A National Association of Insurance Companies subgroup is developing a white paper on the advantages and disadvantages of using methods other than formal receivership proceedings to handle troubled insurers.

The Restructuring Mechanisms For Troubled Companies Subgroup, part of the Financial Condition Committee at the NAIC, Kansas City, Mo., has written the draft, and the subgroup has posted the draft on its section of the NAIC website.

The subgroup looks at a number of alternative “resolution” mechanisms, such as letting a company operate in “run-off” mode; the kind of reinsurance agreement commutation system permitted by New York Regulation 141; and Rhode Island’s voluntary restructuring system.

The subgroup also considers mechanisms available in the United Kingdom, such as a system that permits insurers to arrange compromises with their creditors, and a system that permits a reinsurer to move part or all of its business to another reinsurer with High Court approval, but without permission from the policyholders.

“Alternative mechanisms can be useful tools for a troubled insurer’s management and regulators, potentially leading to a quicker resolution than a traditional receivership,” the subgroup writes in a description of the advantages of alternative mechanisms.

“Alternative mechanisms typically allow for continuous claims payments, or at least orderly claims processing and partial claims payments without interruption,” the subgroup writes. “Alternative mechanisms can cost less than receiverships, thus resulting with maximum dollars paid out to policyholders/claimants. Alternative mechanisms may allow greater flexibility to achieve commercially acceptable results, such as freeing up capital.”

But, without strong regulatory monitoring and controls, there is no guarantee that consumers and other claimants will get the information they need to protect their rights, or that anyone will ensure that “appropriate fairness” takes place, the subgroup writes.

In some cases, for example, “alternative mechanisms for troubled insurers might become a tool for solvent carriers to transfer value away from policyholders,” the subgroup writes.

“Overall, although alternative mechanisms for troubled insurers can provide cost savings or greater efficiency over the current system, these mechanism can also pose unique risks for consumers and require specialized surveillance monitoring, practices, and procedures, particularly where the activities may occur outside of court supervised receivership proceedings,” the subgroup writes. “In this context, regulators are encouraged to consider implementing standards and best practices responsive to these risks in order to preserve important consumer protections, increase transparency, and provide appropriate procedural safeguards.”

Regulators should, for example, ensure that alternative resolution mechanisms place the interests of consumers ahead of other competing interests, the subgroup concludes.