In the previous three articles, we took a journey that would be a dream if it were a holiday itinerary: Europe and its uniform legal and regulatory framework for portfolio transfers; then Europe met the U.S., which with small but steady steps is trying to develop its own system for legal finality and insurance business transfers; and finally, we focused on Rhode Island, Connecticut and Oklahoma and the current discussion about legal finality statutes in the U.S. and the reasons for which such legislation is slow to develop. We also discussed why use of the Rhode Island statute is taking longer than originally anticipated.
What is delaying matters? What are the concerns? Are these unique to the U.S.?
There seems to be recognition of the difficulty in achieving a uniform approach to insurance business transfers in the U.S. and a general belief that a federal approach is near impossible. As a European that is very committed to uniformity, freedom of movement, and the idea of collaboration for the common good without losing one’s cultural and national identity, I still struggle to see why this area of insurance regulation in the U.S. could not be carved out and dealt with differently so that it would deliver a level playing field for all players and states.
There seems to be a belief that a portfolio transfer is somehow an exotic creature that interferes with a contractual arrangement with which one should never interfere. What about the robust approval process that must be followed before it actually concludes? What about the need for the transferor to ensure that its reputation remains intact following the sale and the safeguards that are put in place with this in mind? And what about the transferee, who must ensure that it does a good job in order for his business plan to be met and its shareholders to be kept happy and that their investment is well-managed? All these interests and considerations go a long way towards ensuring that policyholder rights (the other contracting party) are protected following the contractual change. We often hear that claims settlement is actually better in the hands of legacy acquirers. This is not surprising. The portfolio transferred would most likely be a non-core portfolio managed by a small team that perhaps had little involvement in the company’s core/ active business. When it lands on the transferee’s balance sheet, it becomes a core part of the acquirer’s value creation and receives top management attention.
While considering the issue of interference with the original contractual arrangement, I wonder how this is protected when faced with bankruptcy. When insurance companies fail, the contractual arrangement is fundamentally altered and, accordingly, regulators and courts do their best to protect policyholders’ rights. But we have all seen how it often ends.
Equally, what about the contractual relationship in the case of a sale of the entire entity? Regulators are entrusted with approving the sale of an insurer. Is that not an interference with policyholder contractual rights? Do we not rightfully trust that the commissioner, entrusted with this decision, will ensure that policyholder rights are observed in the context of this business transaction? And why is the sale of part of the insurance company’s business so different from the sale of the whole business and the legal entity?
For the full article, refer to page 12 in the Spring 2018 issue. https://www.airroc.org/assets/docs/matters/AIRROC_Matters_Spring_2018_Vol_14_No_1.pdf