Rhode Island Regulation 68


William D. Latzka of Stroock & Stroock & Lavan, LLP, David Scasbrook, Head of Retrospective Solutions at Swiss Re, and Jay C. Votta, Principal, Insurance & Actuarial Advisory Services at Ernst & Young, participated on a lively panel, moderated by Luann Petrellis, Insurance Advisory Services at Ernst & Young, discussing new Rhode Island Regulation 68.  Rhode Island Regulation 68 is a court-sanctioned exit mechanism, modeled on UK Part VII transfers, whereby companies can effect a transfer of insurance or reinsurance business, subject to certain exceptions for life business and workers’ comp.  A transfer effected under Regulation 68 requires approval by the Rhode Island Department of Business Regulation in the first instance and then by the Rhode Island Superior Court, following the filing of a Petition for Implementation.  Each of those approvals hinges, in large part, on the impact report prepared by an independent expert that is required by the statute.  The panel noted that the impact report should ideally address the regulator’s principal concerns: the rights of and protections for the policyholders, the financial security of the acquiring company, and how the acquiring company intends to manage the business.  Notice to all policyholders of the contemplated transfer is required, and anyone – including policyholders – can appear at the court hearing and can claim adverse impact that would result from the transfer. 

This restructuring tool has at least two primary purposes.  First, Regulation 68 can be used to reduce the number of entities in the corporate family.  The insurance or reinsurance business at issue can be transferred into one company, and the transferor entity or entities can then be dissolved or sold.  Second, Regulation 68 can be used as a legal finality tool.  When the insurance or reinsurance business at issue is transferred to a third party, the transferor entity no longer bears any liability for that business.  Further, there is no opt-out provision in the statute, so a policyholder may not refuse to transfer its policy if the transfer is approved by the court. 

The panel discussed the need for upfront planning to obtain the necessary buy-in from the regulator and from policyholders.  For example, the Regulation 68 transfer might be preceded by a reinsurance agreement and an administrative services agreement to demonstrate that no material change to the policyholders would result from the transfer.  The panel also discussed the fact that companies seeking to effect a Regulation 68 transfer should recognize that it is a long process, and approval is not a foregone conclusion.  Legal challenges to a Regulation 68 transfer may include challenges under the United States Constitution, including whether the Regulation violates the Contract Clause and whether the judgment of a Rhode Island court approving the transfer is entitled to full faith and credit.