Recently Rhode Island revised its Voluntary Restructuring of Solvent Insurers Act as implemented by DBR Regulation 68. This was, in many respects, modeled after the UK’s Part VII Transaction, which, subject to court approval, enables an insurance company to transfer/novate a book of business (and divest itself of all residual liability), to another unrelated insurer which assumes all liabilities associated with that business. Reg 68 is not as broad as the Part VII legislation, but nevertheless creates an option in the United States that had not heretofore been available. A number of Locke Lord US attorneys have been involved in Part VII Transfers, and thus are very familiar with the mechanism. Additionally, Al Bottalico joined the firm a year ago after 38 years with the California Department of Insurance. Al was Deputy Commissioner-Finance Surveillance, and has a good regulatory perspective and understanding of what the Rhode Island regulators will likely need in regards to such a transaction and has worked with the Rhode Island Department in the past. Al recently assisted in the preparation and review of one of the Reg 68. applications that was recently filed. Our Providence office gives us easy access to the Department.
The firm has been working with the Rhode Island Department for over 6 months to understand the nuances (pitfalls) of the Regulation, and have become very familiar with the required procedures. Thus far there have been no insurance companies formed or domiciled in Rhode Island for this purpose (two applications are pending), although we have had discussions with various parties interested in getting a company licensed in Rhode Island to transfer/novate business through Reg 68. In our various discussions, we have also become familiar with some of the potential issues that might arise if a company was formed and a transaction was entered into.
There are many reasons companies may want to consider transferring discontinued business that meets the criteria of the revised regulation to a Rhode Island domestic company. Such a transfer can potentially free up capital, free up important management resources currently being utilized to oversee the discontinued business and expedite the process of running off the discontinued lines of business.
Once the transferor identifies the book (or books) of business to be transferred, the first step is obtaining the consent of the domiciliary regulator of the insurer seeking to transfer/novate business to a Rhode Island domestic. Without knowing which other state(s) may be involved, it is impossible to know the applicable regulator’s predisposition to such a transaction. The next step is to either setup a licensed Rhode Island domestic, or to identify one that is prepared to assume the business.Both Elizabeth Dwyer, Rhode Island Superintendent of Insurance and Jack Broccoli, Associate Director - Financial Regulation, will work with other regulators to address any regulatory concerns. After the domiciliary regulator has approved the business to be transferred to a RI domestic and after RI has reviewed and approved the Business Transfer Plan it musts then be approved by the RI court who will make sure all interested parties, including policyholders, have been heard and will make the determination that there is no materially adverse impact to the policyholders from the transfer. The RI regulation requires involvement and scrutiny of regulators and the court system and thus provides for the protection of policyholders and the process also allows other parties to express comments or concerns. Under the regulation the RI domestic may also petition for implementation of a commutation plan either concurrently with the Business Transfer Plan or at a later date.
The Regulatory process to form and license a RI domestic to take advantage of Reg 68. is relatively simple, and requires a minimum capital of $3mm. An advantage of Reg 68. is that it permits one company to set up individual protected cells, thus allowing that company to assume disparate books of business. We can assist in most aspects of the licensing of a new Rhode Island domestic to whatever extent is desired. We may be most valuable coordinating the efforts of the team tasked with assembling the license application and appendices. Utilizing an existing Rhode Island domestic should be an easier process (the statute is limited to commercial property & casualty run-off liabilities so not all lines of business would qualify under the regulation, (for example workers’ compensation would not qualify). Additionally, to qualify under Reg 68, the company must not have written new premium for 60 months. Rhode Island has indicated there is nothing in Reg 68 that would preclude alien business from being transferred to Rhode Island under such a plan and there are various ways this could be accomplished. Many books of alien business have a substantial amount of U.S. policyholders and therefore regulators may view this favorably as policyholders would gain from the oversight provided by U.S. regulators.
There are a number of factors which should be kept in mind for utilizing a Rhode Island domestic for run off purposes such as:
As referenced above, these are some of the potential roadblocks/pitfalls that may confront the transferor.
In summary Locke Lord LLP can assist in the following areas based on our experience
For more information on the matters discussed in thisLocke Lord QuickStudy, please contact the authors.
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