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/.