The NCOIL IBT model law provides an efficient restructuring tool that will allow companies to achieve operational and capital efficiencies to compete more effectively in the global marketplace.
U.S. insurers and reinsurers now have an expanded landscape for restructuring options in the United States. On March 8th, 2020 the Executive Committee of the National Council of Insurance Legislators (NCOIL) approved an Insurance Business Transfer (IBT) model law. The NCOIL IBT model law was sponsored by Representative Lewis Moore of Oklahoma and Assemblyman Andrew Garbarino of New York. After fifteen months of discussions with and presentations from various trade groups, individuals and companies, the NCOIL membership voted to approve the IBT model law, signaling to the market that the IBT legislation is an important and useful toolfor the industry. The U.S. will now be on a level playing field with the global marketplace where most developed countries have and widely use this type of restructuring tool in their insurance activities.
The NCOIL IBT model law is based on the Oklahoma IBT law that was passed in 2018. An IBT involves the substitution of one counter party for another within the same contract. Its greatest value is the potential to conclusively relieve the transferor of its policy obligations and vest themin the transferee. The IBT protects the interests of policyholders with transparent and thorough financial review requirements and high levels of regulatory and court oversight. As a restructuring tool, it is extremely advantageous to a sophisticated insurance industry in allowing firms to adapt themselves to changing business environments through group reorganizations to streamline the corporate structure, to gain operational cost savings and efficiencies, to exit problematic lines of business, to facilitate entry into new lines of insurance,to bring finality to in force run-off business, and to achieve more efficient capital management and improved capital and solvency metrics by releasing excess capital tied up in insurance portfolios.
During its review process, NCOIL considered several relevant issues including state licensing requirements and ensuring the continuity of guaranty fund coverage as liabilities are transferred from one carrier to another carrier. Importantly, the NCOIL IBT model law has included language that addresses these issues. Also, because the IBT approval process requires that there be no material adverse impact on any affected policyholders, these issues will be considered by regulators, the independent expert and the court through the IBT review process.
Currently the pressure is on all insurers and reinsurers to manage their capital more efficiently. It is expected that continuing market conditions, such as the low interest rate environment, globalization, competition and other market trends will requiremany companies to undertake significant restructuring activities.
Restructuring options that are currently available includeassumption reinsurance, sale, LPT and indemnity reinsurance. However, these optionsare limited in their scope and effect. The IBT is a flexible restructuring tool that has wide application. The court-sanctioned novation process set forth in the IBT legislation provides companies with an effective means to transfer all or part of a portfolio to another company achieving complete finality for the transferring company while also protecting the rights of policyholders through a robust regulatory and judicial review process.
States that pass IBT legislation not only provide domestic companies with an efficient restructuring tool that can help to strengthen the insurance industry, but also will see enhanced economic development as these transactions are executed. IBT transactions can generate new business activities by attracting investors and insurance companies to create new companies or re-domesticate existing companies from other jurisdictions. These restructuring activitiescan create new jobs to support the administration of transferred business and will also generate revenue through transaction and processing fees. Also, IBT transactions require involvement of financial, legal and regulatory professionals that will increase activity in insurance, banking and investment management.
Importantly, the IBT provides a fair and rationalsolution that protects policyholders while balancing the business needs of all stakeholders. As more states pass this groundbreaking legislation, companies will have a more efficient restructuring tool to achieve operational and capital efficiencies as well as both financial and legal finality.
Luann Petrellis provides insurance advisory services in connection with the NCOIL IBT model law or general IBT questions. She assisted NCOIL in the drafting and approval process for the model law. Luann can be reached at email@example.com or (610) 304-4524.