The transfer of a US book of insurance with legal finality sometimes seems a distant vision. But, a need exists. In 2021, PwC estimated that there is more than US$400 billion of run-off insurance available for transfer in the US. In the UK, these transactions have become commonplace under Part VII of the UK Financial Services & Markets Act 2000, with more than 300 successful transfers over the last 20 years.

In the US, the story has been tentative and mixed—partly because each State has its own regulatory jurisdiction over insurance. Nonetheless, some States have started to explore how to permit these transfers with regulatory safeguards. Rhode Island in 2015 and Oklahoma in 2018 paved the way with Insurance Business Transfer (IBT) laws and Arkansas followed suit in 2021. These laws (similar to the UK precedent) allow an insurer to petition a court for an order approving the transfer of insurance portfolios. The domiciliary regulators of the insurers must approve the transfer, but, once ordered by the court, the transfer binds all parties with legal finality.

Another front opened when some States started adopting laws taking a different tack, allowing insurers to divide into two or more companies, with the same ultimate result—the allocation of assets and liabilities into new companies and legal finality for the allocation. To date, these states include Pennsylvania (1996), Connecticut (2017), Michigan (2018), Iowa (2019), Georgia (2019) and Colorado (2021).

Whether an insurer uses an IBT or Corporate Division, the result and regulatory issues are very much the same. The use of either option will often affect policyholders in States outside of those approving the transfers, and regulators throughout the country may seek to have some input on the transfers.

So far, only a few such transactions have occurred—two under the Oklahoma IBT law and one under the Corporate Division law in Illinois. (A Pennsylvania corporate division took place in 1996 in the well-known Brandywine transaction involving companies in the CIGNA group - now ACE.)

Illinois has gone a step further and proposed to add IBT legislation to its Corporate Division law. That would make it the only State to permit both Corporate Divisions and IBTs. The Illinois legislation, the Illinois Insurance Transfer Act (HB 5534 and SB 3781), is pending assignment to appropriate legislative committees.

While some States are moving forward with their own enactments, the NAIC in working to formulate a regulatory and financial overview on the subject in the form of a White Paper. A number of NAIC bodies are addressing these issues: the Restructuring Mechanisms Working Group (the Working Group) (dealing with regulatory issues), the Restructuring Mechanisms Working Sub-Group (the Subgroup) (dealing with financial and accounting issues) and a number of existing committees looking at spin-off issues, such as the protection of guaranty fund policyholders.

The Working Group was tasked with drafting the White Paper and is now considering comments and revisions to prior drafts. History shows that, unless the NAIC adopts a Model Law and makes it part of its accreditation program, the number of States enacting these restructuring laws may remain low, as States are often hesitant to adopt innovative proposals without the guidance and standards that come with NAIC deliberations. The first draft of the White Paper was released for comment in early 2021. The most recent draft came out in March of 2022, and it is expected that the next draft will be released in late 2022.

In May of 2022, the Subgroup met virtually to discuss financial and accounting issues, and a draft of its Foundational Principles and Best Practices for IBT and Corporate Division transactions was released for public comment.

On a parallel track, in August of 2022, the NAIC Executive (EX) Committee adopted a request from the Working Group to amend the Property & Casualty Insurance Guaranty Association Model Act (#540) to ensure that policyholders retain guaranty fund coverage following an IBT or Corporate Division.

The NAIC has studied the issues arising from IBT / Divisions for three years, interrupted by COVID. In the meantime, as it often the case with innovative proposals, a few transactions have gone forward, testing the waters and offering opportunities for States to evaluate the real-life implications of IBT/Divisions. How quickly the issues will be resolved will depend upon regulators' commitment to face them and the industry's willingness to press for action. The UK has shown that solutions are possible and readily available. Hopefully, the same conclusion will be reached in the US.



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