Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Oklahoma has now made good on its promise to become the leading domicile for a new U.S.-based insurance restructuring mechanism—the Insurance Business Transfer (IBT). In late November 2019, the Oklahoma Insurance Department approved the IBT application (or IBT Plan) of Providence Washington Insurance Company (part of Enstar Group) to transfer policies to Yosemite Insurance Company (also part of Enstar Group). With Commissioner Mulready’s approval, the IBT Plan was sent to the District Court of Oklahoma County with a request for its approval. Despite court delays resulting from the COVID-19 pandemic, on October 15, 2020, the District Court of Oklahoma issued its order of approval and implementation for the first-ever U.S. IBT, allowing for the novation of insurance policies to an assuming insurer without policyholder consent. Enstar worked diligently to push this “intracompany” business transfer forward and has now set the stage for future transfers in this space.
The benefits to restructuring mechanisms such as the IBT are many:
And now, with the IBT and its full legal finality, parties can achieve the added benefits of:
I was fortunate to be part of this historic transaction in my role as Independent Expert (IE). The IE ultimately works for the state court and is relied upon to assess the terms of the proposed transfer, with specific focus on protecting the interests of the policyholders involved. Specifically, the IE provides a report with an analysis of:
Consulting actuaries have a wealth of experience reviewing other actuaries’ reports, so that aspect of the IE analysis was quite familiar. To evaluate financial condition, I focused on the underlying capital adequacy. I reviewed in detail the group solvency assessment process of Enstar relative to industry best practices. This formed the basis for gaining comfort with its process. I then also reviewed each company’s historical and pro forma results of two well-established, publicly available metrics: a) risk-based capital (RBC) ratio, and b) reserves/surplus ratio. This provided a baseline assessment of capital strength for each company.
I reviewed management’s plans for servicing all policyholders and claimants involved with the subject companies, including corporate and financial governance, claims administration staffing, corporate expense levels, state licensing, and other issues. I reviewed changes in investment income strategy and/or asset allocation. Lastly, I reviewed the details of the transferring company’s policyholder notice requirements.
Overall, the main focus of my analysis was determining whether one of the parties involved in the transfer had been or would be materially adversely impacted. To do this, I had to consider whether the degree of financial security afforded the policyholders post-IBT would have been acceptable pre-IBT. Any adverse impact was deemed to be material if the level of financial security post-IBT would not have been acceptable under the normal constraints with which the company’s capital position was managed pre-IBT.
The industry meetings in the runoff space, especially those conducted by the Association of Insurance and Reinsurance Runoff Companies (AIRROC), have been discussing the nuances of the IBT for a number of years. The discussions became more and more frequent as the first Oklahoma transfer neared approval.
The IBT mechanism has also been actively discussed at National Association of Insurance Commissioners (NAIC) meetings. The NAIC’s Restructuring Mechanisms sub-working groups continue to vet this idea, with significant work done to compare IBTs to other restructuring mechanisms in place in other states, including corporate division statutes. The NAIC will likely address some recurring questions, such as whether RBC should be adjusted when used to evaluate runoff companies; or whether other means of evaluating capital adequacy should be used. There is surely more to come on both fronts, and the NAIC may end up formulating a model law.
Despite the success of the IBT in Oklahoma and the enthusiasm for it within the runoff community, it is far from certain how often these processes will actually be used. The new laws still need to be tested, challenged, and approved in court before insurers take full advantage of them. Regulators from any state of domicile for the transferring company will need to get comfortable for IBTs to become of widespread use. And it is not yet clear whether alternative insurance risk financing structures like captives will see as widespread a usage of IBTs as traditional insurance and reinsurance portfolios.
The industry consensus, however, seems to be, now that this first IBT deal is approved, that a new legacy has been established in the legacy market. More states will follow suit and the runoff market will move at an even faster pace.
A new legacy has been established in the U.S. legacy liability market
On October 15, 2020, the District Court of Oklahoma issued its order of approval and implementation for the first ever Insurance Business Transfer, allowing for the novation of insurance policies to an assuming insurer without policyholder consent.