HR0352 102ND GENERAL ASSEMBLY

HR0352 LRB102 18598 MST 26926 r

HOUSE RESOLUTION

WHEREAS, Effective November 27, 2018, the Illinois General Assembly passed an Article entitled The Domestic Stock Division Law (215 ILCS 5/35B-1 et.seq.); this law allows an Illinois domestic stock insurance company to divide itself into two or more resulting companies; and

WHEREAS, Since its enactment, the Illinois Life and Health Insurance Guaranty Association has been very concerned with certain aspects of the law that could allow for non-transparent transactions and materially deficient resulting insurance companies; and

WHEREAS, The Illinois Life and Health Insurance Guaranty Association has proposed amendments to the law in 2019, 2020, and 2021 on various key deficiencies found within the law; the law allows an existing Illinois domestic insurance company to divide into two or more companies under a Division Plan; the legislation could be used by an insurance company to segregate an unprofitable book of business from the remainder of the company's profitable business and supporting assets; only the new company would be responsible for fulfilment of contractual obligations to policy holders transferred to the new company, not the original insurance company; together, those policy holders and the Association would then bear the risk of insufficient assets or unpredictable liabilities transferred to the new company without the support of the original insurance company's financial strength; and

WHEREAS, The Division Plan can be approved without a hearing; all documents supporting the Division Plan and the Division Plan itself are deemed confidential, unless the Director of Insurance elects otherwise; even if a hearing is held at the Director's discretion, only the Division Plan will become public, not the supporting financial and actuarial information and documents, which remain confidential and not subject to public disclosure through typical discovery such as interrogatories and request for production of documents, subpoena, or even a Freedom of Information Act request; a new company's obligations to policy holders can be supported by inferior assets; the legislation requires that the Director "shall approve" the Plan unless certain conditions are not met; some of the conditions include that the Plan will not create a new company that will be insolvent and the remaining assets of the new company will not be unreasonably small in relation to the business and transactions in which the new company will engage; and

WHEREAS, In determining if these two conditions have been met, the Director may consider inferior assets transferred to the new company; the financial safety of an existing insurance company must be judged on the basis of "admitted assets", i.e., assets defined and deemed as high quality under existing insurance law and regulations; under the Division Law, the financial safety and solvency of the new company can be measured using non-admitted assets, assets which are inferior and do not meet the criteria of high quality of admitted assets; the Division Law specifies that non-admitted assets can include, "without limitation", (1) Reinsurance Agreements, (2) Parental Guarantees, (3) Support Agreements, (4) Keep Well Agreements, (5) Capital Maintenance Agreements, (6) Contingent Capital Agreements, and (7) Other; since the original company cannot use such non-admitted assets to support policy holder liabilities, the provision whereby a new unproven resulting company can use such non-admitted assets is inappropriate; and

WHEREAS, The Division Law allows a Plan to be filed and approved without notice to the public or to policy holders, without a hearing and without public disclosure of the Division Plan or the documents justifying the Division Plan; the policy holders have no right to opt out of the Plan that segregates their policies from the company they chose as their insurance company; the practical effect of the Division Plan is to have the policies assumed by a new, unproven company without affording policy holders the option of staying with the original company they selected when buying insurance; and

WHEREAS, The NAIC has created a group to study Division Plans and other forms of insurance business transfers; provisions in the Illinois Division Law have been heavily criticized by various parties during those proceedings; the concerns are so great among the life insurance industry that the ACLI has adopted principles and guidelines with respect to proposed division laws and actively lobbies against numerous provisions currently contained in the Illinois Division Law; the ACLI Principles and Guidelines specifically provide that all transactions be subject to public notice and public hearing with notice to policy holders, reinsurers, state regulators, Guaranty Associations, and other interested parties; the ACLI provisions include a robust review by the regulator of the entire transaction, its impact on policy holders, the solvency of the new company, asset liability matching, and other significant provisions; an independent expert must be utilized as part of the process before approval of the Division Plan can be made; the independent expert must have access to documents concerning the business purpose of the proposed transaction, capital adequacy and risk-based capital considerations, cash flow and reserve testing, the impact, if any, of concentrations of lines of business following the transaction, business plans, management confidence, experience, and integrity; the Illinois Division Law does not meet even the basic provisions of the ACLI Principles and Guidelines; and

WHEREAS, For three legislative sessions, the Illinois Life and Health Insurance Guaranty Association has proposed simple and straightforward amendments to correct the most serious of the problems with the Illinois Division Law; those amendments include addressing the requirement that public notice be given, actual notice given to policy holders, regulators, reinsurers, and Guaranty Associations, and a requirement for a public hearing; the amendments provide for discovery of key financial documents supporting the Division Plan, such as financial analysis and actuarial studies; the amendments also eliminate the use of inferior non-admitted assets to support policy holder liabilities transferred to the resulting company; and

WHEREAS, Since the passage of the Division Law in 2018, the Illinois Life and Health Insurance Guaranty Association representatives have been actively, transparently, and diligently engaged with interested parties to seek resolution of the four proposed amendments: (1) provide notice, (2) provide public hearing, (3) exclude the use of non admitted assets, and (4) provide certain information (i.e. actuarial, financial); and

WHEREAS, The Illinois Division Law contains provisions that are contrary to the interests of Illinois consumers and policy holders; the failure of the Illinois Division Law to require notice of the Division Plan, a public hearing, discovery of key documents, and the use of inferior assets to support policy holder liabilities results in the potential for serious disruption and harm to Illinois consumers; therefore, be it

RESOLVED, BY THE HOUSE OF REPRESENTATIVES OF THE ONE HUNDRED SECOND GENERAL ASSEMBLY OF THE STATE OF ILLINOIS, that we urge the Department of Insurance not to approve of any divisions under the Illinois Division Law without the consumer protections detailed in the above amendments; and be it further

RESOLVED, That a suitable copy of this resolution be delivered to the Illinois Department of Insurance.