Company Restructuring Statutes Gain Steam in the States- NCIGF Adopts Policy Position

Restructuring statutes, which take the form of either company division statutes or insurance business transfers (IBTs), are gaining steam in the state legislatures. These are statutes that permit an ongoing insurance company to divest itself of certain liabilities, along with a calculated amount of assets, and relinquish any ongoing responsibility for this business. The business divested would be put into an existing or newly created insurance company. The statutes proposed typically call for a plan to be filed with and approved by the state’s commissioner of insurance. Sometimes review and approval by the court is also required.  Requirements for notice to policyholders vary from state to state. The most current proposals do not limit lines of business that can be subject to divisions. Hence, types of insurance such as personal lines, workers compensation and long- term care could be involved.

At its October 2019 meeting, the NCIGF Board of Directors adopted a policy position on restructuring mechanisms. While the NCIGF takes no position on this or any other company business practice, it is concerned with the continued protection of covered policyholders and claimants in the event of insolvency. NCIGF public policy is focused on preserving guaranty fund (GF) coverage for policies and claimants where there has been a division or an IBT:

  • Where there was guaranty fund coverage before the division or IBT, state regulators should ensure that there is coverage after the division or IBT. A division or IBT should not reduce, eliminate or in any way impact GF coverage.
  • Where there was no coverage before the division or IBT, there should be no coverage after the transactions are completed. A division or IBT should not create, expand, or in any way impact GF coverage.
  • Guaranty fund representatives are a good resource for any guaranty fund coverage issues that arise in evaluating these transactions.

NCIGF’s complete position statement can be viewed here. Roger Schmelzer, NCIGF’s President and CEO states “our organization is focused on protecting the policyholders the guaranty fund system is intended to protect. Our position on restructuring mechanisms reflects this primary concern. Some state guaranty funds may have varying views on these statutes. In any case, we hope that regulators considering these transactions will keep the guaranty funds informed and make use of their expertise in the area of insurance insolvency.”

Background and recent developments. This concept began to take shape many years ago when Rhode Island adopted Chapter 14.5 of its insurance code known as “Voluntary Restructuring of Solvent Insurers.” The mechanism was narrowly crafted and applies to “insuring of any line(s) of business other than life, workers’ compensation, and personal lines insurance.” (See RI Statute s. 27-14.5-1(6)).

Pennsylvania also had a related law (PA Bus Corp. Law § 1951 (repealed)) that provided for division of a solvent company. The statute was used most notably in 1996 by Cigna to divide the business of its Insurance Company of North America (“INA”) unit. The newly formed entity, known as Brandywine, assumed certain run‐off blocks of business while INA continued to write new business. The law has since been repealed and replaced with the more generalized Associations Transaction Act (15 Pa.C.S.A. § 361) though its application to insurance policyholders is unclear.

In 2014, Vermont passed its Legacy Insurance Management Act (LIMA). According to the RunOff Re.Solve website (runoffresolve.com), LIMA allows a non-admitted insurer to transfer its discontinued commercial business to a third‐party company. Such a transfer would require approval from the Vermont regulator, but the law does not mandate court approval. Personal lines coverages are excluded, and policyholders can opt out of the transfer process. (See VT ST T. 8 § 7111 et seq.)

Arizona also has a business transfer law. (See AZ ST § 20-736)

Most recently, a number of division statutes have been proposed and adopted in the following states, including the following:

Connecticut: Division statute enacted in 2017

Georgia: Division statute enacted in 2018.

Illinois: Division statute enacted in 2018.

Iowa: Division statute enacted in 2019.

Oklahoma: IBT statute enacted in 2018.

Michigan: Division statute enacted in 2018

Nebraska: Proposal introduced in 2019.  Did not progress.

Again, these most recent proposals are not limited to certain lines of business nor is policyholder approval required. Whether there is guaranty fund coverage for the assuming entity is also an issue of concern.

 

For additional details on division statutes please go to https://www.ncigf.org/industry/public-policy-and-legislation/.

NCIGF Weighs in on Reinsurance Collateral Proposals

On October 22nd the NCIGF weighed in on the current debate about reinsurance collateral proposals in a letter to John Oxendine, chair of the NAIC Reinsurance Task Force.

“The success of reinsurance collections has a direct bearing on how much insolvencies ultimately cost the public,” wrote Barbara Cox, NCIGF’s vice president Legal & Regulatory Affairs. “For this reason, we are watching with interest the continuing debate over Reinsurance Collateral Proposals.”

Cox also wrote, “It stands to reason, based on the significant impact collateral appears to have on estate recoveries, that any reduction in current collateral requirements will directly and considerably add to the cost of guaranty association protection that is, by statute, ultimately passed on to the public.”

For Now, OFC Legislation Keeps P/C Guaranty Fund System Intact

By Roger H. Schmelzer

Sometimes the “buzz” on an issue can be gauged by the number of media clips about it that come though the NCIGF offices.

There is major ink being spilled editorializing about currently proposed Optional Federal Charter legislation. In one day alone, the NCIGF office received more than 25 clips from industry publications and mainstream news outlets about the issue. In the past month, it seems virtually every writer in the industry has examined, analyzed and vetted every conceivable facet and angle about the OFC.

The jury is still out on the fate of the bill introduced in the U.S. Senate by Senators Tim Johnson (D-SD) and John Sununu (R-NH) May 24. The NCIGF takes no position on OFC legislation. Our focus – and that of our members – is to deliver on our mission: to step into the shoes of a failed insurance company to pay property and casualty claims. This is our role as currently defined by state law. As introduced, the Johnson-Sununu bill would leave those responsibilities mostly untouched.

Of course, legislation as introduced usually has no relation to legislation as enacted. Inevitable political tradeoffs have a way of changing things, sometimes drastically. While I do not anticipate that the guaranty fund system will be the most important element of the bill to be discussed, it will receive its share of attention.

As lawmakers consider OFC or any other proposal that could call for a federalized guaranty fund system, we urge caution in deliberation. After all, for nearly 40 years the system has delivered on its statutory mandate, paying claims that otherwise would have gone unpaid due to insolvency. The system works well on behalf of consumers and would quite simply be a bear for a federal agency to manage.

Indeed, unlike many of the alternatives that some are eager to float, the guaranty fund system has a proven track record. And we believe that the state-run system is working well, providing, as it does, important insurance consumer protection.

Here’s a statement I’d like to see in the news clips that have been coming in: The GF system is financially healthy; it has and is able to step in for failed insurers to pay policyholder claims at state law-defined allowable limits, therefore Members of Congress are reluctant to disrupt it.

The Johnson-Sununu bill calls for the National Insurance Guaranty Corporation to step in when a state guaranty fund has not met the standards established by the federal legislation.

Presently each state legislature creates guaranty association rules for its own state. This OFC bill proposes a set of minimum qualification standards which state guaranty associations must satisfy to be classified as qualified and be allowed to protect consumers of both national and state insurers doing business in their state. As currently drafted in the National Insurance Act of 2007, the qualification standards closely track the NCIGF’s own model guaranty fund law, which many of our member guaranty association’s state legislatures have now adopted.

It’s important to note, an absence of uniform standards in the past has not prevented the system from working effectively. Insurance, including guaranty funds, has long been regulated by state statue; this means there is variation in law from state-to-state. This has given the states flexibility to craft laws that address their individual needs and reflect their specific circumstances. But this variation does not suggest that guaranty fund laws in any way are deficient. If anything, this variation makes the guaranty funds better able to protect policyholders in the states they serve.

In its current form, the proposed OFC legislation would give states four years to amend the state laws to meet federal standards. That’s what most, if not all, of the states would do if OFC legislation passes. Most guaranty funds already meet many of the proposed qualification requirements. If the current proposal were enacted, minor changes to state laws would be required to allow national insurers to become members of the state guaranty association. It will only be in rare instances that some funds will have to make further changes to their guaranty fund laws to meet the qualification standards and be considered a qualifying guaranty fund, or they will choose not to provide the guaranty fund mechanism for claims of national insurers, in which case the national corporation would take over all guaranty fund functions in the state.

The state-based property/casualty guaranty fund system can live with the Johnson/Sununu proposal, but that is not necessarily the end of the story; the legislative process is long, convoluted and unpredictable.

There will be a bill introduced in the U.S. House of Representatives that could have different provisions. Assuming the proposal gains momentum, there will be committee hearings in both chambers where changes can be made and potential amendments on the floor if the bill were to get that far. Finally, should the bill pass both houses, there will likely be a conference committee where the real dealing will take place.

The guaranty fund community should be pleased with where we stand, but should not take undue comfort from what is essentially a first draft that gets it right. Insurance regulation is not the hottest topic in Washington, but it is one cataclysmic natural disaster or huge insolvency away from becoming one. Additionally, proponents of an OFC are spending millions of dollars and thousands of human resource hours on getting this bill passed. Things could change dramatically for stakeholders affected by the bill, including the guaranty fund system.

For that reason, we must continue to concentrate on making the existing system work as well as we can. We need to focus on communicating the message of success and improving collaboration with our insolvency partners to underscore the value of the system to consumers. We must use this period to establish the innate strength of the guaranty fund system so that members of congress will be satisfied that it is in place rather than motivated to “fix” it.

Runoffs

Runoffs – Friend or Foe?
Runoff of a statutory insurer or a discontinued line of business has been a method used for years by typically large insurance organizations when exiting a market or a line of business. This kind of runoff has been managed internally within the organization and is largely invisible to the outside world. As of late, there seems to be a growing trend of insurance regulators running off troubled companies. At present, Kemper, Highlands and Frontier are in runoff, under the formal or informal supervision on their respective insurance departments. This article presents and discusses the issues raised by these regulator-supervised runoffs.

At first glance, runoff may appear, to at least regulators, to be an attractive alternative to attempting to rehabilitate an insurer, or liquidating an insurer through a formal, judicially supervised process. A liquidation is viewed by many regulators as something to be avoided at all costs. A troubled insurer is also an in-state employer providing local jobs that can, at least temporarily, be preserved with a runoff. Further, the bankruptcy of an insurer, although arguably a natural occurrence in an intensely competitive marketplace populated by a large number of companies selling a largely homogenous product, is still viewed by many as a regulatory failure. Runoff allows this negatively viewed outcome to be avoided.

As a good friend has pointed out to me, the fact that a liquidation has occurred does not by itself indicate a regulatory failure. A poorly run liquidation or poorly handled troubled company that results in higher costs passed on to the public is a regulatory failure. The goal should not be to avoid liquidation, it should be to minimize the cost of any liquidation that becomes necessary.

In any case, a regulator may see a runoff as attractive because it also means that guaranty funds are not triggered. Guaranty fund assessments are not required. If a state which allows premium tax offset for assessments is involved, premium tax revenues do not decrease.

My message to primary insurers is quite simple. We need to tell regulators to HOLD EVERYTHING! STOP! Please take a break. We need to ask whether runoffs are a good thing. Is the insurance consuming public better off with a runoff? The primary purpose of insurance regulation is to protect policyholders. All things considered, are runoffs in the best interests of policyholders?

These are all good questions that have not been answered. I would submit that an important step has been skipped. Has anyone looked at this on a public policy level? That is, what are the public policy implications of this change in approach? From a financial standpoint, is it clear that runoff provides a better result to those impacted by an insurance insolvency?

Decades ago, legislators in the many states acted in a surprisingly uniform way to address the problem of insurance insolvencies by putting in place a network of state insolvency laws. These laws embodied the measure of protection that would be provided to the various individuals and organizations impacted by an insurer insolvency. There were winners and losers – some parties would be protected, others would not. Legislators decided that
troubled companies that were insolvent, or operating in a way that was hazardous to policyholders or the public, would be taken out of the marketplace, with the policy claims of those most in need of protection paid by the state guaranty funds. Claims against the insurer including claims under policies were required to be substantiated, and would be paid subject to a priority of distribution scheme that preferred policyholders and claimants, and also the guaranty funds that protected those policyholders and claimants.

Guaranty funds would be administered by those who know best how to handle insurance claims – the insurers themselves. Guaranty funds would be examined and regulated just like insurance companies, since insurance regulators would have a similar interest in ensuring that policyholders were protected, whether or not an ongoing insurer is involved. Protection of policyholders was the pervasive theme and principal goal shared by insurance regulators and guaranty funds, with the goal achieved through the operation of the state system of
guaranty funds.

The benefits that are provided by runoffs are unclear. Runoffs are conducted without established regulatory standards (e.g., policyholder’s preferred status for protection and claims priority) similar to those that exist in insolvency laws. There seems to be little evidence available at least to the author that indicates that companies in runoff receive the same vigorous level of regulation as ongoing insurers. While writing this article, I have been trying to recall the last time I heard about a regulatory examination of a company in runoff. Whatever good public policy is represented by runoffs remains unclear.

Further, it is not at all clear whether a runoff (that is almost always followed by a liquidation) results in lower costs ultimately passed on to insurance consumers, state taxpayers, estate creditors and other stakeholders. The case really has not been made by way of financial analysis that runoff provides a better overall result to these important
stakeholder groups.

To address the matter from a practical standpoint, and from the guaranty funds’ perspective, it is critically important that regulators conduct a runoff in such a way as to be consistent with the overall goal of protecting policyholders. A runoff must meet certain minimum requirements to do this: (1) The same rules should apply on claims, insureds and claimants must be treated fairly, (2) A runoff cannot result in a “deepening” of insolvency, and (3) Any runoff must include a separate effort to work with the guaranty funds to plan for liquidation, should liquidation become necessary.

To explain, claims adjusted and paid in runoff should be handled in the same manner as claims handled by ongoing insurers. There should be no question about whether claims processed during runoff are being promptly and fairly investigated, adjudicated and paid. There is at least anecdotal evidence that different rules sometimes exist for settling claims in runoff.

A runoff should not result in higher costs passed on the public through the guaranty fund system. Runoffs almost always involve financially troubled insurers. A runoff should not result in a larger deficit or shortfall than what existed at the outset. Finally, the runoff should be conducted in such a way that an orderly transition to liquidation can occur, should liquidation be necessary. This is essential to ensuring that policyholders are protected, even when it is necessary to liquidate the insurer. Every effort should be minimize the disruption that results from placing an insurer in liquidation. With proper planning and consultation with the guaranty funds, a smooth transition to liquidation is achievable.

From an ongoing insurer’s perspective, a runoff can seem attractive – guaranty fund payout is postponed and possibly reduced. However, runoffs cut both ways. Guaranty funds in effect lose the benefit of their preferred position in the priority of distribution scheme, and are forced to “share” assets with all creditors, through the operation of the insurer while in runoff. The latter will almost certainly result in lower distributions to guaranty funds. To the extent that there is a double standard that applies from regulatory perspective, and policyholders suffer as a result, guaranty funds may easily be viewed as the problem even though not involved. So, while runoffs may seem superficially attractive, there may be a “cost” borne by industry that is not initially apparent.

Difficult issues are raised by the runoff of an insurer. Important questions have yet to be answered. Hopefully this article has helped these issues and questions to be seen more clearly.