As part of its 2020 priorities, the Central Bank of Ireland (CBI) has published consultation paper CP131: Regulations for pre-emptive recovery planning for (re)insurers. The CBI recognizes that the current regulations under Solvency II do not provide for a zero-failure regime and therefore an appropriate framework is necessary to ensure that where it occurs, the failure of insurers is managed in an appropriate manner to reduce the impact on financial stability and policyholders across domestic and international firms.

The CBI states that pre-emptive recovery planning is necessary to facilitate increased awareness and preparedness within firms for severe stress events or potential failures. The consultation sets out a number of proposals under the Recovery Plan Requirements for Insurers Regulations 2020 and associated guidance. The proposals are separate to resolution planning, which identifies how an insurer would be resolved and which would be initiated when an insurer is no longer viable or has no reasonable prospect of becoming so.

Requirements under the Regulation

The proposed Regulations require that insurers and reinsurers draft and continually review pre-emptive recovery plans that are relevant for the scale and complexity of the business of the firm. The plan should set out measures which could be taken by the insurer to restore the financial position following a significant deterioration of same. The plan should also provide details of the governance process for the preparation, approval, invocation and execution of the plan in practice. The plan should also be updated following any material change within the firm.

The CBI also sets out the expectation that these pre-emptive recovery plans will be linked to the Own Risk and Solvency Assessment (ORSA), although should be wider than focusing mainly on solvency assessment and stress testing. The recovery plan should consider a wide range of causes of potential failure including liquidity, solvency and operational events.

Proposed content of the pre-emptive recovery plan

The proposals require that the pre-emptive recovery plans include the following sections:

• Summary – a brief overview of the key elements of the recovery plan

• Changes since last recovery plan – Highlighting any material changes from previously approved versions

• Approval of recovery plan – Date the plan was approved by the Board

• Governance – Documenting the governance arrangements including the development and updating of the plan as well as for the implementation of the plan, should a stress event occur

• Strategic Analysis – Providing a clear description of the insurers business strategy, operating model and organizational structure with a view to identifying likely vulnerabilities

• Recovery Indicators – How the insurer will monitor the development and progression of key risks so that the deployment of a recovery option can be implemented in a timely manner

• Recovery Options – Identifying and assessing a range of actions that the insurer may take in order to restore its financial position/maintain ongoing viability should a severe stress event occur

• Scenario Analysis – Testing the effectiveness of the recovery options and adequacy of recovery indicators under a range of scenarios of financial/operational stress

• Communication Plan – Anticipating the communication requirements in the event of a recovery event and the development of a plan in dealing with those demands

• Information on preparatory measures – Details of any preparatory measures which are necessary to facilitate the implementation of the pre-emptive recovery plan or improve its effectiveness 

Proportionality

The Regulations allow for a proportionate approach to the level of detail within the plan. It should reflect the systemic importance of the insurer and its interconnectedness with its Group or other third parties. The Regulations specifically permit Captives and Third-Country Branches to take a more proportionate approach to the drafting of the pre-emptive recovery plan.

Next steps

The CBI has set out the opportunity to comment on the proposals as well as identifying whether there are other areas which should be included in the Guidelines or where the application of proportionality could be clarified.

The Consultation closes on 30 October 2020. Insurance Ireland invites members who wish to participate in the discussion to contact Jacqueline.thornton@insuranceireland.eu