In The Legacy Market article that ran in the Spring 2017 issue, we discussed the various exit and capital release tools available to the European insurance market with each providing different degrees of finality and capital relief. The second Legacy Market article which ran in the Fall issue, discussed the first finality statute available in the U.S. and steps taken by other states to adopt a similar framework. This third article in the Legacy series will discuss where we are today and the concerns and challenges we understand are currently being discussed in the market.
While approaching the end of another busy year, the European legacy market can look back and be proud for the transactions signed, approved, closed, and, of course, last but not least, for those rumoured to be in exclusive discussions with the various acquirers. The year may end with some surprising results, all of which will add to the growing attraction of the legacy space and the increasing trust and consequent collaboration between the sellers and buyers.
The mechanism is long established, tried and tested, and with no failures. The legacy acquiring market can proudly boast zero failure. This, without any qualification or footnote, delivers the certainty and reputational promise made to clients and, most importantly, to policyholders.
Across the Atlantic, more than two years on, the Rhode Island statute remains “unused,” while rumours that the first transaction will be announced in the early part of 2018 are widespread. This will be a welcome step in the right direction. But why is it taking so long? Why is the U.S. market not as enthusiastic as the European market about the availability of legal and/or economic finality for non-core or unwanted portfolios? Certain concerns have been consistently raised that provide valid and varied reservations of a market that is normally state-focused and state- managed and one that has consistently resisted federal legislation on any insurance aspect. I outline below some widely-discussed concerns and offer some thoughts from experience gained in the last few decades in Europe.
Insurers are understandably concerned about their reputations when considering the transfer of a portfolio. This is particularly relevant when considering a transfer of a line of business that they wish to continue to underwrite. How will the acquirer treat their customers? Who may still have a policy with the insurer (a concern that is especially relevant in relation to direct policies, such as automobile or homeowner’s policies)? Who will handle their claims? Will the acquirer unduly delay payment of claims? Will the acquirer try to treat policyholders less fairly given that the acquirer would not be interested in any future business?
These are all valid concerns, but express a failure to see the transaction in its entirety, which includes looking at it from the acquirer’s point of view. Acquirers’ core business is insurers’ non- core or unwanted business. In order for them to be in a position to succeed, to continue to grow, to meet their business plans, to satisfy their shareholders’ expectations and to achieve the plethora of business goals that all businesses have, they have to build a reputation of reliability and credibility so that they can continue to acquire more portfolios and to grow their own balance sheet. The reputation of the seller is only one side of the same coin. The acquirer is just as keen to preserve its own reputation in order to gain more business from the same clients, new clients, to grow, and to avoid any regulatory issues that may follow from policyholder complaints. It is obvious how the parties’ interests in any transaction are aligned.
Policyholder protection is a key driver in any transaction approval process. It is quite rightly the most important driver for the approving regulator or court. The approving regulator or court must be sat- isfied that policyholders will be protected in the hands of the new owner. The examination process before approval is long and thorough, whether this is done by a regulator in the EU, or by a judge in the U.K. or Rhode Island. The Inde- pendent Expert’s report, commissioned by the Rhode Island Department, would consider all interested parties, and will be an important element of the process as to whether or not the transfer is sound; the regulator will only approve a trans- fer if satisfied that policyholders will be just as protected, if not better protected, after the transfer. Equally, the acquiring insurer must show that its own solvency is sound pre- and post-transfer. Regula- tion 68 provides that both the home and the receiving regulators be involved in the approval process and that the court’s approval is required to effectuate the transfer. Any new process is bound to be encountered with reluctance or doubt. The success of the process will be entirely dependent on the actual success of the transactions themselves. And this can only be seen once the process is used.
State v. Federal legal framework and regulation
In the Legacy article published in the Fall 2017 issue of AIRROC Matters, I questioned whether or not a EU-style legal finality would be possible in the absence of Federal legislation on this aspect of insurance law. State commissioners are understandably protective of their insurance industry and their policyholders. A uniform system would ensure that all transactions are reviewed in the same way and are decided within the same legal and regulatory framework, thus rendering state issues less relevant. In a uniform system, business transactions would be completed with certainty, not concerned with potential challenges by other states that do not have similar legislation; they would not be dependent on judicial interpretation on whether or not another state court’s decision should receive full faith and credit. Reciprocity and equivalence are key ingredients to a level playing field in business transactions from which certainty would flow. Certainty is key to business transactions and to business success.
For the full article, refer to page 11 in the Winter 2017-2018 issue. https://www.airroc.org/assets/docs/matters/AIRROC%20MATTERS%20Winter%202017-2018%20vol%2013%20No.%203.pdf