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Groundbreaking Vermont Insurance Legislation to Create New Insurance Market, Investment Opportunities


Groundbreaking Vermont Insurance Legislation to Create New Insurance Market, Investment Opportunities

February 19, 2014
Colleen M. Murphy

Once again, Vermont is showing itself to be an innovator and leader in the insurance and financial sectors as Gov. Peter Shumlin signed the Legacy Insurance Management Act (LIMA) today, following its passage by Vermont’s legislature last month. Members of Goldberg Segalla’s Global Insurance Services Practice Group worked closely with Apetrop USA, the private-sector driving force behind the creation and passage of LIMA, on its development.

LIMA represents the first instance of US legislation enabling the transfer of closed blocks of commercial insurance and reinsurance policies, creating for the first time a legal and regulatory framework and marketplace for such transfers. The act augments an already progressive insurance environment in Vermont, which has long been known as the pioneer and leader in facilitating the creation of captive insurance companies, with more than 1000 such entities currently registered in the state.

In addition to fulfilling a need in the global insurance market, LIMA creates new investment opportunities. Since the blocks of policies involved are closed, the investor need not be active as an insurance company. Investors may include those with long investment horizons such as foundations, institutional endowments and family trusts.

LIMA was the brainchild of Anna Petropoulos, an expert in the global insurance/reinsurance industry and President of Apetrop USA.

“A European insurer approached me wanting to divest itself of its portfolio of legacy US liabilities. I looked for a solution that benefitted everyone and LIMA was the result,” said Ms. Petropoulos, of Apetrop USA. “Then it was just a matter of turning this vision into a reality. The legislators and business community in Vermont are innovators in the insurance and financial sectors, so it made perfect sense to work with them to fulfill this need in the global insurance/reinsurance industry. For their efforts, the state will benefit through the creation of new jobs and revenue.”

LIMA enables a non-admitted insurer from any part of the world to transfer closed blocks of business — commercial insurance policies and/or reinsurance agreements protecting underlying American liabilities that  have continued exposure to claims — to an admitted insurer or other entity domiciled in Vermont which then takes over the obligations to policyholders. No personal insurance, such as life, health, auto or homeowners, or workers’ compensation, is involved. The Act provides regulatory oversight by Vermont’s Department of Financial Regulation (DFR) of both the transaction and claims management of the transferred business, where previously there had been none. In fact, the DFR will examine each transaction as a unit, not as part of a much larger company, developing a set of oversight regulations that take into account the specific conditions of each transaction.

Inherent in the creation of this type of transaction was the concern to protect American policyholders. LIMA accomplishes this goal by specifying that any transfer approved by the DFR has the effect of a statutory novation, meaning that the legal responsibility for a policy changes hands.

Colleen M. Murphy, an attorney with the law firm Goldberg Segalla who worked closely with Ms. Petropoulos on the development and passage of LIMA, explains the process. “Let’s say there’s a German insurer with an old book of policies covering US asbestos liabilities. Although the policies may be decades old they might still have long-tail or legacy claims. The insurer doesn’t want to employ specialists in US liability claims and wants to close its books. They simply don’t want that US business anymore. Before LIMA, there was no way for them to transfer this business out of Europe. Now, under LIMA an Arizona company that’s interested in buying those claims could establish an entity in Vermont and proceed with the transfer of that business.” 

Ms. Murphy said further, “The benefits for investors can be significant. Companies wishing to transfer business are willing to pay a premium for the finality that a transfer brings. Transferred reserves can be invested and efficient claims handling by Vermont-based experts can bring additional savings. Policy holders benefit also — instead of having to trek around the world to collect from ancient policies, they can recover from a U.S. based and regulated entity and will have their clams handled by proficient U.S. claims adjusters, again overseen by Vermont’s regulators.”

“Along the way,” Ms. Murphy continued, “there are people working on this transaction in the DFR, and in the private sector as actuaries, accountants, lawyers, and others who are all needed to get the deal done.”

Ms. Murphy brings a unique perspective to the development of LIMA calling on 20 years of experience handling regulatory and contractual matters in the insurance/reinsurance industries, as part of Goldberg Segalla’s leading global insurance practice. Ms. Murphy counsels and defends clients including major insurers and reinsurers, insurance agencies and brokers through regulatory investigations, licensing matters and compliance issues.

(For more information, see “LIMA: A New Liability Exit Strategy Comes to the U.S.” on Goldberg Segalla’s Insurance & Reinsurance Report blog.)