Introducing a UK Insurance Resolution Regime

The proposed regime will provide the Bank of England (BoE) with powers to stabilise and manage (re)insurers identified as failing or likely to fail. It seeks to minimise risks to the wider financial sector and existing policyholders whilst avoiding lengthy and costly insolvency processes.

The Prudential Regulation Authority’s (PRA) current approach is to oversee the execution of the firm’s recovery plan, and if necessary, remove permission to write new business and put the firm in run off. This is in line with the ‘ladder of intervention’ in the Solvency II (SII) framework, which remains unchanged following the Government’s SII review.

Scope of IRR

The regime would apply to any insurer identified as systemically significant in the event of failure. This includes all UK insurers currently authorised to carry out contracts of insurance, mixed financial holding companies, insurance holding companies; regulated entities within the corporate group of an insurer; other non-regulated entities within the corporate group of an insurer; and UK branches of foreign insurers.

When will resolution apply?

(Re)insurers must meet the following four resolution conditions (RC) before being placed into resolution:

• RC1: The PRA assesses that the insurer is failing or likely to fail. This is when the (re)insurer satisfies the threshold conditions for PRA authorisation; the (re)insurer’s liabilities outweigh their assets, or it is likely they will be unable to meet debts as they fall due, and extraordinary public support is required.
• RC2: The BoE assesses that it is not reasonably likely that the insurer will be able to take effective action to avoid the above conditions from occurring.
• RC 3: The BoE assesses that exercising their stabilisation powers is in line with public interests ahead of the initiation of one or more of the statutory resolution objectives.
• RC 4: That one or more of the resolution objectives would not be met to an equal extent without the intervention of stabilisation methods.

Powers possessed by the PRA and BoE

Resolution plans are currently assessed through the PRA’s existing future exit planning framework; however, the regime proposes the introduction of new powers for the BoE not currently possessed by the PRA.

The BoE’s powers will come into effect only once a (re)insurer has been placed into resolution. They will possess some of the PRA’s ancillary powers including:

• The authority to remove or replace directors and senior managers of an insurer.
• Prohibit payments of dividends to shareholders.
• Appoint skilled person(s) or investigator(s).
• Prohibit the payment of remuneration to and allow the recovery of monies from members of the Board, senior management, key persons in control functions and major risk-taking staff.
• Liquidation of whole or part of the insurer.

What happens when resolution conditions are satisfied?

There are four key stabilisation options that the BoE can exercise.

1. Transfer to a private sector purchaser: This involves transferring the shares of the (re)insurer to a purchaser overriding veto rights of shareholders, policyholders or other creditors. Any transfer will not require court proceedings nullifying the protections in place in Part VII of the Financial Services and Markets Act 2000.
2. Establishing a bridge institution: The shares of a failing (re)insurer would temporarily be transferred to the bridge institution (or bridge insurer) allowing time for potential purchasers to carry out due diligence checks and valuations, whilst simultaneously ensuring the insurer can continue to operate and meet its obligations.
3. Bail in: This involves restructuring, modifying, limiting and writing down liabilities whilst allocating losses to shareholders and subordinated debt holders as well as issuing affected creditors with a stake in the equity of the (re)insurer. This option is more likely to be used to allow for the (re)insurer to carry out safe run-off rather than to re-establish a capital coverage ratio sufficiently in excess of liabilities to allow for new business.
4. Temporary Public Ownership: As a last resort failing other stabilisation options the BoE can place the failing (re)insurer into public ownership to maintain financial stability. This option is only likely to be implemented when a very large (re)insurer is failing or likely to fail and no bidders are available.

The PRA will continue to manage the (re)insurers recovery plan and exit plans, this has been cited as a top priority for the PRA in 2023. The BoE are responsible for drawing up the resolution plans for each insurer. Based on the experience of the banking sector, this will require a significant amount of senior management time and resources to engage with both the PRA and BoE in relation to their plans. The proposal for the IRR intends to maximise the overlap of new BoE preparation requirements and the existing PRA work that (re)insurers are required to carry out.

Next Steps

The consultation is open for responses from firms in the UK insurance sector until 30 April 2023. The input of insurers and the wider industry will be essential in guaranteeing that the regime is implemented in the most streamlined and cost-effective way whilst ensuring HM Treasury delivers on its aims of establishing a world-leading regulatory framework tailored to the interests of the UK insurance sector.