Vermont’s New Law Seeks to Attract Runoff Businesses
A new law in Vermont would soon authorize the state to license and regulate specialized Vermont-based companies whose only purpose would be to buy and manage closed blocks of non-admitted commercial insurance policies and reinsurance agreements.
While this type of transfer mechanism is new to the U.S., it’s a well-known concept in overseas markets, according to industry observers.
Gov. Shumlin’s administration has been bullish on this bill, which has been three years in the making. In his budget address on Jan. 15, Gov. Shumlin offered a glimpse of the new industry, describing it as a new opportunity for Vermont’s financial services sector.
“This year, we have a chance to get a jump start on a new opportunity. The Legacy Insurance Management Act – called LIMA – creates specialized Vermont-based insurance companies that help other companies consolidate policies and redeploy capital,” Shumlin said in his budget speech.
“This could be the next success in our efforts to serve as a specialized global financial services destination,” Shumlin said. “Patterned after Vermont’s captives sector, LIMA would add tax revenue and skilled, well-paying financial jobs.”
The bill also includes protections for the policyholders. It requires the companies assuming the closed blocks of non-admitted commercial insurance policies and reinsurance agreements to provide “direct written notices” to all policyholders and reinsurance counterparties and allow them to opt out of the transfer transactions.
Where Vermont makes its money is that these new runoff companies will be based in Vermont. These new runoff companies will be charged 1 percent of the first $100 million of the gross liabilities transferred and 0.5 percent of gross liabilities transferred in excess of $100 million, said Vermont state Rep. Warren Kitzmiller (D), one of the sponsors of the bill.
“The idea is, there are many commercial lines of insurance that companies no longer sell. I’ve always used the example of a company that may have insured asbestos mines or other businesses that were a going concern back in the ’60s or ’70s. A company may have a block of policies still on its books that have a very long tail,” Kitzmiller said.
“I would like to think the new law will be successful. It’s a concept that’s very familiar to much of the European Union, especially in Germany, Italy and England,” Kitzmiller said. “We think it’s a good idea because we can understand why companies would want to relieve themselves of these old contingent liabilities that may never amount to a new claim. But they are sitting there on their books as a liability and they would like to be rid of them at some point.”
Under the bill, the commissioner of the Vermont Department of Financial Regulation would review the assuming company’s solvency before and after the implementation of the proposed transfer of closed legacy insurance business.
The commissioner would also review the company’s ability to comply with all requirements of the policies and inward reinsurance agreements, including the company’s capacity regarding the administration of claims.