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.
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 RI domestic. Without knowing which other state(s) may be involved, it is impossible to know the applicable regulator’s predisposition to the transaction. Rhode Island has indicated that it is also possible that alien business could be transferred to the U.S. via a Rhode Island domestic company. Both Elizabeth Dwyer, Superintendent of Insurance and Jack Broccoli, Associate Director - Financial Regulation, will work with other regulators to address any regulatory concerns. Assuming no objections at this stage, the next step is to either setup a licensed Rhode Island domestic, or to identify one that is prepared to assume the business.
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 for a potential commutation plan, (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:
- The new (or existing) Rhode Island insurer to which the book of business is transferred/novated may retrocede the business requiring review of the retrocessional agreement and collateral.
- The independent actuarial review (commissioned by the Rhode Island Department) must satisfy all interested parties and will be an important aspect to gaining approval from all the regulators involved.
- Communication with non-domestic regulators may be important in the process so they do not raise objections although their express approval may not be required. For example, review of the business transfer plan to fully understand what blocks of business and why these blocks are being transferred will be necessary in order to communicate with the regulators and gain their support. Although, as noted above, explicit approval may not be required from non-domiciliary states, it is likely Rhode Island will listen to concerns from other states and seek to gain their support.
- Credit for reinsurance of transferred book—business ceded or retroceded by the Rhode Island domestic to a non-admitted (including offshore) reinsurer may require collateral in the form of so-called Reg 114 trusts, letters of credit, other trusts or funds withheld.
As referenced above, these are some of the potential roadblocks/pitfalls that may confront the transferor.
- Some states may be hostile and/or express concerns regarding a voluntary restructuring and transfers under the Rhode Island law. Early communication with other regulators is quite important.
- Some insurers, insureds, reinsurers and industry groups may oppose them.
- Whether the transfer and commutation plan are respected by other states has not been tested in court. There is a good argument to be made that states should give proper deference to the Rhode Island Reg 68.
- The Rhode Island insurer assuming business may be required to provide collateral such as Reg 114 trusts, letters of credit, etc. so that transferring insurer may claim full reserve credit for any transfer because:
- Assuming the Rhode Island company (particularly if a new domestic) cannot be widely licensed due to seasoning requirements, and may not have rating or significant assets or surplus.
In summary Locke Lord LLP can assist in the following areas based on our experience:
- Assist with the formation of a RI domestic company including assessing capital requirements or assist with the redomestication to RI of an existing company.
- Assist with the preparation and/or review of a business transfer plan from an insurer wanting to transfer business to a Rhode Island domestic for the purpose of running off the business for business purposes (solvent run-off).
- Assist with the preparation and/or review of all necessary agreements to effectuate a business transfer plan including quota share, loss portfolio transfer and assumption reinsurance agreements, retrocession agreements from the Rhode Island domestic to a retrocessionaire, trust agreements, letters of credit, and claims and other administrative services agreements.
- Communication with the Rhode Island Department of Insurance on any such plans.
- Communication with other regulators in other impacted states regarding such a plan.
- After Rhode Island has reviewed the plan, Rhode Island will then submit to its Court for review and approval of the plan, at which time policyholders, regulators, or other interested parties will be able to raise any objections they may have.