Insurance Business Transfer and Corporate Division Laws: An Overview for the Non-Lawyer
The following article is intended to provide high-level background information and does not represent a legal opinion. While the source material was prepared by counsel, this synopsis has been prepared by a non-lawyer and should be read accordingly.
In the past, if an insurer wanted to transfer its liabilities to another entity it had few choices, none of which required policyholder consent. A merger or a consolidation did not require consent, but the business stayed with the writing entity. Assumption reinsurance, on the other hand, required policyholder approval. The recent passage of “insurance business transfer” and/or “corporate division” laws by a number of states has changed the playing field. These laws allow an insurance company to “transfer” insurance liabilities to another insurer. These transactions are different from a traditional merger or consolidation, and are considered to be more efficient in separating companies and blocks of business. Unlike assumption reinsurance, policyholder consent is not required and policyholders generally are not permitted to opt out. To date these transactions have been limited to commercial property and casualty (P&C) transactions, but that is likely changing.
Insurance business transfer (IBT): IBT laws allow an insurer to transfer policies to another insurer. The transferred contracts will be novated and in most cases policyholder consent is not required. The assuming insurer becomes directly liable to the policyholders, and the transferring insurer’s obligations under the contracts are extinguished. The transferring and assuming insurers may or may not be related.
IBT legislation has been enacted in Oklahoma, Vermont, Rhode Island, and Arizona (with various individual state restrictions on business covered). Not all the states listed have adopted regulations as of this writing. There are no additional IBT bills pending in any states.
Corporate division: Corporate division laws permit an insurer to divide into two or more entities upon the approval of the domestic state regulator. There is no transfer or novation of any policies. Rather, the assets and liabilities, including insurance policies, are allocated to the resulting companies, either by legal succession (with the dividing company no longer surviving) or direct transfer (with the dividing company surviving). Policyholder consent is not required. The resulting insurer is liable only to the policyholders that are allocated to that insurer. The insurers involved – the dividing and resulting insurers – may or may not be related.
Corporate division legislation has been enacted in Arizona, Pennsylvania, Connecticut, Illinois, Michigan, Iowa, and Georgia. These statutes apply to all lines of business, including life insurance.
Procedural requirements: The IBT and corporate division statutes vary with respect to procedural requirements such as active or closed blocks, levels of regulatory approval, and notice to policyholders, to name a few.
- Many of the laws provide that certain conditions relating to the impact on policyholder interests and on company solvency and financial condition (e.g., regulator must find that both companies will be solvent after a division) must be met before a commissioner may approve a plan of transfer or division. The requirements vary among the states.
- There is some uncertainty as to whether policyholders that had guaranty fund protection prior to an IBT or corporate division would always continue to have it after the transfer or division, as the laws typically do not require the assuming or resulting insurer to be licensed in other states.
Impact on reinsurers: Many of the enacted laws explicitly require notice to reinsurers. Third parties, including reinsurers, typically have no ability to challenge the division or transfer except to raise concerns in the hearing. Reinsurer consent is not required, and reinsurers may not have a right to object to changes to their offset rights, solvency, and claims handling.
Industry concerns: Additional concerns could arise if a division is used to dispose of problem blocks of businesses, such as in some long-term care insurance or structured settlements.
To address these concerns, IBT and corporate division laws should include protections for policyholders and the industry, including independent expert review, court approval, and rigorous regulatory review of financial condition such that the transfer or division will result in solvent entities with sufficient assets. Regulatory review should encompass financials, operations, and ownership and management qualifications before approval of a transfer or division is granted.
National Association of Insurance Commissioners (NAIC): The NAIC is drafting a white paper to address the perceived need for restructuring statutes and the issues the statutes are designed to remedy, as well as the alternatives insurers are currently using to achieve similar results. It is possible that paper will also provide guidance on necessary protections and requirements.
This article touches the surface of an important and emerging issue that could impact insurers, policyholders, guaranty funds, and the industry as a whole. Please consult with your in-house counsel to get the complete picture.