Companies and investors in the runoff space are generally aware that the State of Vermont’s new Legacy Insurance Management Act (LIMA), signed into law on February 19, 2014, has created a novel runoff business transfer method in a runoff market that has long been in need of growth and innovation, but the Act, its background and its potential applications have only begun to be appreciated.
Under LIMA, insurers and reinsurers that have exited a particular market or ceased to write a class of risk may divest the relevant liabilities to companies that are established for the specific purpose of managing such risks, relieving themselves of the associated financial and regulatory reporting obligations and potentially liberating capital reserves. Other applications—e.g., internal restructurings and consolidations of pools—have drawn growing interest. LIMA creates a flexible, powerful process under a sophisticated, responsive and growth-oriented regulator, but above all LIMA creates new opportunities in the runoff market for insurers and reinsurers, service providers and potential new investors, such as foundations, institutions and trusts. Companies that take early advantage of the LIMA opportunity will benefit in the short term by executing innovative transactions and in the long term by shaping the growth of the new market sector.
The established methods for shifting liability for runoff business are familiar: reinsurance and loss-portfolio transfers offer relative speed and familiarity, but do not provide the legal and financial finality that most auditors will require in order to reflect the transfer in financial statements. The Part VII process, while providing a legally and financially enforceable transfer, can be slow and inflexible, with the progress of any transfer dependent on the attitude and the workflow of the FSA and the courts. Based on the UK and global insurance sector experience of Anna Petropoulos (AIRROC’s 2014 Person of the Year), LIMA adapts useful aspects of the Part VII process to the Vermont and U.S. legal and market environments to create the first U.S. law that enables transfers of runoff insurance and reinsurance business:
Scope and flexibility. LIMA allows an insurer or a reinsurer to transfer a block of business (personal and compulsory areas are excluded: e.g., life, health, automobile and workers’ compensation) to a new entity. The transferring company is not required to re-domicile or become subject to Vermont or U.S. jurisdiction.
Finality. An approved LIMA transfer effects a statutory novation of the transferred business to the assuming company, providing financial, accounting and legal finality to the transferring company, affected policyholders and reinsureds and the assuming company.
Regulatory process; management and compliance. LIMA provides for a streamlined review process and swift action by the regulator. After approval, the assuming company will manage the transferred business according to a portfolio-specific plan developed in consultation with the regulator during the review process.
Consent and opt-out. LIMA allows affected policyholders and reinsureds to opt out of a proposed transfer. This provision was necessitated by the state-by-state structure of the U.S. insurance environment, but the result reflects the trend in non-U.S. markets, where mandatory transfers are increasingly expensive and time-consuming to enforce. Absent an express opt-out notice, affected parties are deemed to have consented to a proposed transfer (as per existing insurance novation laws in Vermont and other U.S. jurisdictions).
For the full article, refer to page 18 in the Spring 2015 issue. https://www.airroc.org/assets/docs/matters/airroc%20matters.%20vol%2011%20no%201%20spring%202015.pdf