Vermont Governor Peter Shumlin has signed H. 198, titled the Legacy Insurance Management Act (“LIMA”), in an effort to attract new domestic insurance companies dedicated to run-off business in Vermont. LIMA allows for the formation of Vermont-domiciled insurance companies whose sole purpose is to acquire closed blocks of P&C commercial insurance and reinsurance business from non-admitted companies. To qualify as a “closed block” the transferring insurer must have ceased to write the business, the policies must have fully expired for a period of at least 60 months, and the must be no active premiums to be paid. The assuming insurer will need to file an application with the Vermont Insurance Commissioner that includes a legacy insurance transfer plan. The plan will need to provide, among other things, details of the underlying policies, a “no objection” letter from the transferring insurer’s domiciliary regulator, the transferring insurer’s financial statements, actuarial support and financial projections. In addition the acquiring company must submit to the limited jurisdiction of insurance regulators in those states where policyholders reside for purposes of application of those states’ Unfair Claims Settlement Practices Acts.
Significantly, unlike a Part VII transfer available in the UK, policyholders and reinsureds may opt out of the plan and polices or reinsurance agreements which, by their terms, are not transferable are automatically excluded unless the insured or reinsured provides written consent. Once the plan is deemed complete, written notices must be sent to all policyholders and reinsurance counterparties that describe the plan and such parties’ right to accept or reject the plan. The notice must also be published twice in two newspapers of general nationwide circulation. After the comment period expires, a hearing will be held to approve the plan and if approved an order will be issued shortly thereafter. An approval order will act as a statutory novation for the transferring insurance company with respect to the transferred policies, releasing the transferring insurance company from all rights, obligations, or liabilities. The application fee is $30,000 plus any amounts paid by Vermont to retain actuaries to review the plan, as there must be a showing of satisfactory financial capacity to meet the potential liabilities. Vermont will also levy a transfer tax of 1% of the first $100,000,000 of the gross liabilities transferred and 0.5% of any excess gross liabilities transferred.
In Governor Shumlin’s 2014 Budget Address, he stated, “The Legacy Insurance Management Act – called LIMA – creates specialized Vermont-based insurance companies that help other companies consolidate policies and redeploy capital. This could be the next success in our efforts to serve as a specialized global financial services destination. Patterned after Vermont’s captives sector, LIMA would add tax revenue and skilled, well-paying financial jobs.” According to media reports, industry reactions have been mixed, with most now taking a wait-and-see approach as to whether companies will take advantage of LIMA and, if so, their results. Given the ability of policyholders and cedents to opt out of any transfer under LIMA, any plan that is implemented should be noncontroversial, but the non-mandatory nature of the plan will also limit its utility for insurers seeking finality with respect to books of runoff business. However, legal fireworks may fly in the event an acquiring company should eventually become insolvent.
For a copy of the official press release, click here.
For a copy of LIMA, click here.