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On 2 August 2023 HM Treasury published the response to its January 2023 consultation on a
new Insurer Resolution Regime (IRR).
In its consultation HM Treasury set out its proposal
for legislative requirements that would give regulators additional
tools and powers to manage the failure of (re)insurers in an
orderly manner (to "resolve" an entity) where such a
failure would have a wider impact on the financial system and
policyholders. Importantly, the IRR would sit on top of existing
corporate and (re)insurer specific insolvency arrangements which
were recently updated as part of the Financial Services and Markets
Act 2023. See our earlier post on the consultation here.
The consultation response addresses many of the points raised by
the industry and commits to provide further guidance on the points
that remain unaddressed.
As expected, responses to the consultation were largely
supportive of the proposals, and therefore HM Treasury plans to
legislate "when parliamentary time allows". HM Treasury
recognises that a lead-in time will be required for firms to
implement any new requirements and acknowledges that the majority
of respondents suggested at least a 12-month period.
However, a number of the proposals in the consultation required
further clarification or further consideration in light of the
specificities of the (re)insurance sector, in particular:
how the IRR resolution conditions and the write-down power
under section 377 FSMA interact;
whether contractual recognition of bail-in would be
required;
how compensation in respect of the No Creditor Worse Off
(NCWO) safeguard would work in practice; and
whether there would be any duplication with existing resolution
planning requirements under the current UK regulatory regime.
The table below provides a high-level overview of HM
Treasury's responses to some of the key areas of
uncertainty.
Area of consideration
HM Treasury's response
Scope of IRR
UK branches of foreign (re)insurers – in
scope – but no resolution planning requirements will be
required
Holding companies – in scope – but
the focus will remain on the regulated entity
Niche (re)insurers – in scope –
where there are financial stability risks but resolution planning
requirements are to apply proportionately to their smaller
size
Mutuals – in scope – but they are
unlikely to trigger resolution therefore no resolution planning
requirements should apply
Lloyd's – out of scope – due
to its legal form and applicable rules which should provide
adequate safeguards in case of financial distress
Gibraltar (re)insurers with UK branches or
that otherwise provide services in the UK – in scope
Process
Resolution trigger – this is not tied to
the Solvency II ladder of intervention and the PRA should instead
have flexibility in determining 'failing or likely to fail'
– more guidance is to follow once the IRR has been
implemented
Overlap between the IRR and the FSMA write-down
power – the Government has clarified that each set
of requirements should in principle apply to different types of
(re)insurers:
the IRR would only apply to systemic (re)insurers; whereas
the FSMA write-down power is likely to apply to support
mid-sized (re)insurers on a temporary basis to facilitate
continuity of cover. The Government intends to amend section
377H(2) FSMA in order to prevent overlap between the regimes
Role of FSCS
FSCS top up – FSCS protected
policyholders will be eligible to receive top-up payments following
a bail-in up to the normal limits
Alignment with write-down – the top-up
and related mechanism will be aligned to those in the FSMA
write-down power
Bail-in
Contractual recognition requirements –
contractual recognition of bail-in powers and stays will be
required in "relevant" contracts governed by non-UK law.
This requirement will require repapering of existing contracts. The
contractual recognition of bail-in powers requirement looks like it
will apply more broadly while the contractual recognition of stays
requirement would be limited to financial contracts
Secured creditors – would be excluded
from a bail-in where they hold a fixed charge or a financial
collateral arrangement – floating charge holders would be
written down
Shareholders to absorb losses before creditors
– the statutory hierarchy will be set out in legislation and
use of bail-in powers will follow this
Pay-as-paid – pay-as-paid clauses to be
overridden
Valuations
Statutory principles – pre-resolution
valuation principles will be devised along with detailed
guidance
Definitive point-in-time – following the
pre-resolution valuation, subsequent independent valuations will
require a set point-in-time to determine NCWO compensation
Planning
Resolution Authority planning engagement
– systemically significant UK-headed (re)insurers will be
required to support the Resolution Authority resolution planning
but on a proportionate basis taking into account existing planning
that may have been undertaken to date
Synergies – PRA and Resolution Authority
planning work to be carefully considered to identify synergies with
further guidance to be provided for those firms that are required
to produce recovery plans
Ancillary powers
Surrender and switching – surrender and
switching rights may be temporarily restricted by the Resolution
Authority
Existing court approved schemes – may be
amended by the Resolution Authority under a new legislative
power
Private Transfer
CMA and PRA – would need to consider the
competition and public interest implications of a private
transfer
Regulatory Rules
Amendments to rules – may be made where
needed to support resolution which would otherwise breach normal
regulatory rules
It should be noted that the IRR is separate from but similar in
certain respects to the EU's proposal for an Insurance Recovery
and Resolution Directive.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
