Recently, the Restructuring Mechanisms (E) Subgroup of the National Association of Insurance Commissioners (NAIC) released seven proposed foundational principles and best practices to provide guidance to state insurance regulators on evaluating insurance company restructurings, including insurance business transfers (“IBTs”) and corporate divisions. With issuance of these drafts, there is now a 45-day comment window ending June 20, 2022.

At this time, the NAIC drafts are proposed guidance but are not intended to be NAIC model laws. Interested policyholders and their attorneys can view the proposed drafts here: Restructuring Mechanisms (E) Subgroup (naic.org) under the “Exposure Drafts” tab and provide comments to the persons named.

The seven foundational principles are:

Don’t leave policyholders and key stakeholders worse off
This applies not only to the health of their insurer but also to claims handling practices and contractual rights.

Conduct a robust regulatory review process
This includes a solvency analysis, a finding that the assets being transferred are sufficient to cover the liabilities transferred, and consideration for any plans the insurer may have after the transaction.

Retain secondary market mechanisms in existence before transfer
The transaction should not reduce policyholder’s coverage.

Ensure there isn’t any impact on guaranty fund coverage
Policyholders should maintain whatever rights they had to access guaranty funds prior to the transaction.

Use of uniform NAIC valuation and accounting standards
The regulator should avoid special considerations when evaluating financial health.

Hire an independent expert
The regulator should have the ability to hire an independent expert to evaluate transactions and perform financial analysis.

Follow due process
This includes notice to stakeholders, a public hearing, and the opportunity to submit comments.

It’s important to note that many IBT statutes are modeled after UK Part VII transfers, and the guidance borrows heavily from papers issued by UK regulators for such transactions. Common policyholder complaints for Part VII transfers include lack of policyholder consent and lack of notice.

The NAIC’s proposals do nothing to assuage such concerns for U.S. transactions. Due process is not defined to include policyholder approval, though the proposed best practices do ask regulators to consider whether policyholder consent should be required for IBTs. Also, legacy liability insurers may face challenges providing notice to impacted policyholders, because it can be difficult to trace many complex corporate histories. Even when policyholders receive such notices, they often sit in the wrong department, or the company is unable to determine which policies are impacted.

The NAIC working group was commissioned to clarify the NAIC’s guidance on these issues at a time when more states are proposing or enacting IBT laws. Oklahoma is even hosting a conference on the topic in August.

KCIC will continue to monitor and report on IBT news.