NAIC Group Issues Guidelines for Corporate Restructuring | Kramer Levin Naftalis & Frankel LLP

Insurers with unwanted redundancy blocks should take into account the latest guidance from insurance regulators on potential transaction structures that could mitigate this problem. On May 13, the National Association of Insurance Commissioners (NAIC) Restructuring Mechanisms (E) Working Group released a revised white paper entitled “Restructuring Mechanisms,” along with a best practices document. The materials cover potential buyout transactions, transfers of insurance operations (IBT) and business divisions (CD) that could allow an insurer to shed exit blocks of operations without necessarily seeking policyholder approval in all cases. The revised white paper discusses relevant statutes that allow several of these types of transactions in Arkansas, Illinois, Oklahoma, Rhode Island, Vermont, Arizona, Colorado, Connecticut, Iowa, Michigan and Pennsylvania. The White Paper, among other things, draws parallels and contrasts between these statutes and their analogues in UK law, solvent schemes and Part VII transfers.

Comments from interested parties on these restructuring materials can be submitted until June 14.

The revised white paper makes six recommendations.

1. There should be a standard set of financial principles against which a redemption, IBT or CD transaction can be assessed.
2. In the event of a restructuring transaction involving a personal line block or a life block, the coverage by the guarantee fund must continue. The working group recommends that the National Conference of Insurance Guaranty Funds’ (NCIGF) proposed language on this point be added to the NAIC Property and Casualty Insurance Guaranty Association Model Act.
3. The working group notes a suggestion from stakeholders that any restructuring requires an independent expert. In response, the Working Group writes: “Although independent experts can be valuable, the mere fact that someone is employed by an insurance department does not mean that their skills are not sufficient for certain transactions. Depending on the transaction, department personnel with in-depth knowledge of the insurer can provide consumers with more protection than a newly hired individual with no history with the insurer.”
4. The NAIC’s National Treatment and Coordination Working Group (E) should “consider whether any changes should be made to the corporate licensing process as a result of the restructuring of runoff block transactions. A streamlined process that still ensures appropriate regulatory oversight (and any licensing necessary to maintain warranty association coverage) may be appropriate in limited circumstances. However, care must be taken to ensure that the permitting process is robust and rigorous. … ”
5. The Statutory Accounting Principles (E) working group must determine the appropriate accounting (including financial reporting and risk-based capital calculations (RBC)) for an IBT or CD transaction using a protected cell. This must be done before the NAIC implements planned updates to the Protected Cell Model Act.
6. States are “strongly” discouraged from using an IBT or CD transaction for long-term care (LTC) insurance. If a state wishes to pursue an IBT or CD transaction with LTC insurance, the state must “first submit such proposed transaction to all licensed states and generally such transactions may only be used to the extent that the NAIC develops a national solution for such a transaction.”