Regulatory Update: The Insurance Business Transfer Mechanism

NAIC publishes Foundation Principles and Best Practices

 

The Restructuring Mechanisms Subgroup of the National Association of Insurance Commissioners has issued two draft publications on the insurance business transfers (IBT) and corporate divisions (CD), as authorized by various States, for the State insurance regulators to use in approving the IBT/CD transactions: Foundational Principles and Best Practices Procedures for IBT/Corporate Divisions.

Learn more about what an IBT is and our view of the mechanism in our piece, Insurance Business Transfer Finality Getting Closer to Reality.  

The Restructuring Mechanisms Working Group had released a white paper in December 2021 on restructuring mechanisms associated with transfers of legacy business. Although the draft white paper takes no position for or against IBTs/CDs, it provides a useful overview on the history of such transactions and considerations for regulators.

The Subgroup’s recent publications address the expected level of reserves, capital expected after transfer, and the adequacy of long-term liquidity needs, among various other matters. The Best Practices Procedures for IBT/Corporate Divisions also includes monitoring companies after the transaction is completed.

Observations on the Foundational Principles and Best Practices Procedures include:

  • Policyholders should be left in the “same or a better position” after completion of the transaction. The Subgroup has requested comments on the term “no worse off” and how this is measured. The Foundational Principles further note that the transaction should not have any “adverse impact” on policyholders, including services, suggesting that the NAIC may recognize that in an IBT, an impact to the policyholder clearly arises (e.g. change in counterparty), but “no impact” is not the standard for approving an IBT.
  • Prior to an IBT or corporate division transaction, an independent expert should conduct the following: an actuarial review of the reserves and capital (e.g. RBC and financial strength) before and after the transaction;
    the assets transferred to insurers involved are adequate to cover liabilities being transferred;
    consideration of any plans to liquidate another involved insurer or make changes resulting in an impact on capital and policyholders; and
    solvency assessment.
    (In a corporate division, an insurer is divided into two or more resulting insurers, and the dividing insurer’s assets and liabilities are allocated between or among the resulting insurers, without requiring policyholder consent.)

The Subgroup requested comment on the use of an independent expert for corporate divisions.

  • Prescribed conservative assumptions should be included in capital calculations to avoid the manipulation of capital thresholds.
  • Capital reviews of the transaction should consider the following:
    – capital and/or reinsurance limits assessments should include quantitative analysis;
    – risk-exposure modeling;
    – horizon and confidence levels to address short term (1 year), mid‐term (5 to 10 years), and long term (relatively consistent with liability horizon);
    – stress scenarios and their relationship to capital adequacy;
    – impact on capital needs attributable to diversification in liabilities, asset mix; and amount and quality of “outside” existing inuring reinsurance and internal hedging.
  • Prescribed conservative assumptions should be included in capital calculations to avoid the manipulation of capital thresholds.
  • Consideration of the plans to consolidate, dividend or sell assets, liquidate or make other similar changes, and the resulting impact on capital, policyholders, reinsurers, and guaranty associations.
  • The Best Practices Procedures further note that one way that IBT laws can differ from corporate division laws is that some states’ IBT laws, the liabilities of the transferee are segregated from the other liabilities not associated with such a transfer and under laws can be expected to be both self-sustaining (e.g. no more monies may be transferred to fund such liabilities under the terms of the transfer) and self-containing (e.g. cannot be used to cover liabilities not associated with the transfer).

For IBTs or other transactions which will not have access to additional capital, an actuarial report of the adequacy of run-off reserves (gross and net) being transferred should include an analysis and comparison of stressed reserves under reasonable deterministic criteria/scenarios provided by the state of domicile; and
if the reviewing authority requires additional capital, which is higher than the required reserve, the additional amount should be reported in special surplus.

Comments on the publications were due on June 21. RiverStone submitted a comment letter specifically related to risk-based capital recommendations for run-off insurers as well as general comments on the Best Practices and Guidelines. We welcome continuing dialogue with regulators and other stakeholders on these issues.

Posted: Oct 19, 2022