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
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
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
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
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
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
CMA and PRA – would need to consider the competition and public interest implications of a private transfer
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.