Good morning ladies and gentlemen. It is my pleasure to welcome you to EIOPA’s Technical Seminar on recovery and resolution in (re-)insurance.
Recovery and resolution is a topic very dear to EIOPA and to myself. In fact, EIOPA has been working on this topic almost since the establishment of the Authority in 2011 and over the years we have published a series of technical contributions. Recovery and resolution has always been a high-priority item on our agenda. You can therefore understand that we were quite pleased in autumn 2021 upon seeing the European Commission’s legislative Proposal for an Insurance Recovery and Resolution Directive – for at least two reasons. Firstly, because the European Commission decided to propose legislation in this important area; and secondly, because a number of elements put forward by EIOPA in previous technical work and advice found their way into the proposal.
But today’s event is not about EIOPA - it is about you and it is for you. For the industry, for the consumers and, in general, for everybody interested in this important topic. We have organized this seminar because we would like to help everyone gain a better and broader understanding of why a pan-European framework for recovery and resolution in (re-)insurance is needed, how could it look like and what impact it would have on the sector in a first instance, but also on consumers.
We recognise from bilateral contacts with you all - market participants, supervisors, regulators and other stakeholders - that some of you have concerns. Today’s event is a perfect opportunity to discuss these concerns and, I hope, to alleviate some of them. We are very happy that you have also joined us here today. My invitation to you: please don’t be shy to ask questions and voice your concerns. We have a broad list of knowledgeable speakers with us today who – I am sure – will be very happy to clarify some contentious points and engage with you constructively.
The timing of the workshop was carefully chosen. EIOPA considers the IRRD as one of the main legislative developments in the insurance sector for the coming years. We are convinced of the urgent need for a minimum harmonized pan-European framework for recovery and resolution in insurance for a number of reasons. Firstly, because despite the positive impact of Solvency II, failures in insurance do happen. A disorderly failure of an insurer or a group of insurers may pose risks to financial stability and to policyholders. A regular insolvency procedure might be cumbersome and unable to manage a failure of an insurer in an orderly fashion. For example, the settlement of policyholders’ claims could be considerably delayed possibly by several years, undermining the wider public’s trust in the insurance sector as whole.
Secondly, we all learn from our past – or at least we try to. That is why a in a number of EU Member States –often following failures of insurers – national recovery and resolution regimes have been set up in recent years. Many (re-)insurers however do not operate only nationally; therefore there is the need to establish rules and for a for cross-border corporation. In addition, we should want to avoid fragmentation and strive for European harmonization, which is more in line with the principles of an internal market.
Finally – and this comes from the mouth of a former national supervisor – there may be situations where even the most conscientious supervisors and having the best intentions – may take the wrong decisions; for example, try to ‘keep alive’ a company for too long while actually it would be in the best interest of all to resolve this company in an orderly fashion. Therefore, an authority that is specialised in the insurance business, is familiar with the challenges of resolution, and is equipped with a set of specific tools, would be best placed to deal with situations of distress and default of insurers.
We at EIOPA are well aware of the on-going negotiations among the European co-legislators and value wholeheartedly the effort and dedication that is given to this dossier by all involved parties. We are mindful of our capacity as independent technical advisors in the process. We have no intention to overstep this role. However, we do believe that having the possibility to clarify any misunderstandings or open points from a technical perspective is useful and can help decision-makers and other stakeholders form informed opinions.
In the lead-up to this event, we published a number of staff papers on various IRRD-related issues. The first one, published in July 2022, summarized the essence of the IRRD. In two further papers that we published last week we provide answers to some frequently asked questions about IRRD and presented a comparison of the recovery and resolution frameworks according to the IRRD and its equivalent in banking, BRRD, to identify both similarities and differences between the two legal texts.
Since by introducing this event today, I am also setting the scene for your technical discussions, I would like to use this opportunity to highlight some key elements of the IRRD proposal and their expected benefits. This will show you also what will change with the IRRD, what is new, what needs to be implemented by whom.
Firstly, an IRRD as the one proposed by the European Commission would introduce a comprehensive framework for the insurance sector, which covers all relevant elements, such as recovery and resolution planning, preventive measures, resolution aspects (objectives and tools) as well as cooperation and coordination.
As you know, there are already recovery and resolution frameworks for the banking sector and for Central Counterparties, so we are happy to see that the gap is being closed. We are also pleased that the framework proposed by COM duly takes into account the insurance-specific features.
Starting off with prevention, we all know very well that prevention is the most effective and least costly way of managing a crisis. We are therefore happy to see that COM’s proposal requires recovery plans to be drafted by undertakings, and resolution plans to be drafted by authorities with regards to a wide range of insurance undertakings.
Resolution authorities (RAs)
The IRRD also proposes to appoint a new type of authorities, which should be equipped with a minimum harmonised set of powers. RAs are in charge of undertaking all the relevant preparatory and resolution actions. The proposal does not say that a new authority should be created or who the authorities should be. And this is important as we sometimes hear some complains arguing that the creation of new authorities is undesirable, too bureaucratic and expensive. This is not about this. What is required are structural arrangements to be in place to avoid conflicts of interest between the supervisory and resolution functions. That´s all.
Let’s now focus on the resolution itself. We fully agree with the four objectives identified by COM, namely:
- The protection of policyholders
- The maintenance of financial stability
- The continuation of critical functions; and
- The protection of public funds.
These are generally accepted objectives and the good thing, in line with EIOPA’s advice, is that the objectives are not prioritised, leaving NCAs with sufficient room for manoeuvre to cope with the specific situation.
Conditions for resolution
Triggering the resolution process is linked to certain conditions and it would only take place if it’s deemed necessary. Besides the objectives for resolution just mentioned, a number of conditions need to be fulfilled. The conditions for entering resolution are defined as follows
Number 1, the institution is failing or likely to fail. This requires that that the company is either in breach or likely to be in breach of the MCR without reasonable prospect of compliance being restored, or it no longer fulfils the conditions for authorisation or fails seriously in its obligations, or it is unable to pay its debts or other liabilities, or it requires extraordinary public financial support.
Number 2, there is no reasonable prospect of any private sector measure to prevent failure within reasonable timeframe, and
Number 3, resolution is necessary in the public interest. This is the case if resolution is necessary for and proportionate to the achievement of one or more of the resolution objectives mentioned earlier. Normal insolvency proceedings would not meet the objectives to the same extend.
These conditions are fully in line with the international standards. Although it is also true that they are “easier said than done”, as we know from experience. All these conditions require a significant amount of judgement. This has obvious benefits, but it also entails some risks.
A further fundamental element of the proposed Directive is the set of resolution powers it includes. It goes from the more traditional ones, like the run-off or the portfolio transfer (where there is a lot of experience by authorities), to others that are newer, such as the bridge institutions, the asset and liability separation or the power to write down or convert liabilities.
Let me elaborate a bit on this last one, which I know is the most controversial one. It should be noted that the write-down or conversion of capital instruments, debt instruments and other eligible liabilities are thought in particular to facilitate the exercise of other resolution tools such as the solvent run-off or the transfer tools. It may also affect insurance liabilities. The idea behind it is that the restructuring of insurance liabilities may be warranted to ensure the continuation of a material portion of the insurance coverage and where that is deemed in the best interest of the policy holders.
Overall, although there are several technical issues that could be subject to debate, we are generally in agreement with the proposed set of tools, which –again- are fully aligned with the international standards.
One key aspect regarding resolution is the issue of the funding. It goes without saying that the aim of resolution is to protect public funds and avoid government bail-outs. Yet naturally resolution has its costs, both in times of going concern and naturally in times when resolution is actually activated. Such costs include administrative costs, valuation costs, legal costs and, of course, the costs associated with the exercise of the tool(s) chosen. The IRRD proposal leaves it up to the Member States to decide which means may be the best suited and we know this is a difficult issue. This is why we decided to organize a dedicated panel on the topic.
A last but definitely very relevant piece of the framework refers to cooperation and coordination. In this context, I think the role that resolution colleges will play should be highlighted. Resolution colleges will need to be created under the leadership of the group resolution authority. The objective is to coordinate preparatory and resolution measures among national authorities. A relevant role has also been assigned to EIOPA in terms of promoting and monitoring the functioning of colleges and ensuring convergence across colleges.
Overall, the resolution colleges are supposed to address one of the key issues always highlighted in the different consultations, namely, the need for cooperation and coordination among authorities, which we know is key to ensure a successful resolution process, particularly in cross-border cases.
Before I finish my intervention, allow me also to briefly touch upon what will change for us, what our role will be. The Authority has been assigned with two types of tasks, some more temporary and some more permanent tasks. The temporary ones consist in the development of an important number of guidelines, regulatory technical standards (RTS) and implementing technical standards (ITS). If the framework is adopted, EIOPA will work closely with the NCAs to develop this technical material. The permanent tasks, in turn, are fundamental to make sure that the framework works well, particularly when it comes to cross-border cases. EIOPA will establish a Committee in which all heads of the resolution authorities are represented, take part in the resolution colleges and, more generally, promote resolution convergence. The overall idea is that EIOPA is well placed to ensure consistency and enhance coordination.
To sum up, EIOPA is satisfied with many elements of the European Commission’s IRRD proposal. In particular, we appreciate its preventive approach, the fact that it addresses all relevant building blocks of a resolution framework and the focus on cooperation and coordination among authorities. We look forward to hearing your questions and comments, and discussing with you. As I said at the beginning: this event is about you and for you.
Finally, I would like to thank our esteemed speakers for their willingness to share their expertise with us as well as to you all for joining this event today and bringing an open mind. I wish you an entertaining and informative event.
- Publication date
- 18 November 2022
- European Insurance and Occupational Pensions Authority