Though deals likely to rise, states slow to adopt insurance business transfer laws

The environment is ripe for insurers to move run-off or closed blocks of insurance in blockbuster transactions. And it would help if more states passed insurance business transfer laws.

Insurance deals are set to rise dramatically, according to the 2022 Global Insurance Run-off Survey released last month by PwC. Ninety-seven percent of respondents predict similar or greater levels of deal activity in North America going forward, the survey found.

PwC projects the global non-life run-off market at $960 billion, up from $790 billion in 2019.

"I think we will see deal numbers rise and much larger deals being done especially in the U.S.," said Andrew Ward, partner, liability restructuring, PwC UK.

Insurance business transfer deals represent one path to getting a deal done.

The insurance industry has struggled for decades with how to handle discontinued blocks of business. The Association of Insurance & Reinsurance Run-Off Companies (AIRROC) formed in 2004 to give insurers a forum for addressing the issues.

Insurers are especially keen these days to move on from old books of business, as ultra-low interest rates continue to make profit goals elusive. Investors prefer insurers sell off lines that lag behind in profitability.

One of the historic problems with selling off a piece of an insurance company is that it requires every policyholder’s signature.

Nevertheless, the appetite for deals remains high, Carolyn Fahey, executive director of AIRROC, said in the PwC report.

"The legacy sector is creative and vibrant," she said. "There are appetites for every type of deal size and tools that can work for any situation."

Oklahoma acted in 2018, becoming the second state after Rhode Island to pass an insurance business transfer law. The main difference is the Oklahoma law covers all lines of insurance.

While IBT plans do not require individual policyholder consent, an independent expert reviews all plans, along with the commissioner and Oklahoma Insurance Department staff. To date, the state has completed two IBT deals and has four more in the works, said Liz Heigle, chief of communications for the OID.

"This is a great restructuring path for insurance companies," said Oklahoma Insurance Commissioner Glen Mulready in an emailed statement. "This mechanism focuses on protecting consumers while allowing insurance companies to deploy their capital to specific areas of focus and bring value to both companies involved.”

In what OID calls the first IBT deal in the United States, Providence Washington Insurance Co. transferred all its insurance and reinsurance business, as well as $38.5 million, to Yosemite Insurance, an Oklahoma insurance company. Both PWIC and Yosemite are wholly owned subsidiaries of Enstar Group Limited.

The IBT process has its critics, however, who say that policyholders are seemingly the lowest priority.

"Imagine you bought a Subaru with a long warranty," explained Birny Birnbaum, executive director of the Center for Economic Justice. "Then you received a notice that Subaru had transferred all remaining warranty rights and responsibilities to Acme Company. Would you feel like something has been taken from you?

"That's how business transfers work. I buy a policy with Prudential or Allstate and then it's now Enstar servicing my policy and I had no meaningful say in the decision or opportunity to opt out."

At minimum, the IBT process should include "a policyholder advocate who has access to all the non-public documents, since the policyholder has no such access," Birnbaum added.

Arkansas passed an IBT law in 2021, but in general, states have been slow to embrace the concept. Meanwhile, the National Association of Insurance Commissioners formed the Restructuring Mechanisms Working Group in 2018 to review “the perceived need for restructuring statutes and the issues those statutes are designed to remedy and also to consider alternatives that insurers are currently employing to achieve similar results.”

The working group produced a best practices for IBT deals this summer and exposed it for public comment. Several issues arose out of that effort. For example, while all parties endorse the general standard of "no policyholder should be left worse off," it isn't clear what that means. Other NAIC regulations use different language to characterize policyholder protections.

"We believe that the most beneficial guidelines for regulators would be those which use and interpret the language of the underlying legislation enacted by the various states, including the 'material adverse' standard, whether in support of insurance business transfers or divisions, rather than creating new, non-statutory language," wrote Robert Redpath, U.S. legal director, and James Mills, vice president for Enstar, a global insurance group.

There are no scheduled meetings for the working group to proceed, the NAIC said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected] Follow him on Twitter @INNJohnH.

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