Insurer Resolution Regime: Consultation

The HM Treasury has launched a new consultation on a proposed new resolution regime for insurance and reinsurance undertakings that 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 key pillars of the proposed new resolution regime would include the following:
(1) The Bank of England will be the dedicated resolution authority (RA) for in-scope firms.
(2) An in-scope firm would be a financial institutions „that could be systemically significant or critical if it fails“.
(3) Friendly societies would be excluded from the regime and so would be firms not subject to Solvency II.
(4) The objectives of the new resolution regime would include, among others,
– the protection of the UK financial system;
– the protection of policy holders and the assurance of access to critical insurance services;
– the minimization of the need for bail-ins; and
– the fostering of public confidence in the UK insurance market.
(5) The new regime would include so-called „resolution conditions“ that would have to be met in order for the Bank of England as the dedicated resolution authority to exercise its resolution powers. Such resolution conditions include, for instance, the assessment of the PRA that an institution is likely to fail or that the Bank of England comes to the conclusion that – without stabilization measures – the undertaking is likely to fail.
(6) Following a pre-resolution valuation of all assets of an affected (re)insurance firm – which would have to be performed by an independent valuer – the Bank would have several stabilization options including the following:
– the transfer of the affected firm to another solvent undertaking willing to purchase the firm. The buyer would then be treated as if it was the principal insurer;
– the implementation of a „bridge“ institution which would be owned and controlled by the Bank of England and which would ensure continued operations that are deemed to be critical;
– the implementation of bail-ins that is the write-down of liabilities or the conversion of fixed-income securities into equities; and
– the temporary placement of a failing institution into „public ownership“ which only the HM Treasury could decide upon due to the use of public funds.
(7) The Bank of England would also have the option to implement some balance sheet „management vehicles“ that is measures to alter the content of the balance sheet of an affected failing firm. Such measures may include, for instance, the transfer of illiquid, non-profitable assets out of the company’s balance sheet into a pool of assets so as to permit the continued functioning of some services of the failing institution.
(8) The Bank of England would be responsible for the performance of regular „Resolvability Assessments which would determine and address barriers to
resolution“ and for the supervision of the recovery and resolution planning of at least systemically important insurance and reinsurance undertakings. The objective is to have a plan at hand to resolve or restructure an institution once an undertaking experiences financial stress and is likely to fail.
(9) The Bank of England would be permitted to restrict the surrender rights of policy holders during resolution that is the right to terminate their contracts prematurely and to draw the corresponding cash value from the policy. This should help implement an effective resolution strategy without having to consider any potential cash outflows during the resolution stage.
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As the above text only includes a brief summary of the proposed new regime, please refer to the original legal document for more detailed, comprehensive information.
The consultation closes on April 20, 2023.