Articles - Are insurers heading into a recovery and resolution regime

It’s been more than a decade since the financial crisis and almost four years since Solvency II came into effect. Over that period banks quite expectedly went through a regulatory revamp that included among other things extensive recovery and resolution (R&R) requirements in the shape of a European Directive (BRRD). At that time insurers were undergoing painful preparations to implement Solvency II and escaped the R&R train or so they might have thought until now...

 By Kareline Daguer, Director at PwC

 In mid-October EIOPA published a consultation on the changes to the Solvency II Regime as part of the 2020 review. The consultation is the very first step in the 2020 review journey and considering the consultation length and scope it will take some time to digest. More to the point today, this gigantic document includes a proposal to establish a recovery and resolution (R&R) framework for the insurance sector.

 For context EIOPA has been pushing for an insurance R&R regime for a few years now. Quite recently some countries such as France and The Netherlands have gone solo and established their own insurance R&R regimes. This is prompting EIOPA to propose incorporating an R&R regime into the Solvency II directive to avoid further fragmentation of approaches to R&R in the Union.

 In parallel, the Financial Stability Board and the International Association of Insurance Supervisors (IAIS) have both called for extending recovery requirements from global systemically important insurance groups (G-SIIs) to all internationally active insurance groups. The IAIS requirements might even come in before EIOPA’s proposals make their way into updated Solvency II regulations.

 Here in the UK, it is understood there are four groups currently caught as G-SIIs and therefore already preparing pre-emptive recovery plans. However, the current proposals would mean most insurers will be required to prepare them.

 But when is this all going to happen? The path from consultation towards getting all the necessary approvals is long, possibly taking us into 2023 or 2024. But for firms it is worth understanding and forming a view on the impact of these measures. Although Brexit might change the landscape, it is very likely the PRA would adopt similar proposals to keep in step with changes to the Solvency II regime for some years to come.

 What are the key EIOPA proposals?
 First on recovery EIOPA proposes that a significant share of each national EU market is required to prepare recovery plans. This means preparing pre-emptive recovery plans that include a set of measures to be taken in the case of triggering recovery. The trigger is expected to be breach of SCR. How regulators will determine who is in or out? This is still to be determined, but could include criteria such as size, type of activity, business model, risk profile, interconnectedness and substitutability. Reinsurers are also captured in the proposals with clarification that reinsurance businesses are different to insurance and therefore the expected plans and the criteria for being subjected to this measures might be tailored. In addition, EIOPA proposes to give national regulators specific powers to deal with firms entering the recovery phase. These include the ability to demand different or more frequent reporting, require the implementation of certain measures included in the recovery plan, require updates to the plan, etc.

 Secondly, on resolution EIOPA proposes that Member States designate a resolution authority to maintain pre-emptive resolution plans and resolvability assessments. Similarly to recovery planning, it is expected resolution planning captures a significant share of each national market but its scope is likely to be narrower than for recovery planning. Also, EIOPA proposes to give resolution authorities extensive powers that include traditional tools such as part VII transfers to more drastic measures that can include allocating losses to policyholders. The trigger for entering the resolution phase is expected to be the non-viability of the insurer, exhausted recovery measures and the public interest.

 I believe R&R to be almost inevitable for the insurance sector at this stage. On the plus side, in a Brexit environment R&R can provide some backbone and protection when it comes to setting out the ground rules of crisis management among regulators and is likely to help when negotiating a deal with the EU that includes insurance. So at long last, and more than a decade since the financial crisis it looks like insurers will not escape R&R requirements. The good news is that there is still time to shape the proposals to ensure we end up with a regime that is beneficial and fit for purpose.

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