What are insurance business transfers and who might use them?
This achieves a legal ‘clean break’ since, by operation of law, the transferor ceases to have any obligations or liabilities to the transferred policyholders. The transferee steps into the shoes of the transferor and assumes the contractual obligations under the policies and any policyholder liabilities.
This mechanism has, for many years, helped firms achieve legal finality in respect of their businesses, to acquire blocks of business directly rather than only economically through reinsurance, and to reorganize and streamline their group structures to enhance capital efficiencies.
The UK, in particular, has a strong track record of facilitating insurance business transfers which are international in nature, through the Part VII transfer regime. The U.S. is now taking strides to develop similar regimes.
What does the UK do to facilitate transfers of international business?
Despite the UK's departure from the European Union, the scope to transfer international business by a Part VII transfer remains extensive. In fact, neither the transferor nor the transferee needs to be a UK incorporated insurer. The English court's jurisdiction is engaged, provided the transferred business is carried on in the UK, both immediately before and immediately after the transfer.
The English court has no difficulty sanctioning transfers where the business includes policies governed by non-UK laws. There is a threshold question of whether a court's order would be made "in vain" (as the case law puts it) so that the court would not exercise its inherent discretion to make an order which had no real effect. Where a meaningful percentage of the transferred policies are governed by English law, the court has, on several occasions, been satisfied on the basis that its order will undoubtedly have effect with respect to those policies.
What structures can been used for Part VII transfers?
The transferred business does not need to have been originally written in the UK, but it needs to be carried on in the UK at the time of transfer. Importantly, a business which was written outside the UK can be relocated to the UK to meet the English court’s jurisdictional requirements. A relocation is not a legal transfer of policies, and simply requires that, as a matter of fact, the business becomes carried on by the transferor in the UK. A non-UK transferor needs to ensure that it has a UK branch with sufficiently broad regulatory permission to cover the relocated business prior to relocating it to the UK, which may require regulatory approval.
The transferee may be the UK branch of an insurer incorporated outside the UK. It will need sufficiently broad UK regulatory permission to receive the transferred business. It is possible for the transferee to relocate the transferred business from the UK to its head office, post-transfer. In any Part VII transfer, the English court must satisfy itself that transferring policyholders will not be materially adversely affected. While this is primarily a question of the relative financial security of the transferee, where the business is to be relocated post-transfer the regulatory environment in which the transferee operates will be a relevant consideration.
What about the recognition of a Part VII order where a transferred policy is not English law governed?
The extent of non-recognition issues, including whether they give rise to issues in practice, is something which needs to be considered at an early stage of any Part VII transfer proposal. Recognition of a Part VII transfer under the laws of an EEA State is no longer automatic, for example, so transfer parties may need to take local advice on any additional steps needed. Additionally, the UK regulators have, for some time, looked to see issues of recognition considered and addressed including by the independent expert reporting to the court on the Part VII transfer.
While the position on recognition in the U.S. is still untested, it is expected that the fact that there is a court process, plus the other protections in place for policyholders, makes it likely that a Part VII order would be upheld in the U.S. under the doctrine of comity. The increasing adoption by U.S. states of Part VII-like processes can only help with this.
What is the U.S. doing?
The use of insurance business transfers in the U.S. is continuing to develop and evolve. In 2020, Enstar Group Limited completed the first insurance business transfer in the U.S., and Randall & Quilter completed a second in 2021. Both transactions utilized the insurance business transfer law in Oklahoma. Like a Part VII transfer in the UK, an insurance business transfer in the U.S. is a direct transfer of liabilities between insurers that provides finality to the transferring insurer, without obtaining the express consent of individual policyholders. While insurance business transfer statutes have only been adopted in a limited number of states, our expectation is that other states will adopt similar statutes over time.
In general, an insurance business transfer in the U.S. involves the development of a business plan with respect to the transfer, submission of financial information regarding each insurance company involved in the transaction, receipt of an independent expert’s report on the impact of the transaction on policyholders and claimants, and a plan for notifying the affected policyholders. Policyholders are given the opportunity to object to the proposed transaction and, in some states, the right to opt out of the transaction. Most states with insurance business transfer statutes provide that the transaction is subject to review and approval by a court. The legislative framework is designed to address any argument from policyholders that they were denied the right to consent to the transfer of their policies.
Despite forward progress on insurance business transfers in the U.S. in recent years, there are questions that remain, including whether a transfer approved in one state will ultimately be respected by other states. In addition, older legacy blocks of business present logistical challenges for providing policyholder notifications. Some states with insurance business transfer statutes also place restrictions on the types of insurance that can be transferred, as well as the requirements related to the age of the policies that are the subject of the transaction. Over time, we expect these issues to be overcome, given the industry’s desire to strategically release capital and reduce costs associated with discontinued lines in transactions that provide finality for the transferring insurer.
Authored by Bob Juelke and Neil Chisholm.
