doug stolte/david smith co-chairs (va) summary of comments · note powerpoint presentation noted...
TRANSCRIPT
© 2019 National Association of Insurance Commissioners 1
Date: 5/13/19 Conference Call
RESTRUCTURING MECHANISMS (E) SUBGROUP
Thursday, May 23, 2019 12:30 p.m. Eastern / 11:30 a.m. Central / 10:30 a.m. Mountain / 9:30 a.m. Pacific /
8:30 a.m. Alaska / 6:30 a.m. Hawaii Call duration: 1.5 hours
ROLL CALL
Doug Stolte/David Smith, Co-Chairs Virginia Jack Broccoli Vice Chair Rhode Island Mel Anderson Arkansas Kathy Belfi Connecticut Kevin Fry Illinois Fred Andersen Minnesota John Rehagen Missouri Steve Kerner New Jersey Dale Bruggeman Ohio Andy Schallhorn Oklahoma Amy Garcia Texas
NAIC Support Staff: Dan Daveline/Robin Marcotte AGENDA
1. Hear comments on charges and the definition of runoff
— Doug Stolte/David Smith Co-Chairs (VA) Summary of Comments Attachment A Comment Letters Attachment B Additional Information Attachment C
2. Discuss Any Other Matters Brought Before the Working Group
— Doug Stolte/David Smith Co-Chairs (VA) W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\May 23 call\Restructuring Agenda.docx
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
1
Res
tru
ctu
rin
g M
ech
anis
ms
(E)
Subg
rou
p
Su
mm
ary
of C
omm
ents
for
May
23,
201
9 C
onfe
ren
ce c
all
Ref
eren
ce
Nu
mb
er
Des
crip
tion
Com
men
t # 1
– C
onne
ctic
ut
Atta
chm
ent B
P
age
3
Fir
st, I
thin
k ch
arge
1 a
nd 2
are
ver
y br
oad
and
regu
lato
rs c
an c
ome
up w
ith g
ood
best
pra
ctic
es b
ased
on
expe
rien
ce.
Cha
rge
#3-
we
shou
ld w
ait f
or
the
pare
nt g
roup
for
cle
arer
gui
danc
e be
caus
e it
appe
ars
that
the
char
ges
over
lap.
My
com
men
ts a
re b
ased
on
char
ges
1 an
d 2
at th
is p
oint
. A
s liq
uidi
ty i
s m
any
tim
es t
he h
ighe
st r
isk
com
pani
es f
ace
(and
reg
ulat
or’s
whe
n fa
ced
with
div
iden
d re
ques
ts)
the
cre
atio
n of
a “
best
pra
ctic
es”
liqu
idit
y re
port
can
be
crea
ted
for
regu
lato
rs to
use
if th
ey c
hoos
e to
. T
his
help
s to
cre
ate
cont
inui
ty a
roun
d liq
uidi
ty c
onsi
dera
tions
; M
onito
r ex
pens
es-
i.e
. as
com
pani
es c
ontin
ue t
o st
rive
to
decr
ease
cla
ims
and
adm
inis
trat
ive
expe
nses
- h
ow d
oes
it a
ffec
t ke
y pe
rson
nel
and
poss
ible
ou
tsou
rcin
g?
Thi
s te
nds
to
crea
te
new
op
erat
iona
l ri
sks-
W
hat
is
the
com
pany
w
illin
g to
gi
ve
up
in
orde
r to
in
crea
se
liqui
dity
? (
Cos
t/ben
efits
sho
uld
be a
naly
zed)
. P
rovi
de th
e re
gula
tor
a lis
t of
all p
ledg
ed a
sset
s an
d po
ssib
le c
oven
ant t
rigg
ers.
C
ash
flow
ana
lysi
s th
roug
h cl
aim
pay
out p
erio
d.
Aga
in,
very
hig
h le
vel.
I t
hink
thi
s w
ill b
e th
e ea
sy p
art
and
will
nee
d di
rect
ion
from
WG
aft
er t
hey
have
sor
ted
thro
ugh
the
mac
ro i
ssue
s.
Com
men
t # 2
– M
aine
A
ttac
hmen
t B
Pag
e 4
G
ener
ally
, loo
ks g
ood,
but
as
we’
re s
eein
g in
the
lon
g-te
rm-c
are
aren
a, s
ome
runo
ff c
ompa
nies
are
stil
l co
llect
ing
prem
ium
and
reg
ulat
ors
still
nee
d to
dea
l w
ith t
he r
esul
ting
ratin
g is
sues
, an
d ot
her
actu
aria
l co
mpl
icat
ions
rel
atin
g to
est
imat
ed p
rem
ium
col
lect
ions
. A
lso,
the
fin
anci
al s
urve
illan
ce
tool
s fo
r ru
noff
com
pani
es m
ight
als
o ha
ve a
pplic
atio
n to
blo
cks
of le
gacy
bus
ines
s in
goi
ng-c
once
rn c
ompa
nies
(an
d th
ose
bloc
ks a
re o
ften
sub
ject
to
or u
nder
con
side
ratio
n fo
r re
stru
ctur
ing)
. So,
I w
ould
con
side
r ch
angi
ng C
harg
e #
1 to
:
1. C
onsi
der
the
deve
lopm
ent
of f
inan
cial
sur
veill
ance
too
ls t
hat
are
spec
ific
ally
des
igne
d fo
r co
mpa
nies
in
runo
ff (
com
pani
es t
hat
are
no
lo
nger
act
ivel
y w
ritin
g in
sura
nce
busi
ness
) an
d co
mpa
nies
with
larg
e bl
ocks
of
runo
ff b
usin
ess.
Com
men
t # 3
– S
outh
Car
olin
a
Att
achm
ent B
P
age
5
O
n be
half
of
Dir
ecto
r R
aym
ond
Far
mer
, Sou
th C
arol
ina
has
no e
dits
or
chan
ges
to p
ropo
sed
char
ges
for
the
Res
truc
turi
ng W
orki
ng G
roup
.
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
2
Com
men
t # 4
– T
exas
A
ttac
hmen
t B
Pag
e 6
P
leas
e ac
cept
the
Tex
as D
epar
tmen
t of
Ins
uran
ce c
omm
ents
for
the
Res
truc
turi
ng M
echa
nism
exp
osur
e. T
exas
sug
gest
s th
e fo
llow
ing
edits
to
the
defi
nitio
n of
run
-off
: Run
off
com
pani
es a
re n
o lo
nger
act
ivel
y w
ritin
g in
sura
nce
busi
ness
or
colle
ctin
g pr
emiu
ms
exce
pt w
here
req
uire
d to
by
law
or
cont
ract
, and
hav
e un
paid
pol
icyh
olde
r li
abil
itie
s.
Com
men
t # 5
– V
erm
ont
Att
achm
ent B
P
age
7
R
egar
ding
the
defi
nitio
n of
run
-off
insu
rer,
her
e ar
e a
coup
le o
f po
ssib
ilit
ies
that
mig
ht b
e a
usef
ul s
tart
ing
poin
t:
1)
In th
e ca
ptiv
e co
ntex
t, a
“run
-off
cap
tive
insu
rer”
mig
ht b
e de
fine
d as
“a
capt
ive
insu
rer
that
has
not
und
erw
ritte
n in
sura
nce
or r
eins
uran
ce
for
at le
ast f
ive
year
s;”
and
2)
In th
e ca
se o
f V
erm
ont’
s L
egac
y In
sura
nce
Man
agem
ent A
ct, w
hile
it d
oes
not d
efin
e “r
un-o
ff c
ompa
nies
,” it
doe
s de
fine
“cl
osed
blo
cks”
th
at c
an b
e tr
ansf
erre
d/as
sum
ed, a
s fo
llow
s:
“C
lose
d bl
ock’
mea
ns a
blo
ck, l
ine,
or
grou
p of
com
mer
cial
non
-adm
itted
insu
ranc
e po
licie
s or
rei
nsur
ance
agr
eem
ents
or
both
:
(A)
whi
ch a
tran
sfer
ring
insu
rer
has
ceas
ed to
off
er, w
rite
, or
sell
to n
ew a
pplic
ants
;
(B)
for
whi
ch a
ll po
licy
peri
ods
have
bee
n fu
lly e
xpir
ed f
or n
ot le
ss th
an 6
0 m
onth
s;
(C)
for
whi
ch a
ctiv
e pr
emiu
ms
are
no lo
nger
bei
ng p
aid;
and
(D)
whi
ch is
not
wor
kers
’ co
mpe
nsat
ion,
hea
lth, l
ife,
or
any
othe
r pe
rson
al li
ne o
f in
sura
nce.
”
Com
men
t #6
– A
CL
I A
ttac
hmen
t B
Pag
e 8
T
he A
mer
ican
Cou
ncil
of L
ife
Insu
rers
(“A
CL
I”)1
look
s fo
rwar
d to
wor
king
with
the
Res
truc
turi
ng M
echa
nism
s Su
bgro
up a
s it
addr
esse
s it
s ch
arge
s re
latin
g to
res
truc
turi
ng m
echa
nism
s an
d “r
unof
fs”
duri
ng th
e ne
xt f
ew m
onth
s.
We
do,
how
ever
, ha
ve c
once
rns
with
the
pro
pose
d de
fini
tion
of “
run-
off
com
pani
es”
that
is
cont
aine
d in
the
fir
st c
harg
e (o
n th
e de
velo
pmen
t of
fi
nanc
ial
surv
eilla
nce
tool
s) a
nd i
n “I
I-D
efin
itio
n of
Run
Off
.” I
n bo
th i
nsta
nces
, “r
un-o
ff c
ompa
nies
” ar
e de
fine
d as
“co
mpa
nies
tha
t ar
e no
lon
ger
activ
ely
wri
ting
insu
ranc
e bu
sine
ss o
r co
llect
ing
prem
ium
s.”
Whi
le w
e ar
e no
t ab
le to
pro
vide
you
with
an
alte
rnat
ive
defi
nitio
n at
this
tim
e, w
e do
not
e th
at, t
radi
tiona
lly, s
ome
com
pani
es t
hat a
re c
onsi
dere
d to
be
in
“run
-off
” co
ntin
ue t
o co
llect
pre
miu
ms.
We
will
be
offe
ring
our
per
spec
tives
and
sug
gest
ions
on
this
def
initi
on a
s th
e Su
bgro
up c
ontin
ues
its
impo
rtan
t wor
k.
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
3
Com
men
t # 7
– A
IRR
OC
Atta
chm
ent C
omm
ent l
ette
r, A
dditi
onal
Atta
chm
ent,
P
age
9
(R
un
off
over
view
slid
es a
nd
PW
C s
urv
ey a
dd
itio
nal i
nfo
rmat
ion
- A
ttac
hm
ent
C)
T
he s
ize
of th
e gl
obal
run
off
mar
ket i
s $3
70 b
illio
n w
ith $
350
billi
on o
f th
at in
the
Uni
ted
Sta
tes.
AIR
RO
C is
the
only
U.S
. non
-pro
fit o
rgan
izat
ion
repr
esen
ting
the
lega
cy in
sura
nce
mar
ket.
The
se m
ater
ials
are
sub
mit
ted
for
educ
atio
n pu
rpos
es o
nly
to p
rovi
de s
ome
back
grou
nd a
nd c
onte
xt f
or t
he S
ubgr
oup
on r
unof
f an
d th
e ru
noff
m
arke
t. M
ater
ials
sub
mit
ted:
1. A
rec
ordi
ng o
f a
web
inar
tit
led
"Ove
rvie
w o
f R
unof
f “
that
was
pre
sent
ed b
y A
IRR
OC
on
Feb
ruar
y 6,
201
9. I
t ca
n be
vie
wed
at:
http
s://
vim
eo.c
om/3
1609
7460
/5be
ab58
3dc
- ad
dit
iona
l in
form
atio
n -
Att
ach
men
t C
Not
e P
ower
Poi
nt
pre
sen
tati
on n
oted
ru
noff
as
Wha
t is
'Ru
noff
'?
Run
off
is th
e te
rm u
sed
to b
road
ly d
escr
ibe
the
proc
ess
an I
nsur
ance
/ R
eins
uran
ce c
ompa
ny f
ollo
ws
whe
n it
has
a bl
ock
of b
usin
ess,
for
whi
ch it
mak
es f
utur
e pl
ans
for
hand
ling
the
liabi
lity
(exp
ecte
d fu
ture
cla
ims
that
it e
xpec
ts to
pay
and
for
whi
ch a
res
erve
has
bee
n es
tabl
ishe
d) a
nd is
not s
uppo
rted
sim
ilar
ly to
“on
goin
g bu
sine
ss.”
2.
The
20
18
Pw
C
- A
IRR
OC
-
IRL
A
Glo
bal
Insu
ranc
e R
unof
f S
urve
y.
Thi
s ca
n be
ac
cess
ed
on
the
Pw
C
web
site
at
: ht
tps:
//ww
w.p
wc.
com
/glo
balin
sura
ncer
unof
fsur
vey
- ad
dit
ion
al in
form
atio
n -
Att
ach
men
t C
AIR
RO
C is
ple
ased
to b
e an
edu
catio
nal r
esou
rce
to th
e Su
bgro
up a
s w
ell a
s th
e fu
ll W
orki
ng G
roup
.
Wh
at is
Run
off?
The
def
initi
ons
of r
unof
f va
ry g
reat
ly b
y co
mpa
ny a
nd e
ven
chan
ge o
ver
time
due
to f
acto
rs s
uch
as c
hang
es i
n un
derw
ritin
g cy
cle,
pro
fita
bili
ty,
rein
sura
nce
avai
labi
lity,
inte
rest
rat
es a
nd s
truc
ture
s to
adm
inis
ter.
In a
rec
ent s
urve
y of
the
mar
ket r
espo
nden
ts w
ere
aske
d “H
ow d
oes
your
org
aniz
atio
n de
fine
run
off
busi
ness
?”
Sam
ple
resp
onse
s in
clud
e:
•“A
ll lin
es o
f bu
sine
ss w
here
pre
miu
ms
are
no lo
nger
bei
ng w
ritte
n.”
•“A
ny d
isco
ntin
ued
line
of b
usin
ess.
” •“
Bus
ines
s th
at is
bei
ng w
ound
dow
n an
d no
long
er u
nder
wri
tten.
”
•“C
lose
d bo
ok o
f bu
sine
ss w
ith n
o m
ore
unde
rwri
ting.
” •“
2001
and
pri
or.”
•“D
isco
ntin
ued
com
pani
es, a
ffil
iate
s or
seg
men
ts.”
•“N
on-c
ore
to th
e gr
oup.
”
•“N
o ne
w w
ritte
n bu
sine
ss.”
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
4
Con
tin
ued
com
men
ts -
AIR
RO
C:
Th
e R
isk
Bas
ed C
apit
al R
equ
irem
ent
and
Ru
nof
f
The
im
pact
of
the
RB
C o
n ru
noff
dep
ends
on
the
defi
nitio
n of
run
off.
Usi
ng t
he g
ener
al d
efin
ition
tha
t th
e ru
noff
mar
ket
is c
ompr
ised
of
A&
E
liab
ilit
ies
that
res
ide
mos
tly
in p
rior
acc
iden
t ye
ars
and
that
ret
roac
tive
rei
nsur
ance
is
ofte
n us
ed t
o m
anag
ed t
hese
exp
osur
es,
the
RB
C m
ay n
ot b
e su
itabl
e to
eva
luat
ing
thei
r ri
sk.
The
NA
IC R
isk
Bas
ed C
apita
l R
equi
rem
ent
atte
mpt
s to
sum
mar
ize
seve
ral
area
s of
an
insu
rer's
ris
k in
to a
sin
gle
valu
e an
d th
e fo
rmul
a re
sult
s ha
ve
spec
ific
act
ions
ass
ocia
ted
wit
h th
em.
The
six
Cat
egor
ies
of C
apita
l Cha
rges
are
:
R0
Inve
stm
ent i
n A
ffili
ates
and
Off
Bal
ance
She
et R
isks
R1
Fix
ed I
ncom
e C
harg
e
R2
Equ
ity
Cha
rge
R3
Rei
nsur
ance
/Cre
dit R
isk
Cha
rge
R4
Res
ervi
ng R
isk
Cha
rge
R5
Pre
miu
m/U
nder
wri
ting
Ris
k C
harg
e L
ever
agin
g L
egac
y L
iabi
litie
s
The
RB
C r
equi
rem
ent
is c
alcu
late
d as
R0+
SQ
RT
((R
1^2)
+(R
2^2)
+((
.5*R
3)^2
)+((
.5*R
3+R
4)^2
)+(R
5^2)
The
RB
C R
atio
is
calc
ulat
ed a
s A
djus
ted
Sur
plus
/RB
C R
equi
rem
ent.
For
Run
off
Com
pani
es, t
hose
no
long
er a
ctiv
ely
wri
ting
new
bus
ines
s, t
he R
4 R
eser
ving
Ris
k C
harg
e do
min
ates
the
cal
cula
tion.
The
RB
C a
ppro
ach
of u
sing
the
late
st 1
0 ac
cide
nt y
ears
may
not
be
suit
able
for
eva
luat
ing
this
ris
k of
run
off
com
pani
es f
or th
e fo
llow
ing
reas
ons:
a) I
n m
any
of t
hese
com
pani
es t
he l
iabi
litie
s ar
e co
mpr
ised
of
A&
E a
nd m
atur
e W
C l
iabi
litie
s th
at r
esid
e in
pri
or a
ccid
ent
year
s; t
here
fore
th
e R
BC
app
roac
h to
usi
ng t
he l
ates
t 10
yea
rs m
ay b
e no
t ap
prop
riat
e fo
r ev
alua
ting
this
ris
k as
lia
bilit
ies
ofte
n re
side
in
acci
dent
yea
rs
beyo
nd th
e la
test
10
year
s, a
nd
b) R
etro
activ
e re
insu
ranc
e is
com
mon
ly u
sed
in th
e ru
n-of
f sp
ace,
and
sin
ce th
ese
cont
ract
s ar
e no
t req
uire
d to
be
repo
rted
in S
ched
ule
P, t
he
RB
C a
ppro
ach
that
util
izes
Sch
edul
e P
dat
a m
ay n
ot b
e pr
actic
al in
eva
luat
ing
thei
r ri
sk.
The
Pre
miu
m/U
nder
wri
ting
Ris
k C
harg
e, R
5, i
s m
uch
less
of
a ri
sk a
rea
for
Run
off
Com
pani
es.
Spec
ific
ite
ms,
lik
e th
e co
llect
ion
of p
rem
ium
on
retr
ospe
ctiv
ely
rate
d po
lices
may
cau
se d
isto
rtio
ns in
the
calc
ulat
ion
of E
xces
sive
Pre
miu
m G
row
th c
harg
es a
nd C
ombi
ned
ratio
trig
gers
with
out a
ny
chan
ge in
the
risk
pro
file
of
the
com
pany
.
With
the
inc
reas
ed u
se o
f In
sura
nce
Bus
ines
s T
rans
fers
and
Ret
roac
tive
Rei
nsur
ance
, the
mos
t cr
itica
l is
sue
for
Run
off
Com
pani
es i
s th
e av
aila
bili
ty
of c
ash
and
liqui
d as
sets
to
satis
fy p
olic
yhol
der
clai
ms
and
othe
r ob
ligat
ions
. It
may
be
prud
ent
for
the
regu
lato
r to
sep
arat
ely
cons
ider
sig
nifi
cant
am
ount
s of
ret
roac
tive
rein
sura
nce
(cur
rent
ly o
utsi
de o
f th
e R
BC
for
mul
a) w
hen
dete
rmin
ing
a ru
noff
com
pany
's c
apita
l req
uire
men
ts.
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
5
Com
men
t # 8
– P
atri
ck C
antil
o of
Can
tilo
and
Ben
nett,
LL
P
Atta
chm
ent B
P
age
12
I
wri
te s
olel
y on
my
own
beha
lf a
nd t
he v
iew
s I
expr
ess
are
not
inte
nded
to
refl
ect
thos
e of
any
clie
nt o
r ot
her
inte
rest
ed p
arty
. As
you
know
, I h
ave
spen
t th
e la
st f
our
deca
des
wor
king
in
insu
ranc
e re
gula
tion,
pri
mar
ily
on b
ehal
f of
sta
te i
nsur
ance
off
icia
ls i
n m
atte
rs a
ffec
ting
trou
bled
ins
uran
ce
com
pani
es a
nd c
ompl
ex i
nsur
ance
tra
nsac
tions
. M
y vi
ews
are
info
rmed
by
that
exp
erie
nce
and
I di
sclo
se t
hat
my
bias
fav
ors
prot
ectio
n of
po
licyh
olde
r in
tere
sts
and
the
stat
e-ba
sed
regu
lato
ry s
yste
m.
I of
fer
two
com
men
ts r
elev
ant
to t
he S
ubgr
oup’
s cu
rren
t de
liber
atio
ns.
The
fir
st
addr
esse
s th
e de
fini
tion
of r
unof
f co
mpa
ny a
nd th
e se
cond
the
role
of
cert
ain
rest
ruct
urin
g m
echa
nism
s.
It is
sug
gest
ed th
at “
runo
ff c
ompa
nies
” ex
clud
e th
ose
that
are
col
lect
ing
prem
ium
. I s
ubm
it th
at d
oing
so
wou
ld b
e in
cons
iste
nt w
ith e
cono
mic
rea
lity.
T
here
are
in
exis
tenc
e m
any
“clo
sed
bloc
ks”
and
othe
r en
titie
s co
mpr
ised
sol
ely
of “
lega
cy”
or e
xist
ing
busi
ness
muc
h or
all
whi
ch c
ontin
ues
to p
ay
prem
ium
tho
ugh
they
can
be
fair
ly c
hara
cter
ized
as
bein
g in
run
off.
Not
able
cur
rent
exa
mpl
es a
re t
hose
of
wel
l-kn
own
long
-ter
m c
are
insu
ranc
e bl
ocks
. C
erta
in c
ompa
nies
hol
ding
the
se b
lock
s ty
pica
lly d
o no
t se
ek t
o w
rite
new
bus
ines
s an
d th
eir
role
is
sole
ly t
o m
anag
e an
exi
stin
g bo
ok o
f lia
bilit
ies
to e
xpir
atio
n. I
pro
pose
tha
t th
e te
rm “
runo
ff c
ompa
ny”
be d
efin
ed a
s “a
n en
tity
who
se s
ole
mat
eria
l bu
sine
ss i
s th
e m
anag
emen
t in
ac
cord
ance
wit
h co
ntra
ctua
l and
reg
ulat
ory
obli
gati
ons
of a
n ex
istin
g gr
oup
of in
sura
nce
polic
ies
or c
ontr
acts
thro
ugh
thei
r te
rmin
atio
n.”
Rec
ently
ther
e ha
s be
en m
uch
talk
thro
ugho
ut m
any
NA
IC c
omm
ittee
s, w
orki
ng g
roup
s, a
nd ta
sk f
orce
s of
rel
ativ
ely
new
alte
rnat
ive
mec
hani
sms
for
the
man
agem
ent
of l
egac
y bl
ocks
and
oth
er s
peci
al t
rans
actio
nal
need
s. N
otab
le e
xam
ples
are
Ins
uran
ce B
usin
ess
Tra
nsfe
rs (
“IB
T”)
and
cor
pora
te
divi
sion
sta
tute
s. W
hile
thes
e an
d si
mil
ar m
echa
nism
s ca
n se
rve
usef
ul p
urpo
ses
for
solv
ent i
nsur
ers
and
rein
sure
rs in
sev
eral
type
s of
cir
cum
stan
ces,
th
ey s
houl
d no
t be
conf
used
with
tool
s fo
r ad
dres
sing
fin
anci
ally
trou
bled
com
pani
es. A
com
mon
ele
men
t of
such
tran
sact
ions
is th
at th
ey d
o no
t add
ne
w v
alue
. The
y ar
e no
t inv
estm
ent v
ehic
les
and,
pro
perl
y us
ed, d
o no
t inc
reas
e as
sets
or
redu
ce li
abili
ties.
Rat
her,
thes
e ty
pes
of tr
ansa
ctio
ns e
nabl
e an
ent
erpr
ise
to s
egre
gate
a d
iscr
ete
grou
p of
liab
ilitie
s (l
ike
a le
gacy
long
-ter
m c
are
insu
ranc
e bl
ock)
and
pla
ce th
em e
ithe
r in
new
ly c
reat
ed is
olat
ed
entit
ies
(as
thro
ugh
a co
rpor
ate
divi
sion
) or
in s
epar
ate
exis
ting
ent
ities
(as
thou
gh a
nd I
BT
).
In t
heir
pur
e fo
rm, s
uch
tran
sact
ions
do
not
impr
ove
the
econ
omic
hea
lth
of t
he b
lock
at
issu
e. O
f co
urse
, suc
h tr
ansa
ctio
ns c
ould
be
mad
e pa
rt o
f a
mor
e co
mpr
ehen
sive
arr
ange
men
t th
at c
an h
ave
that
eff
ect,
such
as
an I
BT
or
corp
orat
e di
visi
on t
hat
also
inc
lude
s th
e co
ntri
butio
n of
add
ition
al
capi
tal d
evot
ed to
the
bloc
k in
que
stio
n. I
t has
bee
n ob
serv
ed th
at th
ese
new
mec
hani
sms
are
sim
ply
new
way
s of
acc
ompl
ishi
ng g
oals
that
hav
e be
en
poss
ible
thr
ough
oth
er m
echa
nism
s li
ke l
oss
port
foli
o tr
ansf
ers
and
assu
mpt
ion
rein
sura
nce
tran
sact
ions
. T
hat
may
be
the
case
but
doe
s no
t su
gges
t th
at t
he a
dditi
onal
fle
xibi
lity
of n
ew p
oten
tial
stru
ctur
es c
anno
t ad
d va
lue.
My
caut
ion
wou
ld b
e si
mpl
y th
at t
hese
are
not
too
ls t
hat
can
impr
ove
mat
eria
lly
our
abili
ty to
cop
e w
ith tr
oubl
ed c
ompa
nies
. The
y ca
n be
com
bine
d w
ith s
uch
tool
s (l
ike
capi
tal i
nfus
ions
or
new
rei
nsur
ance
that
incl
udes
m
ater
ial r
isk
tran
sfer
) bu
t by
them
selv
es d
o no
t rel
ieve
fin
anci
al tr
oubl
e.
Com
men
t # 9
– N
orth
wes
tern
Mut
ual a
nd N
ew Y
ork
Lif
e
Atta
chm
ent B
P
age
14
In
gen
eral
, w
e st
rong
ly s
uppo
rt t
he s
ubgr
oup’
s ch
arge
s. W
hile
we
endo
rse
all
the
char
ges,
we
ask
that
the
sub
grou
p gi
ve s
peci
al e
mph
asis
to
the
deve
lopm
ent o
f un
ifor
m m
inim
um s
tand
ards
for
res
truc
turi
ng m
echa
nism
s.
Th
e Im
port
ance
of
Str
ong,
Un
ifor
m S
tand
ard
s fo
r D
ivis
ion
s an
d B
usi
nes
s T
ran
sfer
s
Sev
eral
sta
tes
have
rec
entl
y en
acte
d ne
w “
divi
sion
” an
d “i
nsur
ance
bus
ines
s tr
ansf
er”
law
s th
at a
llow
insu
rers
to tr
ansf
er a
nd n
ovat
e bu
sine
ss w
itho
ut
polic
yhol
der
cons
ent.
Whi
le t
hese
law
s of
fer
new
fle
xibi
lity
to c
ompa
nies
and
reg
ulat
ors,
the
y al
so i
ntro
duce
new
dan
gers
for
pol
icyh
olde
rs a
nd t
he
stat
e-ba
sed
syst
em o
f in
sura
nce
regu
lati
on.
Bec
ause
we
beli
eve
ther
e ar
e ex
istin
g al
tern
ativ
es t
hat
prov
ide
suff
icie
nt f
lexi
bilit
y in
nea
rly
all
circ
umst
ance
s an
d be
caus
e w
e w
ant
to m
aint
ain
poli
cyho
lder
pro
tect
ions
, ou
r st
rong
pre
fere
nce
is a
gain
st t
he e
nact
men
t or
use
of
divi
sion
and
in
sura
nce
busi
ness
tran
sfer
sta
tute
s fo
r lif
e, a
nnui
ty o
r he
alth
insu
ranc
e. H
owev
er, r
ecog
nizi
ng th
at r
egul
ator
s m
ay w
ish
to f
ind
a w
ay to
per
mit
, in
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
6
Con
tin
ued
com
men
ts -
Nor
thw
este
rn M
utu
al a
nd
New
Yor
k L
ife
lim
ited
cir
cum
stan
ces,
tran
sact
ions
that
are
ben
efic
ial t
o al
l pol
icyh
olde
rs, o
ur c
omm
ents
in th
is le
tter
addr
ess
the
min
imum
sta
ndar
ds r
equi
red
if li
fe,
annu
ity o
r he
alth
div
isio
ns o
r tr
ansf
ers
are
to b
e co
nsid
ered
.
Unl
ike
trad
ition
al i
ndem
nity
rei
nsur
ance
, w
here
the
ori
gina
l in
sure
r re
mai
ns l
iabl
e, t
hese
new
str
uctu
res
allo
w t
he o
rigi
nal
insu
rer
to e
xtin
guis
h lia
bilit
y to
pol
icyh
olde
rs. W
e ha
ve g
rave
con
cern
s ab
out s
ever
al a
spec
ts o
f th
ese
new
law
s:
T
here
is
no n
atio
nally
uni
form
fin
anci
al s
tand
ard
or a
ctua
rial
lev
el o
f co
nfid
ence
for
reg
ulat
ors
to a
pply
whe
n re
view
ing
the
fina
ncia
l st
reng
th o
f a
busi
ness
inc
lude
d in
a d
ivis
ion
or t
rans
fer.
A s
tron
g, n
atio
nall
y un
ifor
m s
tand
ard
is n
eces
sary
to
ensu
re t
hat
poli
cyho
lder
s ar
e pr
otec
ted
agai
nst t
he r
isk
of in
solv
ency
. Thi
s st
anda
rd s
houl
d be
com
e an
NA
IC a
ccre
dita
tion
req
uire
men
t. T
he d
evel
opm
ent o
f th
is s
tand
ard
shou
ld b
e a
criti
cal a
rea
of f
ocus
for
the
subg
roup
.
In
som
e st
ates
, di
visi
on a
nd i
nsur
ance
bus
ines
s tr
ansf
er l
aws
are
open
to
any
line
of b
usin
ess,
eve
n w
hen
it is
dif
ficu
lt or
im
poss
ible
to
arri
ve a
t a
cred
ible
lon
g-te
rm v
alua
tion
of t
he b
usin
ess
invo
lved
. For
exa
mpl
e, a
div
isio
n co
uld
allo
cate
dis
tres
sed,
har
d-to
-val
ue l
ong-
term
ca
re l
iabi
litie
s to
a n
ewly
cre
ated
spl
inte
r co
mpa
ny. I
n th
is s
cena
rio,
hea
lthi
er b
usin
ess
and
asso
ciat
ed a
sset
s m
ight
rem
ain
with
the
ori
gina
l co
mpa
ny, e
ndan
geri
ng p
olic
yhol
ders
rel
egat
ed to
the
spli
nter
com
pany
.
So
me
law
s al
so a
llow
the
cre
atio
n of
mon
olin
e in
sure
rs, p
oten
tial
ly d
epri
ving
pol
icyh
olde
rs o
f th
e be
nefi
ts o
f di
vers
ific
atio
n w
ithou
t th
eir
cons
ent.
So
me
law
s al
so a
llow
the
divi
sion
of
a m
ulti-
stat
e in
sure
r in
to a
spl
inte
r co
mpa
ny li
cens
ed in
a s
ingl
e st
ate,
pot
enti
ally
ove
rwhe
lmin
g th
e
stat
e’s
dom
esti
c gu
aran
ty a
ssoc
iatio
n in
the
even
t of
inso
lven
cy.
S
ome
law
s sa
nctio
n th
e us
e of
non
-adm
itted
ass
ets
to s
uppo
rt p
olic
y lia
bilit
ies.
S
ever
al l
aws
lack
oth
er i
mpo
rtan
t pr
oced
ural
and
sub
stan
tive
safe
guar
ds l
ike
publ
ic n
otic
e, r
equi
rem
ents
to
cons
ult
with
oth
er i
nter
este
d st
ates
, ind
epen
dent
exp
ert r
evie
w, a
hea
ring
or
cour
t pro
cess
, and
req
uire
men
ts to
ass
ess
corp
orat
e go
vern
ance
and
ow
ner
qual
ific
atio
ns.
At
thei
r w
orst
, th
ese
new
law
s co
uld
enab
le t
rans
actio
ns t
hat
enri
ch s
hare
hold
ers
at t
he e
xpen
se o
f po
licyh
olde
rs,
guar
anty
ass
ocia
tions
and
the
re
puta
tions
of
both
the
ind
ustr
y an
d st
ate-
base
d sy
stem
of
insu
ranc
e re
gula
tion.
Eff
ectiv
e, n
atio
nally
uni
form
ove
rsig
ht o
f so
lven
cy h
as l
ong
been
a
hall
mar
k of
sta
te-b
ased
ins
uran
ce r
egul
atio
n. I
t is
ess
entia
l th
at t
he N
AIC
act
to
pres
erve
thi
s st
reng
th o
f th
e st
ate-
base
d sy
stem
. T
hese
new
tr
ansa
ctio
n st
ruct
ures
mus
t no
t be
all
owed
to
unde
rmin
e fu
ndam
enta
l so
lven
cy r
egul
atio
n an
d po
licyh
olde
r pr
otec
tions
. W
e ex
pect
tha
t th
e su
bgro
up’s
wor
k w
ill b
e a
criti
cal p
art o
f th
is e
ffor
t.
In th
e di
scus
sion
bel
ow, w
e su
gges
t sev
eral
pri
ncip
les
that
sho
uld
gove
rn r
egul
ator
y re
view
of
prop
osed
div
isio
n an
d bu
sine
ss tr
ansf
er tr
ansa
ctio
ns.
Pol
icyh
old
ers
Sh
ould
Nev
er B
e L
eft
Wor
se O
ff
Reg
ulat
ors
shou
ld n
ever
app
rove
a d
ivis
ion
or i
nsur
ance
bus
ines
s tr
ansf
er i
f it
wou
ld l
eave
any
cla
ss o
f po
licyh
olde
rs w
orse
off
. In
stea
d,
polic
yhol
ders
sho
uld
be l
eft
in t
he s
ame
or a
bet
ter
posi
tion
afte
r co
mpl
etio
n of
the
tra
nsac
tion.
Bef
ore
the
regu
lato
r si
gns
off,
a v
alua
tion
shou
ld b
e un
dert
aken
by
an e
xper
t to
est
ablis
h at
a h
igh
leve
l of
con
fide
nce
that
pol
icyh
olde
rs w
ill e
xper
ienc
e no
adv
erse
eff
ects
. T
he e
xper
t sh
ould
be
inde
pend
ent
of a
ny i
nflu
ence
fro
m t
he c
ompa
nies
inv
olve
d. T
his
appr
oach
wou
ld a
lign
the
U.S
. re
gula
tory
fra
mew
ork
with
wel
l-es
tabl
ishe
d in
tern
atio
nal
prec
eden
ts l
ike
the
Uni
ted
Kin
gdom
’s “
Par
t V
II”
busi
ness
tra
nsfe
r re
gim
e. A
foc
us o
n po
licyh
olde
r pr
otec
tion
has
been
fun
dam
enta
l to
th
e su
cces
s of
the
U.K
. re
gim
e. I
n a
Par
t V
II t
rans
acti
on,
the
regu
lato
r m
ust
prov
ide
a de
taile
d re
port
to
the
cour
t an
d ce
rtif
y th
e so
lven
cy o
f th
e re
sult
ing
entit
y. A
n in
depe
nden
t ex
pert
mus
t al
so p
rovi
de a
det
aile
d re
port
. Whe
n th
ere
are
ques
tions
abo
ut t
he s
tren
gth
of th
e bu
sine
ss i
nvol
ved,
the
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
7
Con
tin
ued
com
men
ts -
Nor
thw
este
rn M
utu
al a
nd
New
Yor
k L
ife:
U.K
. reg
ulat
ors
and
the
cour
t wil
l nor
mal
ly in
sist
on
ensu
ring
that
the
busi
ness
is tr
ansf
erre
d to
a s
tron
ger
insu
rer,
not
isol
ated
in a
wea
ker
insu
rer.
Req
uir
e S
tron
g F
inan
cial
Sta
nda
rds
and
Str
ess
Tes
ting
for
Lon
g-D
ura
tion
Bu
sine
ss
Eve
n if
a l
ong-
dura
tion
life
or h
ealth
bus
ines
s is
elig
ible
for
inc
lusi
on i
n a
tran
sact
ion,
reg
ulat
ors
wil
l st
ill
need
a r
obus
t fr
amew
ork
to e
valu
ate
the
long
-ter
m s
olve
ncy
of th
e bu
sine
ss. R
egul
ator
s sh
ould
con
side
r th
e fo
llow
ing
prin
cipl
es in
the
deve
lopm
ent o
f th
is f
ram
ewor
k:
For
long
-dur
atio
n lif
e, a
nnui
ty a
nd h
ealth
bus
ines
s, r
egul
ator
s sh
ould
sta
rt w
ith a
foc
us o
n po
licy
rese
rves
, and
sho
uld
requ
ire
stre
ss te
stin
g of
res
erve
s at
a “
seve
rely
adv
erse
” le
vel.
If r
eser
ves
are
not
subj
ecte
d to
a h
igh
leve
l of
str
ess
test
ing,
a d
ivis
ion
or t
rans
fer
may
app
ear
to
leav
e a
busi
ness
ade
quat
ely
capi
taliz
ed a
t th
e tim
e of
the
tra
nsac
tion.
How
ever
, th
e pi
ctur
e ca
n ch
ange
ove
r ti
me
as l
ong-
term
exp
erie
nce
dive
rges
fro
m a
ssum
ptio
ns. A
gain
, con
side
r th
e re
cent
exp
erie
nce
of lo
ng-t
erm
car
e.
Sta
rtin
g fr
om a
bas
is o
f re
serv
es m
eeti
ng a
“se
vere
ly a
dver
se”
stan
dard
, fo
rmul
aic
appl
icat
ion
of r
isk-
base
d ca
pita
l w
ill,
appr
opri
atel
y,
resu
lt in
a h
ighe
r le
vel
of r
equi
red
capi
tal
for
the
busi
ness
aff
ecte
d by
the
div
isio
n or
tra
nsfe
r. H
owev
er,
whi
le r
isk-
base
d ca
pita
l m
ay
prov
ide
a us
eful
sta
rtin
g po
int
to e
stab
lish
capi
tal
requ
irem
ents
, it
is n
ot d
esig
ned
to m
easu
re r
elat
ive
fina
ncia
l st
reng
th a
nd t
here
fore
wou
ld
be in
suff
icie
nt o
n its
ow
n to
det
erm
ine
the
min
imum
req
uire
d fi
nanc
ial p
ositi
on o
f a
tran
sfer
red
busi
ness
.
In
stea
d, i
n ad
ditio
n to
ris
k-ba
sed
capi
tal,
regu
lato
rs s
houl
d ex
plor
e ca
pita
l st
anda
rds
for
long
-dur
atio
n lif
e an
d he
alth
bus
ines
s th
at a
re b
ased
on
a de
fine
d ra
tio o
f as
set a
dequ
acy
stan
dard
s. C
apita
l sta
ndar
ds b
ased
on
this
type
of
cash
flo
w p
roje
ctio
n te
chni
que
can
help
ens
ure
that
eno
ugh
capi
tal i
s he
ld in
a tr
ansf
erre
d bu
sine
ss, s
uppl
emen
ting
the
exis
ting
risk
-bas
ed c
apita
l fra
mew
ork.
Reg
ulat
ors
shou
ld e
stab
lish
a c
onfi
denc
e le
vel
base
d on
the
gre
ates
t pr
esen
t va
lue
of a
ccum
ulat
ed d
efic
ienc
ies
over
a l
ong-
term
hor
izon
ac
ross
sto
chas
tic s
cena
rios
. T
he c
onfi
denc
e le
vel
shou
ld b
e se
t at
a s
tand
ard
that
ass
ures
sol
venc
y ov
er t
he l
ife
of t
he b
usin
ess
so a
s to
pr
ovid
e a
robu
st b
acks
top
to th
e co
mbi
natio
n of
res
erve
s es
tabl
ishe
d to
mee
t a “
seve
rely
adv
erse
” st
anda
rd a
nd r
isk-
base
d ca
pita
l.
P
resc
ribe
d as
sum
ptio
ns s
houl
d be
incl
uded
in c
apit
al c
alcu
latio
ns to
avo
id th
e m
anip
ulat
ion
of c
apita
l thr
esho
lds.
Act
uari
al r
eser
ve a
nd c
apit
al c
alcu
latio
ns s
houl
d be
per
form
ed b
y an
exp
ert t
hat i
s in
depe
nden
t of
the
insu
ranc
e co
mpa
nies
invo
lved
.
Use
Un
ifor
m N
AIC
Val
uat
ion
and
Acc
oun
tin
g St
anda
rds
W
hen
eval
uatin
g th
e so
lven
cy i
mpa
ct o
f a
prop
osed
tra
nsac
tion,
reg
ulat
ors
shou
ld n
ot g
ive
cred
it fo
r no
n-ad
mitt
ed a
sset
s. D
ecis
ions
abo
ut t
hese
tr
ansa
ctio
ns s
houl
d st
art f
rom
the
NA
IC’s
uni
form
sta
tuto
ry v
alua
tion
and
acc
ount
ing
rule
s.
The
pos
sibi
lity
that
non
-adm
itte
d as
sets
mig
ht b
e us
ed to
bac
k re
serv
es a
nd c
apita
l in
thes
e tr
ansa
ctio
ns is
dee
ply
trou
blin
g fo
r th
e fo
llow
ing
reas
ons:
M
ost n
on-a
dmitt
ed a
sset
s ar
e cl
assi
fied
that
way
bec
ause
they
are
not
rea
dily
ava
ilabl
e to
sat
isfy
pol
icyh
olde
r cl
aim
s.
P
ut a
noth
er w
ay, m
any
non-
adm
itte
d as
sets
are
not
rea
dily
mar
keta
ble
or d
o no
t pro
duce
fut
ure
cash
flo
ws.
N
on-a
dmit
ted
asse
ts c
an in
clud
e an
ythi
ng a
com
pany
ow
ns, f
rom
illiq
uid
and
cont
inge
nt le
tters
of
cred
it to
off
ice
furn
iture
, equ
ipm
ent,
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
8
Con
tin
ued
com
men
ts -
Nor
thw
este
rn M
utu
al a
nd
New
Yor
k L
ife:
ha
rdw
are
and
soft
war
e.
It
mak
es s
ense
to e
xclu
de th
ese
item
s fr
om th
e po
ol o
f as
sets
an
insu
ranc
e co
mpa
ny c
an c
ount
tow
ard
the
paym
ent o
f fu
ture
cla
ims,
as
they
ar
e ill
iqui
d, u
nlik
ely
to r
etai
n th
eir
valu
e, a
nd g
ener
ally
do
not p
rodu
ce a
dditi
onal
inco
me.
The
dis
tinct
ion
betw
een
adm
itte
d an
d no
n-ad
mitt
ed a
sset
s sh
ould
not
cha
nge
in t
he c
onte
xt o
f a
divi
sion
or
busi
ness
tra
nsac
tion.
In
fact
, gi
ven
the
risk
tha
t co
mpa
nies
will
use
res
truc
turi
ng m
echa
nism
s to
wal
l of
f di
stre
ssed
bus
ines
ses,
it
is e
spec
iall
y im
port
ant
that
reg
ulat
ors
scru
tini
ze th
e qu
alit
y of
the
asse
ts in
volv
ed.
Inst
ead,
in a
dditi
on to
ris
k-ba
sed
capi
tal,
regu
lato
rs s
houl
d ex
plor
e ca
pita
l sta
ndar
ds f
or lo
ng-d
urat
ion
life
and
heal
th b
usin
ess
that
are
M
inim
um
Req
uir
emen
ts S
hou
ld B
ecom
e N
AIC
Acc
red
itat
ion
Sta
nd
ard
s
Ult
imat
ely,
it w
ill b
e es
sent
ial t
hat t
he N
AIC
est
ablis
h st
rong
min
imum
req
uire
men
ts f
or th
ese
tran
sact
ions
as
accr
edit
atio
n st
anda
rds.
The
str
engt
h of
stat
e-ba
sed
syst
em d
epen
ds u
pon
the
inte
grity
of
solv
ency
reg
ulat
ion
acro
ss t
he c
ount
ry.
Reg
ulat
ors
will
nee
d to
rel
y on
the
ir c
ount
erpa
rts
in o
ther
st
ates
to e
nsur
e th
at tr
ansf
erre
d bu
sine
sses
are
uni
form
ly s
uppo
rted
by
suff
icie
nt r
eser
ves
and
capi
tal,
and
are
run
off
in a
sol
vent
man
ner.
Com
pani
es
shou
ld n
ot b
e al
low
ed to
arb
itrag
e th
eir
way
to d
imin
ishe
d so
lven
cy o
vers
ight
by
choo
sing
one
dom
icile
ove
r an
othe
r.
Oth
er P
roce
dura
l Saf
egu
ard
s A
re A
lso
Imp
orta
nt
In t
his
lette
r, w
e ha
ve f
ocus
ed p
rim
arily
on
the
fina
ncia
l st
anda
rds
that
sho
uld
appl
y to
div
isio
ns a
nd i
nsur
ance
bus
ines
s tr
ansf
ers.
We
expe
ct t
hose
st
anda
rds
will
be
a si
gnif
ican
t foc
us o
f th
e su
bgro
up. H
owev
er, t
here
are
oth
er p
roce
dura
l saf
egua
rds
that
are
equ
ally
impo
rtan
t for
thes
e tr
ansa
ctio
ns.
For
exa
mpl
e, s
ince
pol
icyh
olde
rs lo
se th
eir
norm
al r
ight
to c
onse
nt, c
ourt
ove
rsig
ht a
nd a
ppro
val s
houl
d be
req
uire
d. P
olic
yhol
ders
and
oth
er a
ffec
ted
part
ies
shou
ld a
lway
s be
giv
en n
otic
e, a
cces
s to
all
info
rmat
ion
need
ed to
mea
ning
fully
rev
iew
a p
ropo
sed
tran
sact
ion,
and
an
oppo
rtun
ity to
be
hear
d in
cou
rt.
Als
o, t
he p
roce
ss s
houl
d re
quir
e ap
prov
al o
r no
nobj
ectio
n of
all
affe
cted
sta
tes
and
the
resu
lting
ent
ities
sho
uld
be l
icen
sed
in a
ll st
ates
ne
eded
so
as n
ot t
o im
pair
pol
icyh
olde
rs’
acce
ss t
o th
eir
stat
e gu
aran
ty a
ssoc
iatio
ns.
We
belie
ve t
hese
pro
tect
ions
sho
uld
also
be
cons
ider
ed f
or
accr
edit
atio
n re
quir
emen
ts.
We
look
for
war
d to
pro
vidi
ng o
ur v
iew
s on
thi
s an
d ot
her
proc
edur
al s
afeg
uard
s to
the
Res
truc
turi
ng M
echa
nism
s (E
) W
orki
ng G
roup
.
Com
men
t # 1
0 –
Nat
ionw
ide
A
ttach
men
t B
Pag
e 20
Nat
ionw
ide
beli
eves
tha
t it
wou
ld b
e di
ffic
ult
to c
raft
a s
ingu
lar
defi
nitio
n of
wha
t co
nstit
utes
a c
ompa
ny i
n ru
noff
. T
here
fore
, an
y de
fini
tion
reco
mm
ende
d by
the
Sub
grou
p an
d ad
opte
d by
the
NA
IC s
houl
d pr
ovid
e fo
r a
mec
hani
sm b
y w
hich
the
com
pany
and
its
dom
icili
ary
regu
lato
r ca
n ag
ree
that
an
insu
rer
is o
pera
ting
as a
run
off
com
pany
. We
note
that
cer
tain
run
off
insu
rers
may
no
long
er b
e ac
tivel
y w
ritin
g ne
w in
sura
nce
busi
ness
; ho
wev
er,
they
may
ass
ume
runo
ff b
ooks
of
busi
ness
fro
m t
ime
to t
ime
from
aff
iliat
ed c
ompa
nies
. In
add
ition
, ru
noff
ins
urer
s m
ay a
lso
acce
pt
imm
ater
ial
amou
nts
of p
rem
ium
on
retr
ospe
ctiv
ely
rate
d po
licie
s th
at w
ere
wri
tten
man
y ye
ars
ago.
In
our
view
, th
e as
sum
ptio
n of
aff
ilia
ted
runo
ff
book
s of
bus
ines
s an
d th
e ac
cept
ance
of
imm
ater
ial
amou
nts
of p
rem
ium
due
to
retr
ospe
ctiv
ely
rate
d po
licie
s sh
ould
not
res
ult
in a
run
off
insu
rer
no
long
er b
eing
dee
med
as
such
.
In li
ght o
f th
e ab
ove,
Nat
ionw
ide
prop
oses
the
follo
win
g de
fini
tion
of a
"ru
noff
insu
rer''
.
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
9
Con
tin
ued
com
men
ts -
Nat
ion
wid
e
Run
off
Insu
rer''
mea
ns a
n in
sure
r th
at,
in c
onsu
ltatio
n w
ith i
nsur
ance
com
mis
sion
er o
f its
sta
te o
f do
mic
ile,
has
mad
e an
ele
ctio
n to
be
trea
ted
as a
ru
noff
insu
rer
or h
as b
een
deem
ed to
be
oper
atin
g as
a r
unof
f in
sure
r, b
ased
upo
n its
sat
isfa
ctio
n th
e fo
llow
ing
crite
ria:
(1)
the
insu
rer
does
not
act
ivel
y w
rite
new
bus
ines
s;
(2)
any
assu
med
bus
ines
s is
lim
ited
to th
e as
sum
ptio
n of
run
off
book
s of
bus
ines
s fr
om a
ffili
ated
com
pani
es; a
nd
(3)
any
prem
ium
acc
epte
d by
the
insu
rer
is d
eter
min
ed to
be
imm
ater
ial a
nd in
cide
ntal
to it
s st
atus
as
a ru
noff
insu
rer.
As
the
Subg
roup
car
ries
out
its
cha
rge
of c
onsi
deri
ng w
heth
er t
o de
velo
p fi
nanc
ial
surv
eilla
nce
tool
s sp
ecif
ical
ly d
esig
ned
for
com
pani
es i
n ru
noff
, in
clud
ing
pros
pect
ive
chan
ges
to t
he R
BC
for
mul
a to
bet
ter
asse
ss t
he m
inim
um s
urpl
us r
equi
rem
ents
for
com
pani
es i
n ru
noff
, w
e re
spec
tful
ly
requ
est
that
the
Sub
grou
p al
so c
onsi
der
whe
ther
exi
stin
g re
gula
tory
req
uire
men
ts a
nd s
urve
illan
ce t
ools
sho
uld
no l
onge
r ap
ply
to c
ompa
nies
in
runo
ff b
ecau
se th
ey w
ere
not d
esig
ned
for
runo
ff in
sure
rs a
nd, a
s a
resu
lt, a
re n
ot "
fit f
or p
urpo
se".
To
high
light
one
exa
mpl
e, N
atio
nwid
e ha
s pr
evio
usly
rai
sed
to t
he N
AIC
's P
rope
rty
and
Cas
ualty
(P
&C
) R
isk-
Bas
ed C
apita
l (R
BC
) W
orki
ng G
roup
co
ncer
ns w
ith t
he c
ontin
ued
appl
icat
ion
of t
he P
&C
RB
C t
rend
tes
t to
run
off
insu
rers
. T
he P
&C
RB
C t
rend
tes
t w
ould
req
uire
an
insu
rer
with
a
com
bine
d ra
tio e
xcee
ding
120
% to
hol
d re
gula
tory
cap
ital a
t or
abov
e 30
0% o
f its
aut
hori
zed
cont
rol l
evel
(A
CL
) R
BC
; rat
her
than
200
% A
CL
RB
C
for
com
pani
es w
ith a
com
bine
d ra
tio b
elow
120
%.
Run
off
com
pani
es t
hat
gene
rate
a s
mal
l am
ount
of
retr
ospe
ctiv
ely
rate
d pr
emiu
m f
rom
pol
icie
s w
ritt
en m
any
year
s in
the
pas
t w
ill
alm
ost
alw
ays
be w
ithi
n th
e sc
ope
of t
he R
BC
"tr
end
test
" du
e to
com
bine
d ra
tios
wel
l ex
ceed
ing
120%
. A
s a
resu
lt, th
ey w
ill b
e ex
pect
ed to
mai
ntai
n hi
gher
reg
ulat
ory
capi
tal r
equi
rem
ent,
desp
ite n
ot p
osin
g an
y ad
ditio
nal s
olve
ncy
risk
, whe
n co
mpa
red
to a
runo
ff c
ompa
ny t
hat
does
not
gen
erat
e an
y pr
emiu
m (
or e
ven
nega
tive
prem
ium
) an
d is
not
sub
ject
to
the
RB
C t
rend
tes
t. In
fac
t, th
e ac
cept
ance
of
any
prem
ium
for
thes
e co
mpa
nies
enh
ance
s th
eir
solv
ency
pos
ition
.
The
refo
re,
as t
he S
ubgr
oup
mov
es f
orw
ard
with
its
cha
rges
, w
e be
lieve
it
shou
ld c
onsi
der
not
only
the
nec
essi
ty o
f de
velo
ping
new
fin
anci
al
surv
eill
ance
too
ls f
or r
unof
f in
sure
rs, b
ut a
lso
rem
ovin
g th
e ap
plic
atio
n of
req
uire
men
ts a
nd s
urve
illan
ce t
ools
, lik
e th
e R
BC
tre
nd t
est,
that
wer
e no
t de
sign
ed to
app
ly to
run
off
insu
rers
and
can
res
ult i
n co
unte
r in
tuiti
ve o
utco
mes
whe
n ap
plie
d to
them
.
Com
men
t #11
– Pr
oTuc
ket L
icen
sing
Pap
er
Lic
ensi
ng
pape
r -
add
itio
nal i
nfo
rmat
ion
- A
ttac
hm
ent
C
P
roT
ucke
t sha
red
a lic
ensi
ng p
aper
whi
ch is
17
page
s lo
ng. I
t is
in t
he b
usin
ess
proc
ess
of P
roT
ucke
t. It
not
es P
roT
ucke
t t i
s fo
rmed
to
use
prot
ecte
d ce
lls f
or \
ins
uran
ce b
usin
ess
tran
sfer
(“I
BT
”) o
f po
rtfo
lios
of
insu
ranc
e bu
sine
ss a
nd r
elat
ed a
sset
s un
der
the
Rho
de I
slan
d V
olun
tary
Res
truc
turi
ng
of S
olve
nt I
nsur
ers
Act
(19
95),
as
amen
ded.
It n
otes
they
are
see
king
add
ition
al li
cens
es.
Key
rel
evan
t q
uot
es f
rom
th
e pa
per
:
Fut
ure
IBT
s, in
clud
ing
dire
ct a
dmit
ted
com
mer
cial
line
s or
sur
plus
line
s bu
sine
ss, w
ill b
e ef
fect
ed th
roug
h se
para
te p
rote
cted
cel
ls, e
ach
wit
h it
s ow
n de
dica
ted
asse
ts a
nd s
olve
ncy
prot
ectio
ns.
It i
s im
port
ant
to n
ote
that
the
RI
Act
aut
hori
zes
IBT
s on
ly f
or r
eins
uran
ce a
nd c
omm
erci
al l
ines
(in
clud
ing
surp
lus
lines
), i
n ea
ch c
ase
only
if
the
busi
ness
has
bee
n in
run
-off
for
at
leas
t 5
year
s. W
orke
rs’
com
pens
atio
n, l
ong-
term
car
e in
sura
nce
and
othe
r pe
rson
al l
ines
ins
uran
ce (
not
incl
udin
g re
insu
ranc
e) a
nd a
ny o
ther
bus
ines
s cu
rren
tly b
eing
wri
tten
or in
run
-off
for
less
than
5 y
ears
are
not
elig
ible
for
tran
sfer
und
er th
e R
I A
ct.3
Att
ach
men
t A
© 2
019
Nat
iona
l Ass
ocia
tion
of I
nsur
ance
Com
mis
sion
ers
10
Con
tin
ued
com
men
ts –
Pro
Tu
cket
A
ccou
ntin
g T
reat
men
t of
Sep
arat
e C
ells
. A
s no
ted
in t
he “
Pro
Tuc
ket’
s A
pplic
atio
ns”
sect
ion
of t
his
Pap
er,
ProT
ucke
t’s
busi
ness
pla
n is
to
use
prot
ecte
d ce
lls
purs
uant
to
R.I
. G
en.
Law
s se
ctio
n 27
-64-
4 so
as
to p
erm
it IB
Ts
of b
ooks
of
insu
ranc
e bu
sine
ss i
nto
sepa
rate
cel
ls, e
ach
wit
h it
s ow
n de
dica
ted
asse
ts a
nd s
olve
ncy
prot
ecti
ons.
T
here
is
curr
ently
no
dire
ctly
rel
evan
t N
AIC
Sta
tuto
ry A
ccou
ntin
g P
rinc
iple
s (S
AP)
gui
danc
e fo
r se
para
te c
ells
(pr
otec
ted
cells
) as
Pro
Tuc
ket
cont
empl
ates
usi
ng s
uch
cells
or
as t
he R
hode
Isl
and
law
pre
scri
bes.
How
ever
, ex
istin
g S
AP
gui
danc
e fo
und
in S
SAP
No.
74
– In
sura
nce-
Lin
ked
Sec
urit
ies
Issu
ed T
hrou
gh a
Pro
tect
ed C
ell (
SS
AP
74)
and
SS
AP
No.
56
– S
epar
ate
Acc
ount
s (S
SAP
56)
pro
vide
use
ful b
ases
for
the
pres
enta
tion
of
Pro
Tuc
ket’
s pr
otec
ted
cell
fina
ncia
l co
nditi
on a
nd f
or o
ther
wis
e de
velo
ping
the
req
uisi
te a
ccou
ntin
g gu
idan
ce f
or t
he u
se o
f pr
otec
ted
cell
s by
in
sure
rs, s
uch
as P
roT
ucke
t, fo
r its
IB
T b
usin
ess
(i.e
., bu
sine
ss t
hat
does
not
inc
lude
the
iss
uanc
e of
ins
uran
ce-l
inke
d se
curi
ties)
. Pro
Tuc
ket
belie
ves
that
thi
s ex
istin
g gu
idan
ce,
mod
ifie
d, a
s m
ore
fully
dis
cuss
ed i
n A
ppen
dix
B,
is s
uffi
cien
t 1)
to
allo
w t
he R
I D
epar
tmen
t an
d ot
her
insu
ranc
e re
gula
tors
to
reco
gniz
e a
perm
itte
d pr
actic
e fo
r th
e ac
coun
ting
for
prot
ecte
d ce
ll c
ompa
nies
and
pro
tect
ed c
ells
, an
d 2)
for
eve
ntua
l ad
optio
n by
the
N
AIC
or
any
Stat
e as
pre
scri
bed
in S
AP
gui
danc
e on
the
subj
ect.
Com
men
t # 1
1 –
R&
Q S
olut
ions
A
ttach
men
t B
Pag
e 22
In
res
pons
e to
the
belo
w r
eque
st f
or c
omm
ents
, one
item
that
we
have
rai
sed
is th
at th
e O
utw
ards
Ret
roac
tive
fol
low
the
Los
s L
iabi
lity
com
pone
nt o
f th
e R
BC
cal
cula
tion.
Thi
s th
en r
efle
cts
the
net r
eser
ve c
alcu
lati
on f
or R
BC
mor
e ac
cura
tely
eve
n th
ough
the
stat
utor
y st
atem
ents
hav
e th
e re
troa
ctiv
e as
the
wri
te-i
n li
ne.
Thi
s is
an
issu
e w
ith a
dis
conn
ect
of t
he r
etro
activ
e re
insu
ranc
e w
rite
-in
line
(pu
rsua
nt t
o S
SA
P 6
2) a
nd t
he b
alan
ce s
heet
loc
atio
n of
the
inw
ards
re
serv
es w
hich
are
on
the
loss
liab
ility
line
. The
RB
C o
nly
sees
the
loss
liab
ilit
y on
the
Res
erve
RB
C c
alcu
latio
n an
d no
t the
net
impa
ct o
f th
e
retr
oact
ive
prot
ectin
g th
e lo
ss li
abili
ties.
NA
IC s
taff
req
ues
ted
cla
rifi
cati
on :
W
e ca
n ce
rtai
nly
pass
the
com
men
t al
ong,
how
ever
the
reg
ulat
ory
(and
GA
AP
) vi
ew o
f re
troa
ctiv
e re
insu
ranc
e is
tha
t it
is m
ore
akin
to
fina
ncin
g of
a p
ast e
vent
. Thi
s is
the
reas
on th
at th
e re
sults
are
not
ref
lect
ed in
und
erw
ritin
g, b
ut in
stea
d re
flec
ted
in o
ther
inco
me.
R&
Q r
espo
nded
that
: I’
ve a
lway
s un
ders
tood
why
it
was
cre
ated
in
the
90’s
but
with
the
gro
wth
of
the
run-
off
and
lega
cy p
rote
ctio
ns i
n pl
ace
of l
arge
val
ues,
i.e
. re
troa
ctiv
e, t
he c
apit
al v
alua
tion
s ar
e m
isle
adin
g.
Restructuring Mechanisms (E) Subgroup Comment Letters Received
May 23, 2019
TABLE OF CONTENTS
COMMENTER / DOCUMENT PAGE
REFERENCE
Comment Letters Received for request for comments on charges and the definition of run off companies
1. Connecticut 3
2. Maine 4
3. South Carolina 5
4. Texas 6
5. Vermont 7
6. ACLI 8
7. AIRROC Additional Attachment (7a), Runoff overview slides - additional information – Attachment C and PWC survey - additional information Attachment C
9
8. Patrick Cantilo of Cantilo and Bennett, LLP 12
9. Northwestern Mutual and New York Life 14
10. Nationwide 20
11. ProTucket licensing paper - - additional information Attachment C -
12. R&Q Solutions 22
Attachment B
1 of 22
Attachment B
2 of 22
Connecticut Informal Comments I thought I would informally send you some quick thoughts. First, I think charge 1 and 2 are very broad and regulators can come up with good best practices based on experience. Charge #3‐ we should wait for the parent group for clearer guidance because it appears that the charges overlap. My comments are based on charges 1 and 2 at this point.
1. As liquidity is many times the highest risk companies face (and regulator’s when faced with dividend requests) the creation of a “best practices” liquidity report can be created for regulators to use if they choose to. This helps to create continuity around liquidity considerations;
2. Monitor expenses‐ ie as companies continue to strive to decrease claims and administrative
expenses‐ how does it affect key personnel and possible outsourcing? This tends to create new operational risks‐ What is the company willing to give up in order to increase liquidity? (Cost/benefits should be analyzed).
3. Provide the regulator a list of all pledged assets and possible covenant triggers.
4. Cash flow analysis through claim payout period.
Again, very high level. I think this will be the easy part and will need direction from Working Group after they have sorted through the macro issues. Kathy Belfi
W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4‐26‐19\1 ‐ CT comments .docx
Attachment B
3 of 22
Informal Comments from Maine Generally, looks good, but as we’re seeing in the long‐term‐care arena, some runoff companies are still collecting premium and regulators still need to deal with the resulting rating issues, and other actuarial complications relating to estimated premium collections. Also, the financial surveillance tools for runoff companies might also have application to blocks of legacy business in going‐concern companies (and those blocks are often subject to or under consideration for restructuring). So, I would consider changing Charge # 1 to:
>>> 1. Consider the development of financial surveillance tools that are specifically designed for companies in runoff (companies that are no longer actively writing insurance business) and companies with large blocks of runoff business.
Bob Wake W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4‐26‐19\2 ‐ Maine .docx
Attachment B
4 of 22
South Carolina comments On behalf of Director Raymond Farmer, South Carolina has no edits or changes to proposed charges for the Restructuring Working Group. We look forward to working with the group on this very important matter. Regards, Joe Cregan Assistant to the Director South Carolina Department of Insurance 1201 Main Street, Suite 1000 Columbia, SC 29201 W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4-26-19\3 - SC Comments.docx
Attachment B
5 of 22
Texas Comments Please accept the Texas Department of Insurance comments for the Restructuring Mechanism exposure. Texas suggests the following edits to the definition of run‐off: Run off companies are no longer actively writing insurance business or collecting premiums except where required to by law or contract, and have unpaid policyholder liabilities. Amy Garcia, CFE Chief Analyst – Associate Commissioner Financial Analysis Section W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4‐26‐19\4 ‐ Texas Comments .docx
Attachment B
6 of 22
Vermont Comments: Regarding the definition of run‐off insurer, here are a couple of possibilities that might be a useful starting point:
1) In the captive context, a “run‐off captive insurer” might be defined as “a captive insurer that has not underwritten insurance or reinsurance for at least five years”; and
2) In the case of Vermont’s Legacy Insurance Management Act, while it does not define “run‐off companies”, it does define “closed blocks” that can be transferred/assumed, as follows:
“‘Closed block’ means a block, line, or group of commercial non‐admitted insurance policies or reinsurance agreements or both: (A) which a transferring insurer has ceased to offer, write, or sell to new applicants; (B) for which all policy periods have been fully expired for not less than 60 months; (C) for which active premiums are no longer being paid; and (D) which is not workers’ compensation, health, life, or any other personal line of insurance.”
Thanks much, Dan Dan Raddock Assistant General Counsel Vermont Department of Financial Regulation 89 Main Street Montpelier, VT 05620‐3101 W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4‐26‐19\5 ‐ VT Comments.docx
Attachment B
7 of 22
April 26, 2019
Co-Chairs Doug Stolte (VA) and David Smith (VA)
Vice-Chair Jack Broccoli (RI)
Restructuring Mechanisms (E) Subgroup
National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108
RE: Subgroup Charges and Definition of Run-Off
Dear Messrs. Stolte, Smith and Broccoli:
The American Council of Life Insurers (“ACLI”)1 looks forward to working with the Restructuring
Mechanisms Subgroup as it addresses its charges relating to restructuring mechanisms and “runoffs”
during the next few months.
We do, however, have concerns with the proposed definition of “run-off companies” that is contained
in the first charge (on the development of financial surveillance tools) and in “II-Definition of Run-
Off”. In both instances, “run-off companies” are defined as “companies that are no longer actively
writing insurance business or collecting premiums”.
While we are not able to provide you with an alternative definition at this time, we do note that,
traditionally, some companies that are considered to be in “run-off” continue to collect premiums. We
will be offering our perspectives and suggestions on this definition as the Subgroup continues its
important work.
If you have any questions, feel free to contact me at [email protected] or 202-624-2135.
Sincerely,
Wayne Mehlman
Senior Counsel, Insurance Regulation
1 The American Council of Life Insurers (ACLI) advocates on behalf of 280 member companies dedicated to
providing products and services that promote consumers’ financial and retirement security. 90 million American
families depend on our members for life insurance, annuities, retirement plans, long-term care insurance,
disability income insurance, reinsurance, dental and vision and other supplemental benefits. ACLI represents
member companies in state, federal and international forums for public policy that supports the industry
marketplace and the families that rely on life insurers’ products for peace of mind. ACLI members represent 95
percent of industry assets in the United States. Learn more at www.acli.com.
Attachment B
8 of 22
Leveraging Legacy Liabilities
Carolyn W. Fahey Executive Director
15220 Lord Culpeper Court Woodbridge, Virginia 22911
Phone: 703-730-2808 Mobile: 703-740-7527
E-Mail: [email protected]: www.airroc.org
April 26, 2019
Doug Stolte and David Smith, Chairs Restructuring Mechanisms (E) Subgroup
Dan Daveline and Robin Marcotte National Association of Insurance Commissioners
Please find attached a submission on behalf of AIRROC (the Association of Insurance and Reinsurance Runoff Companies) in response to the request for comments from the Restructuring Mechanisms (E) Subgroup.
The size of the global runoff market is $370 billion with $350 billion of that in the United States. AIRROC is the only U.S. non-profit organization representing the legacy insurance market. These materials are submitted for education purposes only to provide some background and context for the Subgroup on runoff and the runoff market.
Materials submitted:
1. A recording of a webinar titled "Overview of Runoff “ that was presented by AIRROC on February 6, 2019. It can beviewed at: https://vimeo.com/316097460/5beab583dc The slides from this session have been placed in a Dropbox foraccess due to the size of the file.
2. The 2018 PwC - AIRROC - IRLA Global Insurance Runoff Survey. This can be accessed on the PwC websiteat: https://www.pwc.com/globalinsurancerunoffsurvey A PDF of this survey is also attached to this email.
AIRROC is pleased to be an educational resource to the Subgroup as well as the full Working Group. Please don’t hesitate to let me know if you have any questions or would like further information from us.
Respectfully Submitted,
Carolyn W. Fahey Executive Director
Attachment B
9 of 22
Leveraging Legacy Liabilities
Carolyn W. Fahey Executive Director
Phone: 703-730-2808 Mobile: 703-740-7527
E-Mail: [email protected] Web: www.airroc.org
SubmissiontotheNAICRestructuringMechanismsSubgroupApril26,2019
WhatisRunoff?Thedefinitionsofrunoffvarygreatlybycompanyandevenchangeovertimeduetofactorssuchaschangesinunderwritingcycle,profitability,reinsuranceavailability,interestratesandstructurestoadminister.Inarecentsurveyofthemarketrespondentswereasked“Howdoesyourorganizationdefinerunoffbusiness?”Sampleresponsesinclude:•“Alllinesofbusinesswherepremiumsarenolongerbeingwritten.”•“Anydiscontinuedlineofbusiness.”•“Businessthatisbeingwounddownandnolongerunderwritten.”•“Closedbookofbusinesswithnomoreunderwriting.”•“2001andprior.”•“Discontinuedcompanies,affiliatesorsegments.”•“Non-coretothegroup.”•“Nonewwrittenbusiness.”TheRiskBasedCapitalRequirementandRunoffTheimpactoftheRBConrunoffdependsonthedefinitionofrunoff.UsingthegeneraldefinitionthattherunoffmarketiscomprisedofA&Eliabilitiesthatresidemostlyinprioraccidentyearsandthatretroactivereinsuranceisoftenusedtomanagedtheseexposures,theRBCmaynotbesuitabletoevaluatingtheirrisk.TheNAICRiskBasedCapitalRequirementattemptstosummarizeseveralareasofaninsurer'sriskintoasinglevalueandtheformularesultshavespecificactionsassociatedwiththem.ThesixCategoriesofCapitalChargesare:R0 InvestmentinAffiliatesandOffBalanceSheetRisksR1 FixedIncomeChargeR2 EquityChargeR3 Reinsurance/CreditRiskChargeR4 ReservingRiskChargeR5 Premium/UnderwritingRiskCharge
Attachment B
10 of 22
Leveraging Legacy Liabilities
Carolyn W. Fahey Executive Director
4927 Wolf Run Shoals Road Woodbridge, Virginia 22912
Phone: 703-730-2808 Mobile: 703-740-7527
E-Mail: [email protected] Web: www.airroc.org
TheRBCrequirementiscalculatedasR0+SQRT((R1^2)+(R2^2)+((.5*R3)^2)+((.5*R3+R4)^2)+(R5^2)TheRBCRatioiscalculatedasAdjustedSurplus/RBCRequirement.ForRunoffCompanies,thosenolongeractivelywritingnewbusiness,theR4ReservingRiskChargedominatesthecalculation.TheRBCapproachofusingthelatest10accidentyearsmaynotbesuitableforevaluatingthisriskofrunoffcompaniesforthefollowingreasons:
a)InmanyofthesecompaniestheliabilitiesarecomprisedofA&EandmatureWCliabilitiesthatresideinprioraccidentyears;thereforetheRBCapproachtousingthelatest10yearsmaybenotappropriateforevaluatingthisriskasliabilitiesoftenresideinaccidentyearsbeyondthelatest10years,andb)Retroactivereinsuranceiscommonlyusedintherun-offspace,andsincethesecontractsarenotrequiredtobereportedinScheduleP,theRBCapproachthatutilizesSchedulePdatamaynotbepracticalinevaluatingtheirrisk.
ThePremium/UnderwritingRiskCharge,R5,ismuchlessofariskareaforRunoffCompanies.Specificitems,likethecollectionofpremiumonretrospectivelyratedpolicesmaycausedistortionsinthecalculationofExcessivePremiumGrowthchargesandCombinedratiotriggerswithoutanychangeintheriskprofileofthecompany.WiththeincreaseduseofInsuranceBusinessTransfersandRetroactiveReinsurance,themostcriticalissueforRunoffCompaniesistheavailabilityofcashandliquidassetstosatisfypolicyholderclaimsandotherobligations.Itmaybeprudentfortheregulatortoseparatelyconsidersignificantamountsofretroactivereinsurance(currentlyoutsideoftheRBCformula)whendeterminingarunoffcompany'scapitalrequirements.
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CANTILO & BENNETT, L.L.P.ATTORNEYS & COUNSELORS
A Texas Registered Limited Liability Partnership
Comprised of Professional Corporations
11401 Century Oaks Terrace
Suite 300
Telephone: (512) 478-6000 Austin, Texas 78758 Facsimile: (512) 404-6550
www.cb-firm.com
April 23, 2019
Mr. Douglas C. StolteMr. David SmithCo-ChairsRestructuring Mechanisms (E) Subgroupvia Dan Daveline and Robin MarcotteNAIC Staff
RE: Request for Comments
Dear Messrs. Stolte and Smith:
I write solely on my own behalf and the views I express are not intended to reflect those ofany client or other interested party. As you know, I have spent the last four decades working ininsurance regulation, primarily on behalf of state insurance officials in matters affecting troubledinsurance companies and complex insurance transactions. My views are informed by that experienceand I disclose that my bias favors protection of policyholder interests and the state-based regulatorysystem. I offer two comments relevant to the Subgroup’s current deliberations. The first addressesthe definition of runoff company and the second the role of certain restructuring mechanisms.
It is suggested that “runoff companies” exclude those that are collecting premium. I submitthat doing so would be inconsistent with economic reality. There are in existence many “closedblocks” and other entities comprised solely of “legacy” or existing business much or all whichcontinues to pay premium though they can be fairly characterized as being in runoff. Notable currentexamples are those of well-known long-term care insurance blocks. Certain companies holding theseblocks typically do not seek to write new business and their role is solely to manage an existing bookof liabilities to expiration. I propose that the term “runoff company” be defined as “an entity whosesole material business is the management in accordance with contractual and regulatoryobligations of an existing group of insurance policies or contracts through their termination.”
Recently there has been much talk throughout many NAIC committees, working groups, andtask forces of relatively new alternative mechanisms for the management of legacy blocks and otherspecial transactional needs. Notable examples are Insurance Business Transfers (“IBT”) andcorporate division statutes. While these and similar mechanisms can serve useful purposes forsolvent insurers and reinsurers in several types of circumstances, they should not be confused withtools for addressing financially troubled companies. A common element of such transactions is that
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Cantilo Letter to Restructuring Mechanisms (E) Subgroup April 23, 2019, page 2
they do not add new value. They are not investment vehicles and, properly used, do not increaseassets or reduce liabilities. Rather, these types of transactions enable an enterprise to segregate adiscrete group of liabilities (like a legacy long-term care insurance block) and place them either innewly created isolated entities (as through a corporate division) or in separate existing entities (asthough and IBT).
In their pure form, such transactions do not improve the economic health of the block atissue. Of course, such transactions could be made part of a more comprehensive arrangement thatcan have that effect, such as an IBT or corporate division that also includes the contribution ofadditional capital devoted to the block in question. It has been observed that these new mechanismsare simply new ways of accomplishing goals that have been possible through other mechanisms likeloss portfolio transfers and assumption reinsurance transactions. That may be the case but does notsuggest that the additional flexibility of new potential structures cannot add value. My cautionwould be simply that these are not tools that can improve materially our ability to cope with troubledcompanies. They can be combined with such tools (like capital infusions or new reinsurance thatincludes material risk transfer) but by themselves do not relieve financial trouble.
I would be pleased to answer any questions about my comments.
Respectfully yours,
Patrick H. Cantilo
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BY E-MAIL April 26, 2019 Doug Stolte David Smith Co-Chairs, NAIC Restructuring Mechanisms (E) Subgroup Attention: Dan Daveline ([email protected])
Robin Marcotte ([email protected]) Re: The Restructuring Mechanism Subgroup’s Charges Dear Messrs. Stolte and Smith, The undersigned companies are grateful for the opportunity to comment on the charges of the Restructuring Mechanisms (E) Subgroup. In general, we strongly support the subgroup’s charges. While we endorse all the charges, we ask that the subgroup give special emphasis to the development of uniform minimum standards for restructuring mechanisms. The Importance of Strong, Uniform Standards for Divisions and Business Transfers Several states have recently enacted new “division” and “insurance business transfer” laws that allow insurers to transfer and novate business without policyholder consent. While these laws offer new flexibility to companies and regulators, they also introduce new dangers for policyholders and the state-based system of insurance regulation. Because we believe there are existing alternatives that provide sufficient flexibility in nearly all circumstances and because we want to maintain policyholder protections, our strong preference is against the enactment or use of division and insurance business transfer statutes for life, annuity or health insurance. However, recognizing that regulators may wish to find a way to permit, in limited circumstances, transactions that are beneficial to all policyholders, our comments in this letter address the minimum standards required if life, annuity or health divisions or transfers are to be considered. Unlike traditional indemnity reinsurance, where the original insurer remains liable, these new structures allow the original insurer to extinguish liability to policyholders. We have grave concerns about several aspects of these new laws:
There is no nationally uniform financial standard or actuarial level of confidence for regulators to apply when reviewing the financial strength of a business included in a division or transfer. A strong, nationally uniform standard is necessary to ensure that policyholders are protected against the risk of insolvency. This standard should become an NAIC accreditation requirement. The development of this standard should be a critical area of focus for the subgroup.
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In some states, division and insurance business transfer laws are open to any line of business, even when it is difficult or impossible to arrive at a credible long-term valuation of the business involved. For example, a division could allocate distressed, hard-to-value long-term care liabilities to a newly created splinter company. In this scenario, healthier business and associated assets might remain with the original company, endangering policyholders relegated to the splinter company.
Some laws also allow the creation of monoline insurers, potentially depriving policyholders of the benefits of diversification without their consent.
Some laws also allow the division of a multi-state insurer into a splinter company licensed in a single state, potentially overwhelming the state’s domestic guaranty association in the event of insolvency.
Some laws sanction the use of non-admitted assets to support policy liabilities.
Several laws lack other important procedural and substantive safeguards like public notice, requirements to consult with other interested states, independent expert review, a hearing or court process, and requirements to assess corporate governance and owner qualifications.
At their worst, these new laws could enable transactions that enrich shareholders at the expense of policyholders, guaranty associations and the reputations of both the industry and state-based system of insurance regulation. Effective, nationally uniform oversight of solvency has long been a hallmark of state-based insurance regulation. It is essential that the NAIC act to preserve this strength of the state-based system. These new transaction structures must not be allowed to undermine fundamental solvency regulation and policyholder protections. We expect that the subgroup’s work will be a critical part of this effort. In the discussion below, we suggest several principles that should govern regulatory review of proposed division and business transfer transactions. Policyholders Should Never Be Left Worse Off Regulators should never approve a division or insurance business transfer if it would leave any class of policyholders worse off. Instead, policyholders should be left in the same or a better position after completion of the transaction. Before the regulator signs off, a valuation should be undertaken by an expert to establish at a high level of confidence that policyholders will experience no adverse effects. The expert should be independent of any influence from the companies involved. This approach would align the U.S. regulatory framework with well-established international precedents like the United Kingdom’s “Part VII” business transfer regime. A focus on policyholder protection has been fundamental to the success of the U.K. regime. In a Part VII transaction, the regulator must provide a detailed report to the court and certify the solvency of the resulting entity. An independent expert must also provide a detailed report. When there are
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questions about the strength of the business involved, the U.K. regulators and the court will normally insist on ensuring that the business is transferred to a stronger insurer, not isolated in a weaker insurer. Some state laws provide that a regulator should approve a division or business transfer if there is no “material adverse effect” on policyholders. This standard falls far short of what should be required. The standard endorses policyholder harm so long as the harm does not rise to a vaguely defined materiality threshold. For example, a transaction might accomplish nothing more than benefit shareholders at the expense of policyholders. Although the damage to policyholders may not rise to the level of a “material adverse effect,” the law should not call on the regulator to approve unless the effect on policyholders is neutral or there is some expected policyholder benefit. No Monolines Regulators should never permit a transaction that transforms a diversified insurance company into one or more monoline insurers, especially when the transaction involves long-duration life, annuity or health insurance business. It makes little sense to deprive policyholders the benefits of diversification. The wisdom of this principle is borne out by the recent experience of carriers like Penn Treaty that concentrated their offerings in long-term care insurance. Hard-to-Value Business Like LTC Should Be Ineligible for Division or Transfer It is important that standards for approval acknowledge fundamental differences among lines of business. A standard that may be appropriate for short-duration commercial property and casualty risks is likely to need significant adjustments before it can be applied successfully to long-duration retail life, annuity and health businesses. As a threshold matter, some lines of business are best excluded from division and business transfer transactions. Long-term care offers the best example. The history of reserve deficiencies, rate increases and, in some cases, insolvencies, associated with this product demonstrates the challenges of arriving at satisfactory valuations. Given this history and the long duration of the liabilities, it is clear to us that long-term care blocks should not be separated from other businesses that provide financial stability and diversification for the entity overall. The experience of long-term care leads us to suggest the following possible approach to similar long-duration life and health businesses: for each such business, the regulator should be able to confirm the sufficiency of assets supporting the liabilities based on a reasonable valuation relative to an industry standard of experience. To make this determination, the Commissioner should first compare the valuation of liabilities to what the valuation would be using standardized valuation tables adopted by the NAIC for each line of business. If such standardized valuation tables are not available, the business should not be eligible for division or transfer.
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Require Strong Financial Standards and Stress Testing for Long-Duration Business Even if a long-duration life or health business is eligible for inclusion in a transaction, regulators will still need a robust framework to evaluate the long-term solvency of the business. Regulators should consider the following principles in the development of this framework:
For long-duration life, annuity and health business, regulators should start with a focus on policy reserves, and should require stress testing of reserves at a “severely adverse” level. If reserves are not subjected to a high level of stress testing, a division or transfer may appear to leave a business adequately capitalized at the time of the transaction. However, the picture can change over time as long-term experience diverges from assumptions. Again, consider the recent experience of long-term care.
Starting from a basis of reserves meeting a “severely adverse” standard, formulaic application of risk-based capital will, appropriately, result in a higher level of required capital for the business affected by the division or transfer. However, while risk-based capital may provide a useful starting point to establish capital requirements, it is not designed to measure relative financial strength and therefore would be insufficient on its own to determine the minimum required financial position of a transferred business.
Instead, in addition to risk-based capital, regulators should explore capital standards for long-duration life and health business that are based on a defined ratio of asset adequacy standards. Capital standards based on this type of cash flow projection technique can help ensure that enough capital is held in a transferred business, supplementing the existing risk-based capital framework.
Regulators should establish a confidence level based on the greatest present value of accumulated deficiencies over a long-term horizon across stochastic scenarios. The confidence level should be set at a standard that assures solvency over the life of the business so as to provide a robust backstop to the combination of reserves established to meet a “severely adverse” standard and risk-based capital.
Prescribed assumptions should be included in capital calculations to avoid the manipulation of capital thresholds.
Actuarial reserve and capital calculations should be performed by an expert that is independent of the insurance companies involved.
Use Uniform NAIC Valuation and Accounting Standards When evaluating the solvency impact of a proposed transaction, regulators should not give credit for non-admitted assets. Decisions about these transactions should start from the NAIC’s uniform statutory valuation and accounting rules. The possibility that non-admitted assets might be used to back reserves and capital in these transactions is deeply troubling for the following reasons:
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Most non-admitted assets are classified that way because they are not readily available to
satisfy policyholder claims.
Put another way, many non-admitted assets are not readily marketable or do not produce future cash flows.
Non-admitted assets can include anything a company owns, from illiquid and contingent letters of credit to office furniture, equipment, hardware and software.
It makes sense to exclude these items from the pool of assets an insurance company can count toward the payment of future claims, as they are illiquid, unlikely to retain their value, and generally do not produce additional income.
The distinction between admitted and non-admitted assets should not change in the context of a division or business transaction. In fact, given the risk that companies will use restructuring mechanisms to wall off distressed businesses, it is especially important that regulators scrutinize the quality of the assets involved.
Minimum Requirements Should Become NAIC Accreditation Standards Ultimately, it will be essential that the NAIC establish strong minimum requirements for these transactions as accreditation standards. The strength of state-based system depends upon the integrity of solvency regulation across the country. Regulators will need to rely on their counterparts in other states to ensure that transferred businesses are uniformly supported by sufficient reserves and capital, and are run off in a solvent manner. Companies should not be allowed to arbitrage their way to diminished solvency oversight by choosing one domicile over another. Other Procedural Safeguards Are Also Important In this letter, we have focused primarily on the financial standards that should apply to divisions and insurance business transfers. We expect those standards will be a significant focus of the subgroup. However, there are other procedural safeguards that are equally important for these transactions. For example, since policyholders lose their normal right to consent, court oversight and approval should be required. Policyholders and other affected parties should always be given notice, access to all information needed to meaningfully review a proposed transaction, and an opportunity to be heard in court. Also, the process should require approval or non-objection of all affected states and the resulting entities should be licensed in all states needed so as not to impair policyholders’ access to their state guaranty associations. We believe these protections should also be considered for accreditation requirements. We look forward to providing our views on this and other procedural safeguards to the Restructuring Mechanisms (E) Working Group.
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We appreciate the opportunity to comment on this important topic. Please let us know if you need any additional information or would like to discuss. Sincerely,
Douglas A. Wheeler Senior Vice President, Office of Governmental Affairs New York Life Insurance Company
Andrew T. Vedder Vice President – Solvency Policy & Risk Management The Northwestern Mutual Life Insurance Company
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R&Q Solutions Comments Dear Mr. Daveline and Ms. Marcotte, In response to the below request for comments, one item that we have raised is that the Outwards Retroactive follow the Loss Liability component of the RBC calculation. This then reflects the net reserve calculation for RBC more accurately even though the statutory statements have the retroactive as the write‐in line. Thank you, Stephen Parisi Senior Litigation Counsel U.S. Insurance Services Division R&Q Solutions LLC NAIC Staff requested clarification
Thanks, for the comments, however, I am not sure I am completely following your comments below. Would you perhaps, elaborate a bit more?
Robin Marcotte | Senior Manager Accounting
R&Q Response This is an issue with a disconnect of the retroactive reinsurance write‐in line (pursuant to SSAP 62) and the balance sheet location of the inwards reserves which are on the loss liability line. The RBC only sees the loss liability on the Reserve RBC calculation and not the net impact of the retroactive protecting the loss liabilities. Pamela Sellers‐Hoelsken President U.S. Insurance Services Division R&Q Solutions LLC Two Logan Square, Suite 600 W:\National Meetings\2019\Summer\Cmte\E\Restructuring\Subgroup\Comments 4‐26‐19\12 ‐ R&Q Solutions.docx
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