews all plans, along with the commissioner and OID staff.
In what OID calls the first IBT deal in the United States, Providence Washington Insurance Co. transferred all its insurance and reinsurance business, as well as $38.5 million, to Yosemite Insurance, an Oklahoma insurance company. Both PWIC and Yosemite are wholly owned subsidiaries of Enstar Group Limited.
That deal was approved by an Oklahoma court in September, and more deals are expected, Mulready said, emphasizing that policyholders are protected and businesses can thrive.
“There’s a lot of pent-up demand,” he explained. “There were policies in that first transaction where they hadn’t sold those policies in 40 years. So it allows them to sell those off and reactivate their capital for areas they are focused on.”
On April 29, Arkansas Gov. Asa Hutchison signed the Arkansas Insurance Business Transfer Act. It is based on the Oklahoma statute, and the NCOIL Insurance Business Transfer Model Act approved in March 2020.
White Paper Coming
The National Association of Insurance Commissioners also has the IBT issue on its radar. The NAIC formed the Restructuring Mechanisms Working Group in 2018 to review “the perceived need for restructuring statutes and the issues those statutes are designed to remedy and also to consider alternatives that insurers are currently employing to achieve similar results.”
Work has progressed slowly, but the working group has collected information and plans to put out a white paper in the coming months, Mulready said.
Meanwhile, insurers have concerns about opening up sales of closed blocks. In a letter to the working group, executives with New York Life and Northwestern Mutual said the rush to allow transfers could “introduce new dangers for policyholders and the state-based system of insurance regulation.”
The executives suggested the following “principles” to guide IBT laws:
» Policyholders should never be left worse off. An independent expert should review any block transfers to ensure that no class of policyholders is left worse off.
» No monolines. Regulators “should never permit a transaction that transforms a diversified insurance company into one or more monoline insurers,” especially when the transaction involves long-duration life, annuity or health insurance business.
» LTCi blocks should be ineligible for division or transfer. Long-term care insurance blocks are too hard to value and are plagued by reserving deficiencies, rate increases and, in some cases, insolvencies.
» Require strong financial standards and stress testing. Long-term solvency of the business taking over a block of policies should be rigorously tested.
» Use uniform NAIC valuation and accounting standards. Use of questionable assets to back reserves and capital in transfers is concerning, the letter noted.
The letter also urged the NAIC to establish strong minimum requirements for these transactions as accreditation standards.
“The strength of the state-based system depends upon the integrity of solvency regulation across the country,” the letter reads. “Companies should not be allowed to arbitrage their way to diminished solvency oversight by choosing one domicile over another.”
In a corporate division, an insurer divides into two or more insurance companies. Subject to its own state rules, the division creates isolated businesses for potential sale to third parties. Because the business is not transferred, no court approval is necessitated by the division, differentiating it from an IBT.
Connecticut enacted a division law in 2017, requiring an insurer to submit a plan of division that must include certain elements prescribed by statute and be approved by the insurance commissioner. Illinois, Georgia, Iowa and Michigan have since followed with similar laws.
In a significant deal approved in April, Allstate divided more than $5 billion worth of Michigan auto insurance policies into newly formed Illinois-based companies.
“We’re looking forward to engaging with more companies and discussing more of those transactions going forward,” said Dana Popish Severinghaus, the acting Illinois director of insurance, during the Global Insurance Symposium.