Introduction of an Insurer Resolution Regime

As expected from the 2022 Regulatory Initiatives Grid, HM Treasury has published a consultation on Introducing an Insurer Resolution Regime which would give additional powers to the Bank of England rather than the PRA and bring the insurance industry into line with banking.  The intention is to comply with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions.  The consultation closes on 20 April 2023.

Background

Amendments to the arrangements for insurers in financial difficulties, extending and clarifying the powers of regulators and courts, as consulted on during 2021, are currently being taken through Parliament in the Financial Services and Markets Bill 2022.  However, these amendments will not be effective in all scenarios, including the rapid failure of a large firm, the concurrent failure of multiple insurers or the failure of a firm offering niche insurance, so the HMT proposals are aimed at addressing those possibilities.

Application and exclusions

The proposed regime would be able to apply to UK insurers, subject to certain exclusions.  Small insurers not subject to Solvency II (after the reforms currently proposed), all friendly societies and Lloyd’s would be excluded.  However, in practice the tests for resolution action would only be likely to be met by a few insurers and therefore others would be likely to be subject to alternative procedures if they failed.

Resolution objectives

The Resolution Authority (“RA”) would be the Bank of England and it would be required to have regard to Resolution Objectives relating to:

• protecting and enhancing the stability of the UK financial system and public confidence in its stability
• protecting public funds
• protection policyholders of the firm in resolution
• avoid interfering in property rights

Focus would be on where the discontinuation of activities, services or operations of an insurer would be likely to disrupt UK financial stability or services essential to the UK economy.

Conditions for resolution

Four conditions would need to be met for an insurer to be placed into resolution:

• The PRA assesses that an insurer is likely to fail.
• The RA assesses that it is not reasonably likely that action will be taken by the insurer resulting in (1) ceasing to be met.
• The RA assesses that exercise of stabilisation powers is necessary in the public interest.
• The RA assessment that one or more of the Resolution Objectives would not be met if stabilisation powers were not deployed.

Stabilisation options

The RA would consult with the PRA, FCA and HM Treasury and would be empowered to apply one or more stabilisation options, as follows:

• Transfer to another willing insurer, without need for consent by regulators, shareholders or policyholders of the failing insurer.
• Transfer to a temporary insurer, usually to give time for due diligence and valuation before a more permanent solution found.
• “Bail-in” the insurer, effectively reducing liabilities to eg shareholders and unsecured creditors and, if necessary, to some or all policyholders, usually to restore a sufficient level of capital coverage to enable a safe run-off.
• As a last resort, put the insurer into temporary public ownership, with intention to in future return to private sector.

Before taking action, the RA would appoint an independent valuer to value the assets and liabilities of the insurer.

The RA would also be able to

• establish a balance sheet management vehicle to maximise value of relevant assets, liabilities, property or rights through eventual sale or orderly wind-down, and
• introduce an insurer administration procedure to allow an appointed administrator to give precedence to facilities and services that allow it to continue its insurance operations effectively.

The RA would be able to direct a firm to take action to remedy barriers to resolvability and if necessary take enforcement action.  It would also have other powers including in respect of appointment, removal or pay of directors or senior managers and payment of dividends or transfer of assets.

The proposals include the introduction of a proportionate restriction on policyholder surrender rights when a failing insurer enters resolution.  The aim would be to reduce liquidity and capital strain that could occur if a significant proportion of policyholders surrendered over a short period.

Ongoing assessments and planning

In respect of the resolution system as a whole, the RA would carry out regular resolvability assessments to determine and address barriers to resolution. It would also carry out ongoing recovery and resolution planning for, as a minimum, systemically important insurers, which may require insurers to carry out additional work.  It would work with the PRA to ensure that this work did not duplicate what the PRA is doing in this area.

Our view

This proposal is in line with PRA statements on resolution planning, such as that by Charlotte Gherken at the 2021 AFM Conference, where it was emphasised that, whilst all firms need to consider recovery and resolution, the requirements would be applied proportionately.  Whilst the proposals will not directly affect small insurers and friendly societies, they may lead to changes in the PRA’s resolution planning requirements.  However, potentially greater stability of and therefore greater public confidence in the insurance sector is of benefit to all insurers and policyholders.