New legislation is loosening the tight regulatory knot that’s been wrapped around legacy insurance business in the U.S. Upcoming game-changers include:
- Key amendments to the Rhode Island Voluntary Restructuring Statute (the ‘Rhode Island Statute’), which, among other amendments (House Bill 8163), would allow (re)insurers to transfer eligible portfolios without requiring that the assuming company put the transferred business through a commutation plan.
- The Oklahoma Business Transfer Act, which provides (re)insurers with the opportunity to transfer active and discontinued life and health and property and casualty exposures to an Oklahoma domiciled (re)insurer.
What are the potential benefits and limitations of these developments? What is the market appetite for such innovative approaches? Are there potentially better solutions to consider?
Legacy business ties up a huge amount of capital, staff time, and management attention. Yet the complex and diverse U.S. regulatory system makes it difficult to rationalize scattered portfolios and optimize capital.
Insurers and reinsurers wanting to ease the capital strain of legacy have favored the familiar defaults of sale of distinct legal entities or reinsurance of problematic portfolio of business. Yet these options can be expensive for the seller or reinsurance purchaser and, in the case of reinsurance, the liability can revert to the original issuing carrier. While sale eliminates the legacy business from the seller’s balance sheet, there are few carriers whose entire business is in runoff. Even with a competitive bid process, the acquisition price may not reflect the value to the seller if the seller retained the business and managed the legacy risks to finality in a proactive manner.
In turn, the consolidators that are the main acquirers of runoff business may be storing up problems for the future, especially if the regulatory barriers to transferring portfolios and amalgamating them into larger administrative units make it hard to deliver the benefits of economies of scale. As the term suggests, this is a business model that needs to consolidate to accumulate value.
Similarly, while reinsurance — either as an adverse development cover or loss portfolio transfer — provides immediate balance sheet relief, the premium needs to be high enough to protect the reinsurer from adverse and accelerated claims development. As a result, the value in the portfolio can be diminished. Moreover, the liability can still remain with or revert to the original carrier.
Alternatives to sale or reinsurance include the commutation process available through the Rhode Island Statute. This enables an eligible Rhode Island domiciled carrier to crystallize its obligations and accelerate the payment to creditors of 100% of the net present value of agreed claims.
For the full article, refer to page 13 of the Fall 2018 issue. https://www.airroc.org/assets/docs/matters/AIRROC_Matters_Fall_2018_Vol_14%20No_2.pdf