Insurance Recovery and Resolution: Perspectives from the EU and Switzerland
Speakers:
Dr. Monica Mächler, Member of the Board of Directors of Zurich Insurance Group AG and Chair of the Advisory Board of the ICIR
Heinrich Wollny, Deputy Head of Unit, Resolution and Deposit Insurance, DG FISMA, European Commission
Moderation:
Prof. Karel Van Hulle, Prof. em. KU Leuven and Goethe University Frankfurt, ICIR Fellow
The International Center for Insurance Regulation (ICIR) hosted a further Digital Insurance Forum on June 25, 2024, focusing on the topic of insurance recovery and resolution. The forum featured Karel Van Hulle, Monica Mächler, and Heinrich Wollny, who discussed recent developments and implementations of recovery and resolution frameworks in the insurance sector in Switzerland and the European Union.
Prof. Karel Van Hulle, KU Leuven and Goethe University Frankfurt and Fellow of the ICIR, highlighted the growing global efforts to develop specific regimes for dealing with failing insurers, much like recovery and resolution frameworks in banking. He noted the European Union's recent adoption of the Insurance Recovery and Resolution Directive (IRRD) and similar legislative efforts in Switzerland and in the UK. He indicated that, unfortunately, the expert from the Bank of England (PRA) could not take part in the discussion because of the upcoming elections in the United Kingdom. The discussion would therefore be limited to the EU and to Switzerland. He introduced the forum's key speakers, Monica Mächler and Heinrich Wollny, to guide the discussion on this complex issue.
The IRRD
Heinrich Wollny, Deputy Head of Unit Resolution and Deposit Insurance at the European Commission’s DG FISMA, provided an overview of the IRRD.
Mr. Wollny argued that there is a need for a structured recovery and resolution framework to manage failing insurers and protect policyholders, considering that past failures impacted economic and financial stability and social welfare. He explained that the IRRD has three main components: preparedness for crisis situations, resolution powers, and cross-border coordination.
1. Preparedness
Insurers are required to draft pre-emptive recovery plans during stable periods. These plans must address potential crises and recovery options, with insurers defining their own strategies. Supervisors will evaluate these plans based on risk-based criteria, such as size, business model, risk profile, and interconnectedness and substitutability of the business, but also the importance of the insurer’s activities for the economy of the member states in which they operate. National resolution authorities will plan the resolution for insurers whose failure could pose a risk, covering 40% of the market. These plans will test if it is feasible and credible to use the normal insolvency rules to deal with failure in different scenarios. If normal insolvency is not likely to reach the resolution objectives (protecting policyholders' collective interests, ensuring financial stability, safeguarding taxpayers, and maintaining critical functions), the resolution plan will outline how the resolution authority will apply its powers. The.
2. Resolution Powers
National resolution authorities will have a harmonised toolkit that should enable them to ensure the continuity of insurance coverage, which is usually the economically most efficient solution in the best interest of policyholders, while the insurer itself will leave the market: write-down or conversion of liabilities (including insurance liabilities), sale of business, bridge undertaking, and run-off tool.
3. Cross-Border Coordination
Heinrich Wollny stressed the importance of coordination between resolution authorities and supervisors within the EU and internationally. He explained that resolution colleges, comprising supervisory authorities and resolution authorities, will assess and agree on recovery and resolution plans. The IRRD takes a group perspective, ensuring a unified approach to recovery and resolution for insurance groups.
Current Status of the IRRD
The IRRD is currently at the technical and translation stage, with publication expected by the end of 2024. Member states will have two years to transpose the Directive into national law, aiming for full implementation by January 2027. The European Insurance and Occupational Pensions Authority (EIOPA) is developing regulatory technical standards and guidance to support the Directive's implementation.
Swiss regulations on recovery and resolution planning
Monica Mächler, Board Member of Zurich Insurance and Chair of the Advisory Board of ICIR, discussed Switzerland's approach to insurance recovery and resolution.
Mächler explained that new Swiss regulations on recovery and resolution planning came into force on January 1, 2024. The Swiss Financial Market Supervisory Authority (FINMA) oversees the implementation of these regulations.
Scope, Content, Governance in Swiss Regulations
Scope: FINMA can require individual insurance undertakings of economic importance to establish pre-emptive recovery plans, called “Stabilisierungspläne” in German. Insurance groups and conglomerates have to establish pre-emptive recovery plans by law. These plans must identify potential destabilizing scenarios, outline measures for stabilization, and include crisis governance and communication strategies. Group-wide plans suffice for groups and conglomerates, reducing the need for individual entities to create separate plans.
As to resolution plans (“Auflösungspläne” in German), FINMA will decide whether it establishes resolution plans for insurance groups and conglomerates that set out how the restructuring or liquidation it imposes will be implemented.
Content: The pre-emptive recovery is designed to demonstrate with what measures the insurance undertaking intends to stabilizise its operations sustainably based on own funds or private financing obtained from third parties. This includes 1) identifying potential destabilising scenarios, 2) the measures to be taken and the resources needed for their implementation, 3) determining tangible early indicators, and 4) the crisis governance set up and communication concept of the insurance undertaking.
Governance and process: The pre-emptive recovery plan has to be approved by the Board of Directors and be submitted to FINMA. It has to be re-submitted annually. Submissions have to start in 2025. FINMA informs annually about the status of the recovery planning, earliest two years after the first year when undertaking have to submit a pre-emptive recovery plan.
Key matters
Interaction with requirements under the Swiss Solvency Test: If SST requirements are not met, the supervisory authority will intervene based on the ladder of intervention. An insurance undertaking that does not meet the solvency requirements to 100% has to submit a concept on how to meet the 100% threshold again. In working out that concept, it has to assess by law what is included in its preemptive recovery plan, if there is any. There are no SST requirements triggering resolution per se.
Resolution and restructuring: The resolution plan is expected to demonstrate ”how the restructuring or the liquidation imposed by FINMA is to be implemented”. Swiss law has been complemented as of 1 January 2024 also by rules relating to restructuring (“Sanierung” in German). In a restructuring there are measures available that correspond largely to those under the Key Attributes and the IRRD such as transfer of portfolios and assets and liability, write down and issuance of nex capital, bail-in including conversion of debt into equity and write down, and amendments to insurance contracts or specified amendments to certain other contracts.
Restructuring comes into operation if there exist reasoned concerns that an insurance undertaking is overindebted or has serious liquidity problems. In addition, if there exists a reasoned expectation to restructure the insurance undertaking as a whole or to continue to provide certain insurance services, restructuring may be applied, otherwise the undertaking goes into liquidation/wind down which means also termination of insurance contracts.
Insurance claims: Restructuring in terms of bail-in also extends to existing or future insurance claims to the extent they are not covered by tied assets or other special arrangements. Insurance claims represent a large part of the insurer’s balace sheet and therefore provide a large volume for purposes of restructuing. Insurance contracts with unusual provisions can also be amended under the restructuring provisions.
Panel Discussion and Q&A
During the panel discussion, Christian Thimann raised questions about specific failure examples, the problem of sudden insurer disappearances, and the impact of cumulative regulations on corporations. Heinrich Wollny pointed out that insurers can fail and that, in several past cases, public authorities realised that preparedness and a complete toolkit would have enabled better solutions and referred to AIG in the US and a Dutch life insurer as significant cases highlighting the need for recovery and resolution framework. Therefore, the FSB and IAIS standards required such frameworks. He argued that the IRRD is a proportionate framework, without a requirement for internal loss-absorbing capacity and limited to a subset of insurers. He also stressed the importance of the industry's feedback during EIOPA’s public consultations in the coming two years.
In summary, the discussion made clear that the EU's IRRD and Switzerland's regulatory frameworks can be seen as crucial steps toward managing failing insurers. The forum underscored the complexity of implementing recovery and resolution frameworks in the insurance sector. Both Mr. Wollny and Ms. Mächler stressed the importance of pre-emptive planning and international coordination to protect policyholders and maintain financial stability.