Over the last few months recovery and resolution planning for insurers has become an increasing area of interest for many following the issue of the PRA’s approach to insurance supervisions and PS5/14 ‘The PRA Handbook’ both issued in June last year.
Interestingly, the issue is also noted by EIOPA in a recent letter to the European Commission in which they stressed the importance of the development of recovery plans regardless of a firm’s systematic importance.
PS5/14 saw the publication of the final set of Fundamental Rules which replaced the six Principles of Business inherited from the FSA. This included the new Fundamental Rule, FR8, which brings resolution to the attention of the Insurance industry.
"FR8 – A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with minimum disruption to critical services."
The inclusion of this rule is driven by the PRA objectives to promote insurers’ safety and soundness thereby supporting the stability of the UK financial system and contributing to securing an appropriate degree of protection for those who are or may become policyholders.
There are no detailed rules or requirements concerning the provision of resolution information to the PRA, although PRA have noted that they are currently considering whether and how to introduce rules requiring insurers to have recovery and resolution plans.
The PRA however does expect insurers to set out credible steps to maintain or restore their business to a stable and sustainable condition in the event of stress. The PRA have noted that they expect their discussions with insurers regarding resolution plans to vary depending upon factors such as their insurers systemic importance, proximity to failure or specific circumstance e.g. major transactions.
In order to allow the PRA to perform an assessment of an insurer’s resolvability the PRA expects insurers to be able to provide (on request) all the information needed to undertake this assessment. The information required includes relevant information on the group structure, intra-group arrangements, derivative exposures and analysis of the critical economic functions provided by the insurer. The information also needs to be in a suitable form for the FSCS or any insolvency practitioner appointed so that they can effectively undertake their role in the event of resolution.
Although insurers at present do not need full resolution or recovery plans they do need to consider how best to collate the required information should the PRA make such a request. The best way to do this may be starting to develop an initial form for resolution or recovery plan. Insurers should initially consider the existing information available within the organisation. It is likely that a lot of the information required will already been available in other documents or reports within your organisation e.g. your ORSA is likely to provide an overview of your group structure and your business continuity plan is likely to contain information on the shared services necessary to continue operations.
Insurers then need to consider the additional information likely to be required by the PRA or, if they chose to do so, in a recovery and resolution plan.
Although the industry interest in recovery and resolution planning is in the main driven by changing regulatory requirements we expect that insurers will obtain valuable insights into their own business and its ability to withstand changes when thinking about or developing a recovery and resolution plan.