Clifford Chance

To date, Member States have taken very different approaches to addressing the risk of failures of insurers. The new EU insurance recovery and resolution directive (IRRD) will create a harmonised framework for recovery and resolution planning for EU insurance and reinsurance companies, which will begin to apply no later than 18 months after the IRRD becomes law (so potentially as early as Q3 2024). 

The purpose of the IRRD is to ensure:

• that EU authorities have a harmonised, credible set of resolution tools allowing them to intervene early and quickly if insurance companies are failing or likely to fail; and
• a better outcome for policyholders, while minimising the impact on the economy, the financial system, and any recourse to taxpayers’ money.  The proposals are modelled on the 2014 EU bank recovery and resolution directive (BRRD), however, there are many differences between IRRD and BRRD, reflecting the different issues presented by the insurance sector.

The new regime will apply to EU insurance and reinsurance companies covered by Solvency II, EU insurance holding companies and EU mixed financial holding companies. The European proposals are likely to be carefully considered by HM Treasury which is currently reviewing the UK regime. 

Each Member State will set up an insurance resolution authority which will require insurers to prepare pre-emptive recovery plans to address the remedial action that the company or group may take in a range of severely stressed macroeconomic and financial scenarios. The supervisory authority will have powers to direct the remediation of deficiencies in the plan and impediments to recovery. Resolution plans will have to be updated annually and on any material change to the insurer's business (such as an acquisition or corporate restructuring). 

Notably, IRRD does not require companies or groups to maintain a minimum level of own funds to facilitate resolution (unlike BRRD).

Where the conditions for resolution are met (i.e. when an insurer breaches or may breach its MCR with no reasonable prospect of restoring compliance), the resolution tools available to the resolution authority will include:

• Solvent run-off – withdrawal of authority to write new business, run-off all existing contracts
• Sale of business – transfer of shares or assets/liabilities to purchaser on commercial terms (residual entity to be wound up)
• Bridge undertaking – transfer of shares or assets/liabilities to a bridge institution controlled by public authorities aiming to complete an eventual sale
• Asset and liability separation – transfer of all or part of assets/liabilities to asset management vehicle(s) controlled by public authorities 
• Write-down and conversion (bail-in) – power to write down capital investments and eligible liabilities to recapitalise the insurer or a bridge institution.

Whilst protecting policyholders is only one of the resolution objectives, the recitals to the directive state that direct insurance claims should only be subjected to bail-in as a last resort and that resolution authorities should carefully consider the consequences of bail-in on claims under insurance contracts held by individuals and small businesses. 

In May 2021, HM Treasury consulted on proposals to enhance the UK regime for failing insurers. It proposed enhancing the regime for a court-approved write-down of contracts by clarifying and extending the court's powers, creating a new role of 'write-down manager' to oversee the process and protecting written-down policyholders' rights to obtain compensation under the Financial Services Compensation Scheme. It also made proposals to accompany write-down and insolvency proceedings with a new moratorium regime for termination rights in service contracts and financial contracts and a suspension of the surrender rights of life policyholders. 

It will be interesting to see the extent to which HM Treasury will align with or deviate from the approach the EU is taking.

For further information on the IRRD, please refer to our briefing.