Recently Rhode Island revised its Voluntary Restructuring of Solvent Insurers Act as implemented by DBR Regulation 68. This is, in many respects, modeled after the UK’s Part VII Transaction, which, subject to court approval, enables companies to transfer/novate a book of business (and divest itself of all residual liability), to another unrelated insurer that assumes all liabilities associated with that business. Reg. 68 is not as broad as the UK’s Part VII legislation, but nevertheless creates an option in the United States that had not heretofore been available.
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. Both Elizabeth Dwyer, Superintendent of Insurance, and Jack Broccoli, Associate Director -Financial Regulation, have indicated that Rhode Island will work with other regulators to address any regulatory concerns. Assuming no objections at this stage, the next step is to either establish a newly-licensed Rhode Island domestic, or to identify one that is prepared to assume the business pursuant to the requirements of the statute and regulation.
While utilizing an existing Rhode Island domestic may be an easier process, the regulatory process to form and license a Rhode Island domestic to take advantage of Reg. 68 is relatively simple, and requires a minimum combined capital and surplus of $3mm. An advantage of Reg. 68 is that it permits a Rhode Island company to set up individual protected cells, thus allowing that company to assume disparate books of business, and then to either retain or reinsure the business as part of the business transfer plan.
Pursuant to the statute, the business to be transferred to the Rhode Island domestic is limited to commercial property & casualty run-off liabilities, so not all lines of business would qualify for a business transfer plan, (for example workers’ compensation would not qualify). Additionally, to qualify under Reg. 68, the business to be transferred must have a natural expiration that occurred more than sixty (60) months prior to the filing of the Insurance Business Transfer Plan and be in a closed book of business or a reasonably specific groups of policies. The Rhode Island domestic* would then manage the run-off of the business, but the business could be reinsured from the Rhode Island company, or from each protected cell within the company, to a third-party reinsurer. This structure would add another layer of separation by giving it separate reinsurance protections.
There are a number of factors that should be kept in mind in planning for the utilization of a Rhode Island domestic for run-off purposes including, but not limited to:
Consent must be obtained from the domiciliary regulator of the insurer seeking to transfer/novate business;
The new (or existing) Rhode Island insurer to which the book of business is transferred/novated may reinsure the business as part of the business transfer plan, but this would require review of the reinsurance agreement any potential collateral requirement;
For the full article, refer to page 22 in the Spring 2017 issue. https://www.airroc.org/assets/docs/matters/AIRROC%20Matters%20Spring%202017%20No%2013%20Vol%201.pdf