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Recovery and resolution planning for insurers

Recovery and resolution planning for insurers

Following its March discussion paper on the need to harmonise insurer recovery and resolution regimes across EEA countries, EIOPA issued a formal Opinion in July.

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Director and Insurance regulatory lead, EMEA

KPMG in the UK

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Bridge under the cloud

The Basel Committee and the EBA The European Systemic Risk Board (ESRB) issued a report in August that also called on the European Commission to introduce a harmonised legislative recovery and resolution framework for insurers and reinsurers.

Ever since the Financial Stability Board (FSB) first published its Key Attributes for Effective Resolution (KAs) in 2011, insurers have contested that they are not systemically risky in the way that banks are, due to their business model and significantly lower exposure to liquidity risk. Nevertheless, in 2014 the FSB added a specific insurance annex amendment to the KAs.

When the EU Bank Recovery and Resolution Directive (BRRD) was finalised in 2014, the Commission stated that further consideration would be given to introducing something similar for insurers, but little has happened subsequently. As mentioned in our March article, the updating of the insurance core principles by the IAIS to bring recovery and resolution into mainline insurance supervision from 2020 makes it more likely that something will happen at a European level.

EIOPA Opinion

There are no surprises in the EIOPA Opinion given its March discussion paper (PDF 1.14 MB). It proposes EU legislation similar to the BRRD for insurers, including:

  • Insurers developing recovery plans (more wide-ranging than Solvency II’s recovery planning which aims to restore regulatory solvency within two months of a solvency breach);
  • Clear objectives for resolution, including continuity of critical functions and avoiding use of taxpayer funding;
  • Establishing national resolution authorities to undertake resolution planning for major insurers; and
  • National implementation of a common set of resolution powers, including a ‘bail-in’ power to restructure or write down liabilities and to allocate losses to shareholders and creditors.

ESRB

The Advisory Technical Committee of the ESRB also calls for a recovery and resolution framework for the EU insurance sector (PDF 600 KB). Although there were differences of view among its members, the majority view is that:

  • The disorderly failure of a single insurer or a group of insurers could pose financial stability risks. Examples include common risk exposures; potentially common procyclical behaviours; failure of a major reinsurer; failure of a major provider of essential services that are necessary for the functioning of the real economy.
  • Existing insolvency, run-off and transfer procedures might be unable to manage a failure in an orderly fashion. A broader set of resolution tools could help authorities to be better prepared to deal with failing insurers, including:
    • Designating a resolution authority for insurance firms
    • Adequately funded policyholder protection schemes, and possibly resolution funds
    • Greater powers for a resolution authority to transfer assets and liabilities
    • Some form of transparent and predictable ‘bail-in’ capability (to be used as a last resort measure), including both the insurer’s equity and debt instruments and power to allocate some losses to policyholders.
  • Establishing a common set of resolution powers and procedures through EU legislation would help to harmonise existing national legislation and facilitate the resolution of an insurer active in several EU Member States in an orderly manner.

The suggestion that policyholders could be required to bear a share of the losses if an insurer fails is again likely to prove controversial. Such a measure would need to be carefully constructed to ensure it does not undermine the supremacy of policyholder liabilities which was reinforced in Solvency II.

It is unclear how quickly the Commission will respond, but insurers may want to revisit the suggested actions set out in our March article.

Authors:

Clive Briault (mailto: Clive.Briault@KPMG.co.uk)

Janine Hawes (mailto: janine.hawes@kpmg.co.uk)

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