Part 3: The case for expanding the Rhode Island Insurance Business Transfer to other lines of business
Current global market conditions have increased pressure on business leaders to focus on efficient capital management with an eye towards long-term trends. Rhode Island’s amendments to Insurance Regulation 68 are the first step in providing greater flexibility to the U.S. insurance market to take part in the advance restructuring game. The U.S. lags behind the UK in the available tools and mechanisms at their disposal to achieve business transfers that provide an effective and definitive exit solution. Although the U.S. has moved judiciously on this front, it is poised to make more gradual steps forward.
Entire industries are being challenged like never before to open up, innovate and reinvent themselves. In a world where everything is changing, the biggest risk is standing still. This is as true for the insurance industry as it is for any other industry seeking to stay competitive in a growing global economy.
The global game of (re)insurance is evolving at an accelerating pace. There are significant restructuring activities going on in the global and U.S. market. In 2013, Fitch Ratings, when referring to accelerating restructuring in the life insurance industry, stated that there is an “ongoing trend in the industry where many insurers are taking steps to refocus operations and discontinue or divest businesses that have underperformed and/or no longer provide a strategic fit. Some of this product rationalization has also been driven by persistently low market interest rates, which have lowered the relative profitability of some traditional products while also lowering the cost of borrowing if debt is used to finance the acquisition of these businesses … We expect this rationalization process will continue to create opportunities for both traditional players looking to strengthen existing core business, reinsurers with an expertise in block acquisitions, and nontraditional players (e.g., private equity).”
The pressure is now on all insurance carriers to manage their capital more efficiently. It is expected that continuing market conditions, such as the low interest rate environment, globalization, competition and other market trends, will force many insurance companies to continue to undertake significant restructuring activities. According to the 2015 Swiss Re Sigma Report, in Europe “the introduction of regulations such as Solvency II will encourage insurers to restructure in pursuit of capital efficiencies and/or economies of scale or scope. Similarly, the influx of alternative capital will continue to stimulate deals, especially if financial investors become active sellers as well as buyers.”
Moving discontinued or capital absorbing product lines to another business’s balance sheet is a huge advantage to an insurance group that has found itself with multiple portfolios of discontinued business, developed over many years and in many formats that can be resource-draining and possibly problematic to the modern insurance organization. Throughout the world there are many jurisdictions that have a restructuring tool to achieve this type of transfer. The most familiar is the Part VII Transfer in the UK — a court sanctioned novation of policies from one carrier to another carrier used by insurers to rationalize portfolio and corporate restructurings and to assist in the closure of businesses in run-off. Generically, this mechanism is referred to as an insurance business transfer.
For the full article, refer to page 6 in the Winter 2016-2017 issue. https://www.airroc.org/assets/docs/matters/airroc_matters_winter_2016_2017_vol_12_no_4.pdf