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As noted in the Locke Lord Quick Study: Rhode Island Regulation 68, Voluntary Restructuring of Solvent Insurers Act, there are many reasons companies may want to consider transferring business. Such a transfer can potentially free up both capital and management resources overseeing discontinued lines of business, and expedite its run off. Furthermore, and possibly most importantly, it brings finality to the transferor.
On April 22, 1899, President Benjamin Harrison officially proclaimed the ‘Unassigned Lands’(subsequently named Oklahoma) open to settlement. Thousands of people lined up on the border and, when the signal was given, they raced into the territory to lay claim to their land. Of course, just as we see today, not everyone ‘minds the queue’, and some settlers snuck in early to claim their land, referred to at the time, pejoratively, as Sooners. Hence, resulting in Oklahoma’s nickname, “The Sooner State”. As November 1, 2018 is quickly approaching, will we see another ‘queue’?
Oklahoma Insurance Business Transfer Act
Oklahoma recently passed Senate Bill 1101 which created Article 16C, known as the Insurance Business Transfer Act (Code Sections 1681-1688), of the Oklahoma Insurance Code (Title 36)1. The statute becomes effective on November 1, 2018. Oklahoma now joins Rhode Island which has its Voluntary Restructuring of Solvent Insurers Act which is implemented by DBR Regulation 68. Both Acts are somewhat modeled after the UK’s Part VII Transaction which enables an insurance company, subject to court and regulatory approval, to transfer/novate a book of business to another insurer which assumes all liabilities associated with the business.
As we noted in a previous Quick Study about the Rhode Island regulation, there are many reasons companies may want to consider transferring business. Such a transfer can potentially free up capital, important management resources currently being utilized to oversee discontinued lines of business and expedite the process of running off the discontinued lines of business.
The Oklahoma Act is broader than the Rhode Island Act in that it allows all lines of business including in-force business, whereas the Rhode Island Act limits transfers to certain commercial lines of business which must have been in run-off for at least 60 months. Oklahoma has yet to establish any regulations to supplement the Act.
The Oklahoma Act is adopted to provide a basis and procedures for the transfer and statutory novation of policies from a transferring insurer to an assuming insurer by way of an Insurance Business Transfer (“IBT”) without the affirmative consent of policyholders or cedents. An assuming insurer under the Act means an insurer domiciled in the State of Oklahoma that assumes or seeks to assume policies from a transferring insurer pursuant to this Act. An assuming insurer may be a company established pursuant to the Oklahoma Captive Insurance Company Act. This Act establishes the requirements for notice and disclosure and standards and procedures for the approval of the transfer and subsequent novation by the Oklahoma Insurance Commissioner and the District Court of Oklahoma County pursuant to an Insurance Business Transfer Plan (“IBT Plan”). This Act does not limit or restrict traditional methods of effecting a transfer or novation. Both direct and reinsurance assumed policies are eligible for transfer under the Oklahoma Act and include property, casualty, life, health and any other line of insurance the Commissioner finds suitable for an insurance business transfer. The Commissioner shall have the authority to promulgate rules to effectuate the provisions of the IBT Act.
The Oklahoma Act also permits transfer of existing or in-force contracts of insurance or reinsurance from a transferring insurer to an assuming insurer.
Under the Oklahoma Act an IBT Plan must be filed by the applicant with the Insurance Commissioner for his or her review and approval. The transferring insurer must first obtain approval or letter of non-objection from its domiciliary regulator. The Plan must contain the information set forth below or an explanation as to why the information is not included. The Plan may be supplemented by other information deemed necessary by the Commissioner:
- the name, address and telephone number of the transferring insurer and the assuming insurer and their respective direct and indirect controlling persons, if any,
- summary of the IBT Plan,
- identification and description of the subject business,
- most recent audited financial statements and statutory annual and quarterly reports of the transferring insurer and assuming insurer filed with their domiciliary regulator,
- the most recent actuarial report and opinion that quantify the liabilities associated with the subject business,
- pro-forma financial statements showing the projected statutory balance sheet, results of operations and cash flows of the assuming insurer for the three (3) years following the proposed transfer and novation,
- officers' certificates of the transferring insurer and the assuming insurer attesting that each has obtained all required internal approvals and authorizations regarding the IBT Plan and completed all necessary and appropriate actions relating thereto,
- proposal for Plan implementation and administration, including the form of notice to be provided under the IBT Plan to any policyholder whose policy is part of the subject business,
- full description as to how such notice shall be provided,
- description of any reinsurance arrangements that would pass to the assuming insurer under the IBT Plan,
- description of any guarantees or additional reinsurance that will cover the subject business following the transfer and novation,
- a statement describing the assuming insurer's proposed investment policies and any contemplated third-party claims management and administration arrangements,
- evidence of approval or non-objection of the transfer from the chief insurance regulator of the state of the transferring insurer's domicile, and
- an opinion report from an independent expert, selected by the Commissioner from a list of at least two nominees submitted jointly by the transferring insurer and the assuming insurer, to assist the Commissioner and the court in connection with their review of the proposed transaction. Should the Commissioner, in his or her sole discretion, reject the nominees, he or she may appoint the independent expert.
The Act also provides a list of requirements for the independent expert opinion report noted above and a list of items that must be reviewed by the independent expert prior to issuing the report. The independent expert will need to provide an opinion on the likely effects of the IBT Plan on policyholders and claimants of both the transferring insurer and the assuming insurer, among other things, and note the facts and circumstances supporting the opinions expressed in the report including an analysis of the transferring insurer's actuarial review of reserves for the subject business to determine the reserve adequacy.
The Act provides a listing of who must receive notice regarding the IBT Plan which includes certain regulators, guaranty funds, policyholders and reinsurers.
The Act provides specific time frames for submission and review by the Commissioner and also specific time frames for submission and review by the Court including notice to policyholders who may want to provide comments and/or objections to the Court.
In summary Locke Lord LLP can assist in the following areas based on our experience:
- Assist with the formation of a OK domestic company including assessing capital requirements or assist with the redomestication to OK 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 Oklahoma domestic;
- 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; trust agreements, letters of credit, and claims and other administrative services agreements;
- Communication with the Oklahoma Department of Insurance on any such plans;
- Communication with other regulators in other impacted states regarding such a plan.
If either the Rhode Island or Oklahoma IBT Acts generate interest, and it appears that they clearly have, don’t hesitate to contact the authors of this Locke Lord QuickStudy...
The SOONER the better!