NAIC Discusses Best Practices for Restructuring Mechanisms

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Insurers with legacy blocks of business, or with other motivations to enter into block transfers of business or corporate split-offs, should consider a recent regulator call on so-called Insurance Business Transfers (IBTs) and corporate divisions. These are techniques that would allow an insurer to (i) assign a book of insurance policies to another carrier without unanimous affirmative policyholder consent (a so-called IBT) or (ii) to split into multiple distinct entities (a division). Some states have already adopted statutes allowing these types of transactions, which have invited comparison to the United Kingdom’s Part VII. IBTs and corporate divisions are subject to state regulatory approval, and in some cases judicial review, following a prescribed process under the respective state statutes.

The Restructuring Mechanisms Subgroup of the Restructuring Mechanisms Working Group within the National Association of Insurance Commissioners’ (NAIC) Financial (E) Committee is tasked with developing best practices with respect to these kinds of transactions and also considering any needed changes to risk-based capital rules arising out of these matters. On a May 4, 2022, video call with interested parties, the Subgroup discussed “foundational principles” and proposed best practices associated with IBTs and divisions. The Subgroup addressed materials, issued in late April and available here, that set out the NAIC’s priorities governing these transactions.

The foundational principles are summarized below, along with some highlights of the call. As a general comment, it was noted on the call that some states already have assumption and novation statutes expressly requiring unanimous policyholder consent, and therefore it might be unrealistic for such a state to relax these requirements in an IBT or division context. At the same time, the need for uniformity among state procedures governing IBTs and divisions was also emphasized by some.

  1. Policyholders and Other Key Stakeholders Should Never Be Left Worse Off. A brief discussion was held on whether the threshold should be “no worse off” or “not materially adversely affected.”
  2. Robust Regulatory Review Process. The domiciliary state regulator should perform a review akin to that conducted in a Form A application (for a corporate acquisition).
  3. Guaranty Fund Coverage. No impacted policyholder should lose guaranty fund protection as a result of a transaction. During the call, it was noted that the nationwide associations of guaranty funds — NOLHGA for life and health and NCIGF for property and casualty — have been involved in this process and can be valuable resources for regulators and policyholders.
  4. Secondary Market Mechanisms. A division or IBT should not reduce coverage benefits. Specifically, if there were any “secondary market or similar mechanisms” that benefited policyholders, state regulators should ensure that the benefits remain after the division or IBT.
  5. Use Uniform NAIC Valuation and Accounting Standards. In their review, regulators are “discouraged” from allowing permitted practices and should require applicants for an IBT or division to adhere closely to the NAIC’s statutory accounting principles.
  6. Independent Expert. The regulator’s ability to hire independent experts for specialized transaction review and financial testing is “essential.” It was noted that different states have varying levels of access to expert resources.
  7. Due Process. “Robust due process” must be afforded to policyholders, claimants, reinsurers, guaranty associations, regulators and others that are affected by a transaction, in advance of any public hearing. These constituencies should have access to information concerning the transaction.

The “best practices” document goes into some additional detail on each prong of the foundational principles above.

The foundational principles and best practices documents were exposed for a 45-day comment period.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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