Insurance recovery and resolution

Who this blog is for:

Board members and senior executives working across the EU and UK insurance industries, in particular those in finance, operations, risk and strategy teams.

At a glance:

• Following years in the making, we believe that 2022 will mark a turning point when it comes to insurance recovery and resolution, with a number of regulatory initiatives across several jurisdictions well underway or about to be launched.
• From what we know now, all of these appear to be moving in a similar direction - i.e., establishing insurance recovery and resolution frameworks that are similar to those we have seen on the banking side.
• As regulators finalise their views in the year ahead, insurers should revisit and update their recovery and resolution planning and processes well ahead of any formal requirements coming into effect, taking into account lessons learnt from the banking side. This could include, for example, exploring to what extent challenges could arise when revaluing their balance sheets in resolution, and revisiting existing regulatory guidance to realise synergies in terms of recovery and resolution planning.

Introduction

Insurance recovery and resolution is a topic that has been around for many years, but it is only recently, following a number of important developments, that we can see regulatory plans being put into action.

This blog, which is the first in a three-part series setting out our view of what these developments actually mean for the UK and EU insurance sectors, outlines the historical context and explains why we think now is a moment of truth for the insurance sector. The second blog looks at the direction of travel in terms of insurance recovery and resolution in the EU and the UK, while our third blog outlines actions insurers can take to get ahead of the curve on this topic in the context of lessons learnt from the banking side.

Historical context and recent developments

Insurance recovery and resolution has been on the international regulatory agenda for a number of years. In 2013, the Financial Stability Board (FSB), in consultation with the International Association of Insurance Supervisors (IAIS) and national authorities, identified a list of nine global systemically important insurers (G-SIIs), and the policy measures that should apply to them (which included recovery and resolution requirements). A year later, the FSB developed its Key Attributes of Effective Resolution Regimes for Financial Institutions, followed by complementary guidance on developing effective resolution strategies and plans for G-SIIs in 2016. While the FSB stepped back from G-SII designations in 2017, the IAIS has since adopted its Insurance Core Principles as well as its Common Framework, the first applicable to all insurers and the second to Internationally Active Insurance Groups (IAIGs), outlining expectations in relation to pre-emptive recovery and resolution planning. The IAIS also published its application paper on recovery and resolution planning in 2021 – some elements (including e.g. on resolution powers) apply to all insurers, while others (including e.g. on the establishment of crisis management groups) only apply to IAIGs.

This is the context for the EU and UK regulators formally announcing that they will introduce insurance-specific recovery and resolution regimes. The European Commission published its proposal in October 2021. Separately, there has been activity in individual EU Member States. The Dutch National Bank (DNB) was one of the first countries in Europe to implement a resolution regime for insurers when it introduced its Act on the recovery and resolution of insurers in 2019. The Central Bank of Ireland (CBI) published recovery plan regulations and guidelines, and consulted on a national resolution framework for insurers in 2021. In France, the regulator recently published updated guidance on insurance resolution tools. In the UK, meanwhile, Sam Woods’ speech at the Mansion House last autumn committed the PRA to doing more work in this area this year, while the UK’s updated regulatory initiatives grid includes for the first time a reference to HMT “[introducing] a specific resolution regime for insurers”, with further detail to be announced in “due course”.

2022 – a decisive year

After years in the making, 2022 will therefore be a decisive year when it comes to the future of insurance recovery and resolution. In the case of the EU, it is clear that the direction of travel is consistent with what is currently in place for banks; in fact, the EU’s proposed insurance recovery and resolution framework is virtually identical to its banking equivalent. And while the detail of the UK’s future insurance recovery and resolution regime remains unclear, we already have some indications of the areas of reform that the UK authorities are considering (we will take a closer look at these in our second blog).

Although negotiation of the EU proposal and the finalisation of the UK framework will not conclude this year, and implementation will take longer, the reforms will be material and require significant work by insurers which are already busy with other regulatory change programmes. What’s more, as the incoming requirements also apply at group-level, insurers that have operations or indeed parent companies in both the EU and the UK are likely to be captured by both frameworks. In practice, this means working out where the regimes align and whether and how any potential divergence between the EU and the UK will affect insurance groups’ wider compliance, risk and regulatory strategies.

If the lessons from the banking side have taught us one thing, it is that early action, investment and engagement are not only advantageous but also necessary in order to anticipate and address effectively the resulting challenges. Insurers should, for example, explore to what extent challenges could arise when revaluing their balance sheets in resolution, while also re-visiting existing regulatory guidance (including for example in relation to operational resilience, third party risk management and liquidity planning) in the context of recovery planning. With regulators are still finalising their policies in the next year or so, 2022 is a good time for insurers to start planning and get ahead of the curve, bearing in mind lessons learnt from banks’ experience.

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This blog is part of a series, for more detail please read our other blogs:

- Insurance recovery and resolution Part II: Similar direction of travel in the EU and the UK
- Insurance recovery and resolution Part III: Putting plans into actions

We therefore intend to do more in the coming years to increase our confidence that firms can exit the market without disturbing it, in an orderly way and without having to rely on the backstop of an insolvency or resolution process.