The Legacy Insurance Management Act (LIMA) was passed by the Vermont legislature in January, 2014 and signed by Governor Peter Shumlin on February 19, 2014.
The purpose of LIMA is to enable the transfer of closed blocks of commercial insurance business, limited to excess and surplus lines and reinsurance. The principal public benefit is the creation of a mechanism to transfer long-tail closed blocks from companies that are exiting or have exited the markets represented by the closed blocks into the hands of financially-capable entities that want that type of business.
There are other benefits to all constituencies in these transactions: the transferring company and the assuming company receive value relevant to their long-term interests and, of comparable value, finality through the statutory novation effected by the Commissioner’s order. The policyholders and/or reinsureds in the closed block, though the applicable terms and conditions for do not change, benefit from the focused management of the specialist assuming company and the sophisticated and tailored oversight of the Vermont regulator. While the assuming company, a new entity, will own the responsibility of satisfying claims, that new entity, in acquiring the closed block, will assume the same contractual obligations and liabilities that the transferring company was subject to—and, furthermore, in fulfilling such assumed obligations, will operate in accordance with claims management, investment management and other procedures that will have been reviewed and approved by the Vermont regulator.
LIMA brings the transferred business, known as “nonadmitted,” under the supervision of the experienced and well-qualified Vermont regulators, which improves and broadens the regulatory oversight. Each transaction will have a specific set of compliance requirements and oversight conditions developed with and approved by the Vermont Department of Financial Regulation, allowing the DFR to craft an oversight regime specifically to address the nature and conditions of the business in the transferred closed block. Accordingly, the DFR will examine each transaction discretely, not as part of a much larger company: this will focus oversight on reserve quality and quantity and claims handling and payment.
Of great interest to both the transferring company and the assuming company is the finality of the transaction. LIMA accomplishes this goal by specifying that the Commissioner’s order has the effect of a statutory novation, which is a definite legal term meaning that the legal responsibility for a policy changes hands.
The UK has a similar mechanism called “Part VII Transfers”: more than 100 property and casualty insurance transfers have been executed under Part VII, with no insolvencies or claims payment failures. However, in light of the very different U.S. insurance regulatory environment, LIMA recognizes the interests of policyholders differently from Part VII: LIMA requires the exclusion of any policy or reinsurance contract that either has an express “nontransfer” clause or the holder of which simply declines to be transferred. This provision of the statute permits a policyholder to make its own choice to participate or not in a proposed transfer; the choice to remain with the transferring company may create “orphan” insureds, but the choice of that status remains with the policyholder and not the regulator (or the transferring company or the assuming company).
Detailed presentation on how LIMA works (PDF download) by ApetropUSA’s Anna Petropoulos and Jeffrey Lewis
Flow chart diagramming the LIMA process (PDF download) by the Vermont Department of Financial Regulation
Text of the Legacy Insurance Management Act (PDF download) as passed by the House and Senate of the General Assembly of the State of Vermont.