Insurers with unwanted runoff blocks of business should consider the latest guidance from insurance regulators on potential transactional structures that could mitigate this issue. On May 13, the Restructuring Mechanisms (E) Working Group (Working Group) of the National Association of Insurance Commissioners (NAIC) issued a revised white paper titled “Restructuring Mechanisms” along with a best-practices document. The materials cover potential commutation, insurance business transfer (IBT) and corporate division (CD) transactions that could allow an insurer to shed runoff blocks of business without necessarily seeking policyholder approval in every instance. The revised white paper discusses relevant statutes permitting various of these kinds of transactions in Arkansas, Illinois, Oklahoma, Rhode Island, Vermont, Arizona, Colorado, Connecticut, Iowa, Michigan and Pennsylvania. Among other things, the white paper draws parallels and contrasts between these statutes and their UK-law analogs, solvent schemes of arrangements and Part VII transfers.

Comments from interested parties on these restructuring materials may be made until June 14.

The revised white paper makes six recommendations.

1. There should be a standard set of financial principles by which to judge a commutation, IBT or CD transaction.
2. In the case of a restructuring transaction involving a personal lines block or life block, guaranty fund coverage should continue. The Working Group recommends that language proposed by the National Conference of Insurance Guaranty Funds (NCIGF) on this point be added to the NAIC Property and Casualty Insurance Guaranty Association Model Act.
3. The Working Group notes a suggestion from stakeholders that an independent expert be required in any restructuring. In response, the Working Group writes, “While independent experts can be of value, the mere fact that someone is employed by an insurance department does not mean that their skill set is not sufficient for certain transactions. Depending upon the transaction, department staff with a deep understanding of the insurer might provide more protection for consumers than a newly hired individual without a history with the insurer.”
4. The NAIC’s National Treatment and Coordination (E) Working Group should “consider whether any changes should be made to the licensure process for companies resulting from restructuring transactions of runoff blocks. A streamlined process that still ensures appropriate regulatory oversight (and any licensure necessary to preserve guaranty association coverage) may be appropriate in limited circumstances. However, care needs to be taken to ensure that the licensing process is robust and rigorous. ... ”
5. The Statutory Accounting Principles (E) Working Group should determine the appropriate accounting (including financial reporting and risk-based capital (RBC) calculations) for an IBT or CD transaction that uses a protected cell. This should be done before the NAIC undertakes planned updates to the Protected Cell Model Act.
6. States are “strongly” discouraged from using an IBT or CD transaction for long-term care (LTC) insurance. If a state does wish to pursue an IBT or CD transaction involving LTC insurance, the state “should bring such a proposed transaction to all of the licensed states first and generally such transactions should only be utilized to the extent the NAIC develops a national solution for such transaction.”