The law formerly known as Regulation 68 may not sound like a revolutionary piece of legislation, but it has the potential to energise the US insurance market and release billions of dollars of capital in the non-life run off market, which in total is estimated at $350bn.
It will allow US insurers to transfer discontinued books to run-off specialists, thus allowing them to utilise their staff and capital in more efficient ways. The legislation will also allow for the creation of a vibrant run-off sector in the US.
We, at Pro, assisted in drafting recent revisions to the Rhode Island legislation and we recently became the first company, through our US subsidiary ProTucket, licenced to receive transferred insurance business.
It remains a lengthy process to transfer insurance business, involving both regulators and courts, but the first deal is expected to be announced early next year.
Companies all over the world have been watching what has been developing in Rhode Island and other states are in the process of trying to emulate the Ocean State’s run-off legislation. Vermont, Connecticut, and Oklahoma have all passed some variation of an insurance business transfers mechanism, but Pro decided to establish itself in Rhode Island because we were impressed by the business-friendly atmosphere and sophisticated regulatory team.
The changes have been needed for quite some time. In 2000, the UK government enacted the Financial Services and Markets Act to better regulate and liberalise the financial sector and Part VII of the act enabled these insurance business transfers.
The legislation saw the creation of specialist run-off organisations that could efficiently manage discontinued portfolios, allowing insurers to better utilise their capital and deploy staff elsewhere. Since then, more than 270 portfolios have been transferred. All have taken place without incident, with the rights of policyholders guaranteed and prospects for both sellers and buyers of run-off books improved.
Yet in the US, insurers have been forced to struggle with discontinued books, and run-off specialists left to hope for a change in the legislation.
A report by PwC published earlier this year identified the massive potential in the US non-life runoff market, which it estimated at $350bn. It also found that 68 percent of US insurance companies saw proactive legacy book management as a key strategy and were likely to restructure or exit legacy books in the next three years.
New laws such as Rhode Island’s will allow these companies to transfer portfolios from their current carrier into a protected cell within a Rhode Island domestic company, such as ProTucket. This process, similar to a transfer under Part VII of the UK’s Financial Services and Markets Act, brings full legal and financial finality to the transferring insurer.
The developments in Rhode Island are a welcome addition to the international legacy market. Over the next five-to-ten years, this business transfer process will become a standard industry practice in the US, and all the hard work to facilitate the establishment of a vibrant run-industry will be reali