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IN THIS EDITION:

• Introduction
• Regulatory Framework (B) Task Force
• Restructuring Mechanisms (E) Working Group
• Receivership and Insolvency (E) Task Force

Introduction

Peter Gallanis, Bill O’Sullivan, and Joni Forsythe attended the NAIC’s Spring National Meeting in Orlando on April 6–9, 2019. Highlights of the meetings attended are summarized below.

Regulatory Framework (B) Task Force

The task force adopted the minutes of its February 26 teleconference as well as its Fall National Meeting minutes. The task force then took up consideration of its subgroup and working group reports. The first report was presented by the Pharmacy Benefit Manager Regulatory Issues Subgroup. This subgroup is charged with considering the development of a new NAIC model to establish a licensing or registration process for pharmacy benefit managers. The subgroup met via conference call on March 22, at which time the members voted unanimously to submit a request for NAIC model law development. The report and request for model law development was approved by the task force.

The task force also accepted reports from the Accident and Sickness Insurance Minimum Standards Subgroup, the HMO Issues Subgroup, and the ERISA Working Group. Reports for each of the subgroups were submitted with the written materials in advance of the meeting and are available on the Regulatory Framework Task Force page of the NAIC website. The task force also heard several presentations relating to transparent pricing for health plans, the regulatory role in addressing the opioid crisis, and mental health program issues.

The HMO Issues Subgroup reported that its recommendation to open the Health Maintenance Organization Model Act (#430) to conform to recent changes to the NAIC’s Life and Health Insurance Guaranty Association Model Act (#520) was adopted by the Health Insurance and Managed Care (B) Committee during a February 14 conference call. Virginia has volunteered to chair the HMO Issues Subgroup throughout 2019.

Thereafter, on April 29, the subgroup met via conference call to consider and adopt its 2019 charge, along with a formal request for NAIC Model Law Development. That formal request will be presented for the Regulatory Framework (B) Task Force’s approval on May 15, and to the full (B) Committee for its approval shortly thereafter. The HMO Issues Subgroup has tentatively scheduled a call for May 16 to begin discussion of their work plan for this project.

Restructuring Mechanisms (E) Working Group

Following adoption of its March 11 teleconference minutes, the working group heard presentations from the below interested parties concerning various statutory restructuring mechanisms that are being introduced in several states, including insurance business transfer and corporate division legislation.

American Council of Life Insurers (ACLI)

Richard Bowman (New York Life) and Wayne Mehlman (ACLI) explained that the business transfer statutes being proposed around the country are designed to allow an insurance company to transfer all or part of its business, without the consent of policyholders, and to be released from liability to its former insureds. The corporate division legislation is designed to allow an insurance company to split into multiple companies and divide its assets and liabilities between the surviving entities. It requires no policyholder consent, and each of the resulting companies is liable only to the policyholders that it has retained. The ACLI has not taken any formal position on this legislation but is working to develop principles and guidelines to serve as guardrails for important consumer protections, and to guide the ACLI’s position (i.e., object or not oppose) on such legislation in its various forms. The ACLI expects to complete its work on the guidelines by mid-June.

Kathy Belfi (Connecticut) indicated that her department is struggling with whether to propose an insurance business transfer or a corporate division bill. Assuming that either mechanism would involve some form of regulatory hearing, she asked why either approach would be much different than a Form A acquisition. Mr. Bowman responded, indicating that in the case of a Form A hearing, the insurance department would be considering proposals for bringing companies and assets together, presumably making the resulting entity stronger. According to Mr. Bowman, the opposite is true in the case of the corporate division and business transfer initiatives being considered. The ACLI has developed a chart comparing important features of various forms of restructuring, transfer, and business division mechanisms. That chart has been posted to the Restructuring Mechanisms (E) Working Group page on the NAIC website.

Swiss Re

Dave Scasbrook of Swiss Re stated that Swiss Re does insurance business transfer deals in many foreign countries and has been operating in the runoff sector for about 25 years. He opined that the restructuring tools currently available to insurers in the U.S. are limited, making it difficult for U.S. companies to deal with the cost of operational inefficiencies in evolving markets. According to Mr. Scasbrook, adopting additional restructuring mechanisms for insurers in the U.S. will allow U.S. regulators to benefit from experiences abroad. He believes the UK Part VII transfer laws set the standard for business transfer transactions and are fair to all parties. He also stated that he is not aware of any insurance business transfer transaction in the UK where insufficient assets were transferred.

According to Mr. Scasbrook, the three main reasons for conducting these types of business transfers relate to operational costs, capital needs, and earnings volatility. When asked about the types of policyholder notices given in connection with the UK Part VII transfers, Mr. Scasbrook indicated that the parties advise the court of their proposed notice to insureds. Although it is recognized that policyholders need the ability to be heard, the statute does not direct how notice will be given. Instead, the courts have broad discretion to decide what standards to impose. He was asked if it is difficult to get a UK Part VII transfer recognized in the United States, since U.S. public policy requires consent by policyholders in order to achieve a true novation. In response, Mr. Scasbrook commented that an English court would say that you cannot be sure whether a court in another country would uphold the Part VII transfer. One regulator commented that some Part VII transfers have not been upheld in the United States, and policyholders in the United States have looked to attach U.S. assets of foreign companies.

Doug Stolte (Virginia) asked whether, in the context of an insurance business transfer, there can be a discounting of liabilities permitted, without policyholder consent, and the impact on guaranty association coverage. Mr. Scasbrook responded that he does not believe this has occurred in any of the matters with which he has been involved. On the question of guaranty association coverage, he stated his belief that policyholders in the U.S. are charged a premium for guaranty association coverage, and that being the case, why shouldn’t the guaranty association coverage simply transfer and continue?

On the topic of corporate division, Mr. Scasbrook indicated that he is not aware of any EU corporate division laws like those being proposed in various U.S. states. There are corporate merger laws, but no corporate division laws that he is aware of.

ProTucket

The next speaker was Albert Miller, General Counsel of ProTucket Insurance Company. (Presentation slides were included as Agenda Attachment B.) Mr. Miller’s remarks were focused primarily on the Rhode Island business transfer laws. He explained that ProTucket was formed in 2017 in Rhode Island as a runoff carrier under Rhode Island’s Voluntary Restructuring of Solvent Insurers Act. ProTucket cannot write new business and does not earn premiums. It has no personal lines risks or long-term care and cannot insure or reinsurer life or workers’ compensation business. ProTucket expects to acquire business through insurance business transfers. In 2018, the company formed a protected cell and received a $35 million capital contribution from its parent, Pro US Holdings, for use in meeting minimum capital requirements and expanding licensing and reinsurance accreditation throughout the states.

Mr. Miller pointed out some of the limitations and consumer protections built into the Rhode Island statute that distinguish that law from legislation in some other states. According to Mr. Miller, the Rhode Island statute is restricted to commercial lines business that has been in runoff for five years or more, and all interested parties are entitled to notice and an opportunity to object. The statute requires regulator and court approvals, as well as expert financial and actuarial opinions supporting the transaction. Once a restructuring plan is approved, it provides legal finality to the transferring company since the assuming company will take over liability for the business, subject to the same solvency standards and terms as the issuing company. Further details and analysis of the Rhode Island statute are outlined in ProTucket’s Paper on Insurance Business Transfer Plans Under Rhode Island Law, a copy of which is posted on the NAIC website under the Restructuring Mechanisms (E) Working Group page.

Doug Stolte (Virginia) indicated that these types of transactions are usually done without policyholder consent, but that Virginia has a statute that requires policyholder consent, except where the transaction takes place in receivership. Mr. Miller recognized that there is a question as to whether a decision of a Rhode Island court would be upheld in other states, notwithstanding novation statutes requiring consent. He suggested that if the novation statute does not address a public policy issue, then it should not override the approval of the insurance business transfer, though he admitted there is no case law directly on the subject. Ultimately, he noted, if the domiciliary regulator will not approve the insurance business transfer because of a novation statute in another state, then it will not go forward. When asked whether the assuming company should be licensed in the states in which it is acquiring business, Mr. Miller noted that some states have statutes that preclude licensing of an entity that is not planning to write business in that state.

NOLHGA & NCIGF

Next to present was a panel that included Peter Gallanis and Bill O’Sullivan of NOLHGA and Barbara Cox of the NCIGF. (Presentation slides were included as Agenda Attachment C.)

Mr. Gallanis noted that NOLHGA has been following the new division and transfer statutes. He explained that NOLHGA has not taken a position for or against this legislation but is glad to see that the regulators are looking closely at solvency and consumer protection issues, and that his remarks would be focused on the potential impact of such statutes on guaranty association protections.

Mr. Gallanis recognized that regulators want to avoid confronting consumers with solvency problems and want to be sure that guaranty association coverage is not lost as a result of these types of transactions. He went on to explain why preserving guaranty association coverage is a concern under the current statutes, and more specifically the circumstances under which these types of transfers could result in gaps in coverage for consumers.

To have guaranty association coverage, a consumer must be a resident of a state that provides guaranty association coverage; the product must be a covered line; and the failed company must have been a member insurer in the state where the policyholder resides as of the liquidation date, which means that the company must be licensed or must have been licensed in that state. If the company is not a member company, there is potential coverage for orphan policies by the domiciliary guaranty association. All guaranty association laws have some provision for orphan coverage.

Mr. Gallanis next offered an example of how licensing can become a problem. A company might acquire business in 50 states from a company that was licensed in each state. If the acquiring company is licensed only in its state of domicile, then only the guaranty association in the acquiring company’s domiciliary state would provide coverage, and that association would have to provide coverage for all policyholders in every state. This creates a strain on assessment capacity and also creates a fairness problem for other companies writing business in that state. Mr. Gallanis further explained that the solution requires the weighing and balancing of regulatory priorities. One solution would be to require the resulting company to be licensed in all states where insureds are located.

The next to speak was Barbara Cox (NCIGF). Ms. Cox explained that the NCIGF has not taken a formal position on the referenced legislation but is also concerned that guaranty fund protections continue. There is no orphan coverage available for property and casualty lines, and many states would not provide any guaranty fund coverage. Ms. Cox reviewed the conditions for coverage by property and casualty funds, which include requirements that the policy must have been issued by the insolvent insurer, not transferred to them, and that the company must have been licensed in each affected state at the time when the policies were issued or when the insured event occurred.

A question was raised as to whether guaranty fund model laws should be amended to state that guaranty fund protection for policies written by a company that was a member company at the time of issuance would continue. Ms. Cox responded, noting that the NCIGF has not yet taken a position on that issue, but she believes that Illinois may have made some recent changes in its statute to try to address the issue, at least in part.

Mr. Gallanis added that the member company requirement was no accident. If the guaranty association provides protection for policyholders of a company in any given state, regulators want that company to be licensed and regulated in that state and to contribute its share into the guaranty association assessment base in the state. It is a balancing of those important public policy considerations. Conversely, if the decision is made to trade off the ability to retain regulatory oversight over that business by not requiring licensing by the acquiring company in your state, then you may not want to stay “on the hook” for guaranty association coverage.

Superintendent Dwyer (Rhode Island) indicated that a white paper will be developed by the working group based, in large part, on information drawn from interested party and interested regulator submissions and presentations. The working group will hold a follow-up call in May for further presentations and discussion.

Receivership and Insolvency (E) Task Force

Following adoption of the minutes from the Fall National Meeting, Dave Wilson (California) gave a brief report of the Receivership Financial Analysis (E) Working Group (RFAWG), which met in regulator-to-regulator session on April 7. Mr. Wilson noted that the agenda for this group has been expanded to include discussion of long-running receiverships and impediments to closing estates.

Receivership Large Deductible Report

The Receivership Large Deductible Working Group reported on that group’s February 25 teleconference to discuss 2019 charges. Two work streams were outlined for the group. The first relates to the ownership of large deductible recoveries and collateral; the working group expects to present recommendations concerning ownership by the Fall National Meeting. The second workstream is focused on developing best practices for the large deductible section of the Receiver’s Handbook for Insurance Company Insolvencies. An initial draft was expected to be prepared by mid-April, and the final work product will be delivered in conjunction with the Fall National Meeting.

Macroprudential Initiative Referral

The task force heard an update concerning work to address the macroprudential initiative referral to RITF from the Financial Stability Task Force. James Kennedy (Texas) indicated that the three task force drafting groups had completed a significant amount of work on their individual charges throughout 2018, as detailed in a March 14, 2019, memorandum to RITF. The memorandum was included with the meeting materials as Agenda Attachment 3 and posted to the meetings section of the NAIC website.

Going forward, Mr. Kennedy stated that the three drafting groups would be merged and will continue to review topics identified for further discussion and consideration, including possible guidance for the use of bridge institutions in receiverships; enhancing authority for ensuring continuity of essential services among affiliated entities; key provisions in the NAIC’s current model receivership law that may not be present in prior receivership models enacted in the states; exposure and comments on proposed amendments to the Guideline for Stay on Termination of Netting Agreements and Qualified Financial Contracts; and developing guidance for the Receiver’s Handbook on tax issues in receiverships and securing federal releases. With respect to the evaluation of recovery and resolution planning tools, the drafting group concluded that consideration of imposing recovery and resolution planning reporting requirements on insurers not in financial distress would likely fall outside the purview of RITF and may require referrals to other groups within the Financial Condition (E) Committee.

The task force then considered and voted to expose the revised Guideline for Stay on Termination of Netting Agreements for a 30-day comment period. Comments were due on or before May 7.

International Resolution Activities

Kristine Maurer (New Jersey) next provided an update on international resolution activities. She reported that the International Association of Insurance Supervisors’ (IAIS) Resolution Working Group met in late January to consider comments on its draft Recovery Planning Application paper. She noted that no significant changes were made to the paper as a result of that process, but that the working group was considering ways to clarify circumstances that may warrant recovery plans. The group met again in early April to conclude its work on that Application paper and to discuss work on an Application paper for Resolution Powers and Planning. Work on that paper is expected to begin later this year.

The task force then opened discussion to other matters to be brought before the task force. Mr. Kennedy (Texas) reported that 21 states have now adopted the 2017 amendments to the NAIC’s Life and Health Insurance Guaranty Association Model Act and that six additional states have legislation in progress.

Warrantech

Wayne Mehlman (ACLI) and Richard Bowman (New York Like) discussed developments in connection with ongoing Pennsylvania litigation in which certain health insurers seek to have the decision in Warrantech Consumer Products Services, Inc. v. Reliance Insurance Company, in Liquidation (Warrantech) applied to the Penn Treaty Network America Insurance Company (Penn Treaty) and American Network Insurance Company (ANIC) liquidations to preclude the use of estate assets to pay policyholder claims not covered by the guaranty associations to the extent those claims accrued more than 30 days after liquidation. Mr. Bowman referred to ACLI’s August 23, 2018, comment letter to RITF concerning the potential implications of the Warrantech decision if extended to life and health receiverships. He noted that the task force discussed the matter in November but decided to wait to see how settlement discussions might proceed. Mr. Bowman advised that those discussions have been unsuccessful, and the health insurers have now intervened as parties in the litigation over the objection of the liquidator.

The ACLI strongly opposes extension of the Warrantech decision to life and health insolvencies. Messrs. Mehlman and Bowman expressed concern about the implications for Penn Treaty and ANIC insureds, as well as the adverse precedent that may result from the pending litigation, noting that long-term-care insureds are a vulnerable population and that denying over-limits policy claims a share of estate assets is contrary to longstanding practice and detrimental both to consumers and the reputation of the industry.

Patrick Cantilo (Cantilo & Bennett, L.L.P.) concurred, noting that the public policy behind the guaranty association system was to shift insolvency risk from the policyholder back to the industry. Application of the Warrantech decision in this context effectively shifts that risk back to consumers so that assets that have historically been available to reduce the burden on policyholders will instead flow back to industry by reducing costs to the guaranty associations. Mr. Cantilo noted that the task force previously discussed the possibility of an NAIC amicus brief but thought it might have greater impact at the Pennsylvania Supreme Court level than in the Commonwealth Court where the litigation is currently pending. Mr. Bowman urged additional consideration, noting that the Pennsylvania Supreme Court often remands cases back to the Commonwealth Court such that amicus participation at this level might be appropriate.

NAIC consumer advocate Bonnie Burns echoed concerns raised on behalf of consumers impacted by the Penn Treaty and ANIC insolvencies, arguing that the policyholders are elderly and vulnerable and that allowing industry to limit the assets available to reduce the burden of insolvency for these consumers seems wrong and unfair. She further argued that regulators and industry should be concerned about these victims of insolvency, because they are at the most vulnerable point in their lives, and that the value of this product is called into question if the protections afforded these insureds are reduced just when they are needed most.

Mr. Kennedy (Texas) explained that RITF cannot make a determination concerning NAIC amicus participation. Instead, a request must be made by the domiciliary commissioner and presented to the NAIC’s Executive (EX) Committee for consideration.

Mr. Kennedy also noted that provisions within the NAIC’s Insurance Receivership Model Law (§502) that might be helpful in addressing the Warrantech issue have not been adopted in Pennsylvania. Mr. Cantilo cautioned that there may be some ambiguity within IRMA §502 that might limit the flexibility intended in that provision. He suggested that both IRMA §502 and the Pennsylvania statute could be improved in that regard.

The discussion then turned to concerns over inconsistencies among state receivership laws and whether a targeted list of provisions could be identified as essential for inclusion in state laws. Dave Wilson (California) added that each state should review its own statute to identify comparative strengths and weaknesses that they may want to address. Ms. Maurer (New Jersey) suggested that the lack of uniformity in receivership laws can be perceived by international jurisdictions as a weakness in the U.S. regulatory system and noted, without recommendation, that a more specific accreditation standard could lead to greater uniformity in receivership laws. Doug Hartz (Washington) suggested the identification of critical elements, such as reciprocity. Mr. Kennedy added that many receivership laws require a state to have certain provisions in order to be deemed a reciprocal state. He suggested, as another possible avenue, that consideration could be given to improving the identification of critical elements for reciprocity. Further discussion of this topic is anticipated going forward.