Business Transfer Model Could Apply to Life, Health and Annuity Business

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Some state insurance legislators want to let an insurer pass full responsibility for unwanted blocks of business — including life insurance, health insurance and annuity business — on to another insurer, without having to sell the entire company or go through a state-supervised receivership.

Members of the National Council of Insurance Legislators (NCOIL) are planning to discuss an Insurance Business Transfer Model Act draft Dec. 12, in Austin, Texas, at NCOIL's annual meeting.

NCOIL is a group for state lawmakers who have an interest in insurance. It has no direct ability to set or change states' insurance laws, but state lawmakers may start with NCOIL models when drafting their own bills.

The new business transfer model draft would let one insurer pass a block on to another insurer, after an independent expert assessed the possible effects of the deal, the insurer's state insurance regulator approved the deal, and a court approved the deal.

The NCOIL draft sponsors are New York state Assemblymember Andrew Garbarino, R-Sayville, N.Y., and Oklahoma state Rep. Lewis Moore, R-Arcadia, Okla.

Garbarino and Moore have based their draft on a law that was adopted in Oklahoma.

Insurers can now pass some responsibility for unwanted blocks of business to reinsurers, but an insurer must maintain an ongoing relationship with its reinsurers. If a reinsurer fails, the insurer must take responsibility for the business it had tried to hand off to the reinsurer.

Earlier this year, NCOIL members were talking about the Oklahoma law mainly as a mechanism for restructuring troubled property and casualty companies. It was not clear whether the business transfer option could be available to life, health and annuity issuers.

The draft in the document packet for the NCOIL annual meeting states that:"'Policy' means a policy, annuity contract or certificate of insurance or a contract of reinsurance pursuant to which the insurer agrees to assume an obligation or risk, or both, of the policyholder or to make payments on behalf of, or to, the policyholder or its beneficiaries, and shall include property, casualty, life, health and any other line of insurance the commissioner finds via regulation is suitable for an insurance business transfer."

The packet also includes draft minutes from a Joint State-Federal Relations and International Insurance Issues Committee session, which was held in July, at the NCOIL meeting in Newport Beach, California.

Luann Petrellis — an insurance industry consultant who has worked on efforts to create a run-off facility for blocks of long-term care insurance business — said insurers have about $420 billions in life, annuity, long-term care insurance and other liabilities that are "publicly designated as legacy or run-off-, that are targeted for an exit transaction," according to the NCOIL draft minutes.

Most other countries have insurance business transfer options that give insurers a straightforward way to get rid of unwanted business, Petrellis said.

The options available in the United States "don't provide the level of finality that the company is looking for," according to NCOIL's summary of Petrellis's remarks.

Karen Melchert, regional vice president of state relations at the American Council of Life Insurers, said the ACLI wants any insurance business transfer model to include strict rules for reviewing the financial condition of both companies involved, to keep a "good bank" from exiling unwanted obligations to a "bad bank."

Melchert said ACLI members are split on the idea of insurance business transfer legislation.

Because of that, the ACLI will simply stay neutral if NCOIL includes ACLI-supported safeguard principles in the model, rather than supporting the model, according to the NCOIL draft minutes.

If NCOIL approves a model that leaves out the ACLI principles, then the ACLI will oppose the model, Melchert said.

Kevin Griffith, a partner at Faegre Baker Daniels LLP and counsel to the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA), said one problem is that analyzing the effects of transfer would be difficult.

"The reality is that, if one of these transactions is completed, we won't know for 20 to 30 years whether or not it was successful, and we will not know whether the assuming carrier will actually be alive or ultimately have financial trouble and have to be liquidated," Griffith said, according to the NCOIL draft minutes.

A copy of the transfer model draft, and the minutes of the discussion about the business transfer topic held in July, are available here, in NCOIL's latest 30-day meeting materials packet.

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