Insurer Resolution Regime: Consultation

Following the consulation on a new resolution regime for large, systemically important insurance and reinsurance undertakings including financial and insurance holding companies (please see eventid=19368 for details), the HM Treasury have now issued a consultation outcome paper in this context. Therein, the government briefly describes the responses it has received to the consultation, which were overall supportive, and sets out the Government’s response to the raised issues.
To recall, the new resolution regime for insurance and reinsurance undertakings would be aligned with the international resolution standards set out by the Financial Stability Board (FSB). The new regime would apply to „large“ undertakings and to mixed financial holding companies, insurance holding companies, UK branches of foreign insurers, and several other entities. The resolution would run alongside the rules and regulations issued by the Financial Conduct Authority (FCA) which is responsible for supervising the operations of (re)insurance undertakings and those by the Prudential Regulation Authority (PRA) which is responsible of (re)insurance companies meeting their prudential (primarily capital) requirements. As the PRA already has some rules in place e.g. with respect to resolution planning that are applicable to all (re)insurance companies, the new dedicated resolution framework would take these rules into account when designing the new framework.
The outcome paper summarises 13 written responses to the consultation:
– The respondents generally supported the idea that the UK government implement international standards aligned with International Association of Insurance Supervisors (IAIS)
– Respondents welcomed the idea of BoE being a single Resolution Authority (RA), especially that the Bank already has experience in similar roles, such as being an RA for CCP resolution regimes
– With regards to the regime’s scope, there is still a disparity among respondets. Half of them were either supportive or neutral to the idea of expanding the regime to cover all insurers, whereas the other half said that the UK branches of foreign insurers should fall under the regime in their home country and not that of the UK
– Entry into resolution should not solely be triggered by a monetary requitement breach, however the government should provide examples of when such resolutions could be put into place
– Bail-in bonds and the role of Financial Services Compensation Scheme (FSCS) in protecting some policy holders
– In case of a bail-in necessity, respondents highlighted that firstly shareholders should „absorb losses“ followed by a bail-in
– The Bank would safeguard No Creditor Worse Off (NCWO), and respondents have broadly welcomed this, but expressed concerns in the methodology for calculating their future claims
– Pre-resolution planning under the regime should be put in place
– Respondents welcomed proposed ancillary powers, especially that these could aid the RA’s to implement stabilisation tools
– The lead-time to implement the proposals would be between 12 – 24 months, according to the respondents‘ wishes. It would also be associated with additional costs for the entire industry.
Taking into account the feedback received, the regulator decided to change some aspects of the Government’s proposed approach to reflect further policy development and, for certain suggestions, to provide an explanation as to why the Government has decided not to make any changes.
Other topics raised by respondents and being discussed in the paper, which were not part of the 14 questions, are:
– UK branches of foreign insurers
– Application of the regime to group entities
– Pre-resolution ‘provisional’ valuation
– Private sector transfer
– Bridge insurer
– Temporary public ownership
– Funding the regime