The European Insurance and Occupational Pension Authority (EIOPA) has published an Opinion addressed to the European Parliament, Council and Commission on The Harmonisation of Recovery and Resolution Frameworks for (Re)insurers across the Member States.Following the global financial crisis, both national and supra-national supervisory authorities have turned their attention to the effectiveness of approaches to the recovery and resolution of financial institutions. Following a European Commission review of non-bank institutions in 2012 it was decided to monitor recovery and resolution in the (re)insurance sector. In response, EIOPA decided to investigate the benefits of a harmonised approach to recovery and resolution for insurers.
EIOPA’s Opinion concludes that the existing fragmented approaches to recovery and resolution in the European Union are barriers to the resolution of cross-border insurance groups and affect policyholder protection, financial stability and the protection of public funds. Currently, different approaches in different Member States can increase the complexity and cost of resolution. EIOPA’s view if that a minimum level of harmonisation therefore is required.
“Recovery” and “resolution” refer to different stages of the deterioration of financial resources. Recovery may mean that a business is still viable whereas resolution refers to a situation where a firm has ceased to be viable and has no realistic prospect of returning to viability.
What does EIOPA propose?
EIOPA proposes four ‘building blocks’ where a common approach could bring benefits:
- Preparation and planning – (re)insurers should develop and maintain pre-emptive recovery plans. The resolvability of (re)insurers should be assessed on the basis of these plans.
- Early intervention – common early intervention powers should be given to national supervisory authorities.
- Resolution – designated administrative resolution authorities should be in places for (re)insurers in Member States. Objectives for resolution should be set out in a harmonised framework. The objectives should include policyholder protection and financial stability. The framework should include a common set of conditions for entry into resolution – before a (re)insurer becomes insolvent. National resolution authorities should have access to a common toolkit of resolution powers, including similar enforcement measures.
- Cross-border cooperation and coordination – arrangements for cross-border cooperation and coordination should be established between different countries to deal with crisis situations. Accordingly, EIOPA suggest that a European resolution regime might adopt crisis-management groups along the lines of those required of global systemically important insurers.
EIOPA proposes that the recovery and resolution framework should cover all insurance and reinsurance undertakings subject to Solvency II (2009/138/EC). However, taking into account the proportionality principle of Solvency II, Member States should be free to waive the application of the regime for specific insurers.
EIOPA plans to continue to review recovery and resolution in the insurance sector and will begin work on both the harmonisation of resolution funding and insurance guarantee schemes – both outside the scope of the latest Opinion.
It is not apparent that there is sufficient appetite for additional measures to be introduced in addition to the protections already afforded under Solvency II. The Commission is not compelled to act on the opinion but is likely to consider legislation to introduce minimum harmonisation. Details of the framework including allocation of costs and the use of resolution tools are likely to be highly controversial, as they were during negotiations on the Bank Recovery and Resolution Directive (BRRD) and the ongoing discussions on the recovery and resolution of CCPs.