Framework for recovery and resolution

The IRRD establishes a new harmonization framework for the recovery and resolution planning of (re-) insurance undertakings across the European Union. It provides tools to prevent and mitigate the failure of (re)-insurance undertakings in financial distress and facilitates early intervention of relevant authorities, especially in a cross-border context.

The main requirements under the IRRD are highlighted below.

Pre-emptive recovery planning

The IRRD requires certain (re-)insurance undertakings to prepare and periodically update pre-emptive recovery plans as part of their governance systems. These plans should include prudential financial information, recovery indicators framework, possible remedial actions and a communication strategy. Small and non-complex (re-)insurance undertakings are exempted from these requirements. The same applies for resolution planning (as further discussed below).

The recovery plans are subject to review and stress testing by the relevant supervisory authority. If the recovery plan is deemed inadequate, the supervisory authority may require additional information or specific changes to the plan. The European Insurance and Occupational Pensions Authority (EIOPA) will provide technical standards on various aspects of the IRRD including the stress testing scenarios to be considered.

Resolution planning

The IRRD state that at least 40% of the EU insurance sector should develop resolution planning, which planning is supervised by resolution authorities (to be appointed). These authorities are responsible to draw up the resolution plans for certain (re-)insurance undertakings that are failing or are likely to fail and there is no prospect that alternatives or supervisory measures can prevent this. The resolution plans will (among others) set out the options for applying resolution tools and resolution powers to the (re-)insurance undertaking or group such as solvent run-off, asset and liability separation tool, and sale of business tools.

The assessment takes a risk-based approach taking into account elements such as risk profile, size, interconnectedness and cross-border activity. The resolution authorities may apply simplified obligations for certain (re-)insurance undertakings and groups.

Amendments to Solvency II Directive

The amendment of Solvency II Directive aims to boosting the European insurance sector by promoting long-term investments, simplifying regulations for smaller (re-)insurance undertakings and addressing new risk such as climate-related financial risks.

Key amendments are outlined below.

Smaller and non-complex insurance undertakings

One of the main objectives of the amendment of Solvency II Directive is to increase proportionality of prudential rules and reduce the administrative burden for smaller (re-)insurance undertakings. A definition of “smaller and non-complex” (re-)insurance undertakings is introduced. These undertakings will be able to be classified as small and non-complex through a simple notification procedure providing they meet certain criteria for two consecutive years. With this status, they can automatically benefit from certain proportionality measures regarding, for example, communication and publication of information, governance, review of written policies, calculation of technical provisions.

Management of the undertaking

To strengthen the governance of (re-)insurance undertakings, members of the administrative, management and supervisory bodies of these undertakings should:

  • at all times be of good repute and possess collectively sufficient knowledge, skills and experience to perform their duties; and
  • not have been convicted of any serious or repeated offences related to money laundering, terrorist financing, or other offences concerning their good repute (for at least the 10 years preceding the year in which they perform or would perform their duties).

In addition, (re-)insurance undertakings should have policies in place that promote diversity within the administrative, management and supervisory bodies.

Risk management

New risk management provisions shall be introduced, such as the requirement to consider sustainability risks and cybersecurity risks within the risk management system, and to consider macroeconomic factors and climate change scenarios within the ORSA.

Policies and procedures should also be in place to identify and assess sustainability risks considering short-, medium- and long-term risks. (Re-)insurance undertakings must also have specific plans to address financial risks arising from sustainability factors.

Authorisation for EU subsidiaries

In order for a (re-)insurance undertaking being a subsidiary of an undertaking established in another Member State, or which will be controlled by the same natural or legal person as another (re-)insurance undertaking established in another Member State, to be granted an authorisation, the supervisory authority of the Member State granting the authorisation must consult the supervisory authorities of all Member States concerned.

Proposed timing and next steps

The two pieces of legislation entered into force on 28 January 2025. Member States have until 29 January 2027 to transpose the two directives into national law.

As Member States prepare for implementation, they would need (among others) to bring existing frameworks in line with the new requirements, establish new resolution policies and procedures. Further guidance from EIOPA on some key aspects and specific topics of the IRRD will be prepared.

Contact

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