Healthy Adult Opportunity
State program directors face many complex considerations as they evaluate the Healthy Adult Opportunity 1115 waiver option.
Oklahoma is the geographic center of the United States and, in 2018, Oklahoma became the center of discussion of the U.S. run-off insurance market. Oklahoma’s Insurance Business Transfer Act (effective November 1, 2018) created a palpable buzz as the U.S. market now gets even closer to its first ever deal to transfer and novate insurance policies from a transferring insurer to an assuming insurer without policyholder consent by way of an insurance business transfer (IBT). This legislation gives insurers and reinsurers of U.S. risks much needed finality with respect to obligations for liabilities. The potential impact is large as the size of liabilities within the U.S. run-off market is estimated to be $350 billion for non-life insurance, according to a recent study performed by accounting firm PwC, and could be over $1 trillion when factoring in life insurance and long-term care run-off liabilities.
An essential voice in this process is the Independent Expert (IE), whose role has traditionally been filled by an actuary in venues outside the United States. The Independent Expert provides insight and perspective on the fairness of the transaction to the regulators and courts that must ultimately approve the transfers. Policyholder protection is the most important consideration in the IBT and the role of the IE is critical in protecting the interest of the policyholders from both the assuming and transferring companies. This article provides background on this new opportunity for all companies with legacy liabilities and discusses why actuaries will be at the center of that process.
There are many reasons business is placed into run-off voluntarily by insurance risk-taking entities, meaning new business is no longer being written. These reasons could include exiting a line of business or program that has become unprofitable and would be difficult to correct, or exiting the business as part of a strategic plan to streamline a company’s focus on a particular line or type of business. This can often happen after an acquisition when the acquirer will cease writing and dispose of unwanted business. Business can also be placed into run-off as part of a regulator’s plan to rehabilitate a company.
Companies may want to shed the legacy liabilities associated with run-off business for various purposes including:
However, U.S. companies have been limited in their ability to move legacy liabilities off their balance sheets, primarily relying on either reinsurance or the selling of an entity that contained the liabilities. Reinsurance transactions such as loss portfolio transfers, commutations, or stop-loss contracts can be used, but they do not offer finality as claims can revert to the originating insurer. While the selling of a company does offer finality, it does so at the cost of getting rid of the company and the possibility of having to provide a reserve guarantee.
The new law in Oklahoma is modeled directly after a law in the U.K. that allows for a “Part VII Transfer.” This transaction is named after Part VII of the Financial Services and Markets Act of 2000, which allows an insurer to transfer policies to another insurer with court approval but without explicit policyholder approval. Other U.S. states have enacted similar laws, though the closest to Oklahoma’s have been Rhode Island’s Voluntary Restructuring of Solvent Insurers Act (known as Insurance Regulation 68), which was amended in 2015 to allow for a court-ordered IBT, and Vermont’s 2014 Legacy Insurance Management Act (LIMA), which only requires insurance commissioner (regulatory) approval.
There are some variations and differences in the acts. For example, the Oklahoma act applies to life, health, and property-casualty liabilities. The Rhode Island act only applies to property-casualty books. LIMA only applies to non-admitted policies and reinsurance agreements. In Vermont, policyholders can opt out, while Oklahoma and Rhode Island do not require policyholder consent (in essence, the court is acting on behalf of the policyholders). The Oklahoma law is open to both run-off and active books of business. In addition, Rhode Island and Vermont laws require that the policy periods have been expired for at least 60 months. While there are differences, these new laws all provide for finality—a great advantage for the transferring company.
Under a Part VII transfer, the companies involved in transferring and assuming the business must jointly propose an IE to be reviewed and approved by the U.K. regulators. Similarly, under the Oklahoma IBT law, the companies involved jointly provide a list of IEs, from which one is selected by the Insurance Commissioner. The IE ultimately works for the state court and is relied upon to assess the terms of proposed transfers with specific focus on protecting the interests of the policyholders involved. More specifically, the IE shall provide a report with an analysis of:
The proper execution of these business transfers depends on their fairness— that no group of policyholders is materially adversely impacted by the IBT.
Actuaries currently sign reserve opinions for insurers in their own names, putting their reputations on the line each and every time they evaluate an insurance company’s financial position. This is proven evidence of an actuary’s requirement to be a reliable source of credible analysis to insurance regulators. While not specifically stated in either act, we believe the IE role is uniquely suited to actuaries for the following reasons:
It is important to note that serving as an IE for an IBT is not a new role for the actuarial profession. In the U.K., the majority, if not all, of the IEs used in Part VII transfers are actuaries. It is also important to note that, of the approximately 250 Part VII transfers approved in the U.K., there have been no insolvencies.
While several of these new legacy laws have recently been enacted and there appears to be great enthusiasm for them within the run-off community, it is far from certain how often these processes will actually be used. For example, though the laws in Vermont and Rhode Island have been in place for several years, no actual transactions have been consummated to date.
The new laws will all need to be tested, challenged, and approved in court before insurers take full advantage of them. Another obstacle to full implementation by insurers could be the required approval of the IBT by the regulator in the state of domicile for the transferring company. Until a critical mass of states adopt similar laws, it may be difficult for regulators in states without similar laws to decide to expose policyholders under their protection to even a small increase of risk by allowing an IBT. This obviously increases the importance of the role of the IE in the transaction.
As other U.S. states consider enacting laws similar to those in Oklahoma, we believe the interest in allowing IBT transactions will gain momentum and may become almost necessary in the future. A PwC survey of run-off entities indicates that 41% of U.S. respondents plan to use an IBT in the next three years. The interest expressed by insurers will only increase as the benefits lessen from recent favorable run-off of prior year loss reserves. This could put additional pressure on capital and solvency, increasing the value and use of IBTs.
Experts indicate, and we agree, that once the first deal is consummated, many deals will follow and more states will certainly enter into the mix. It is also worth noting that IBTs may be used for any risk-bearing entity—an insurer, reinsurer, captive, risk retention group, or self-insured organization—so the potential opportunity for application is large and varied.
IBTs will provide a revolutionary new tool to any entity with U.S. run-off liabilities. Based on their education and training, actuaries are ideally suited to play the key role of Independent Expert, allowing this process to proceed and flourish.
Spotlight to shine on U.S. actuaries in the role of Independent Expert for legacy liabilities
Insurance business transfers will provide a revolutionary new tool to any entity with U.S. run-off liabilities, and actuaries are ideally suited to play the key role of Independent Expert.