Bloomberg Insurance Law Vol. 4 No. 3
"Private Run-Offs: Alternatives to Government Administration of Troubled Insurance Companies"
Every state in the United States has a regulatory framework – dictated by state law – that sets forth the process to be followed when an insurance company is, or may become, impaired or insolvent. Typically, the insurance commissioner in the company's domiciliary state initiates the process by instituting expanded supervisory authority over the insurance company (with or without a court order, depending on the applicable statute) and if supervision proves insufficient, by filing petitions with the appropriate state court seeking the right to seize the assets of the impaired or insolvent company, to operate it pending the rehabilitation and, if rehabilitation fails, to liquidate the company.
If granted, the rehabilitation or liquidation order appoints the state insurance commissioner to act as a receiver in orchestrating such rehabilitation or the winding down and ultimate liquidation of the impaired or insolvent insurer. In most states, the receivership is contracted out to private sector specialists.
This process worked relatively well in the past, when insurance company insolvencies tended to be smaller and less complex. More recently, however, with insurance insolvencies involving significantly larger and more complex companies inextricably tied to volatile financial markets, resulting in strain on state agencies, some have questioned the efficacy of the traditional receivership model. These critics argue that the traditional process, which is responsive on a day-to-day basis to public officials who are necessarily concerned with balancing competing interests (including, oftentimes, political interests), is not necessarily the best means to wind down the operations of an impaired insurer and to achieve the optimal resolution of a complex financial situation.
In response to these concerns, new structures, in which companies engage in voluntary, private run-offs as an alternative to a formal receivership proceeding, are gaining acceptance, both from insurance companies and regulators. This article examines the key elements of three private run-off transactions, the nexus between private run-offs and M&A activity putting private capital at risk, and the implications of private run-off alternatives for both the private and the public sectors.