August 17, 2017

ESRB published a report on recovery and resolution framework for EU insurers, from a macro-prudential perspective. This report, which covers both primary insurers and reinsurers, discusses the need for comprehensive recovery and resolution policies to complement supervisory and macro-prudential policies; identifies and describes a number of potential recovery and resolution tools; highlights funding aspects of the resolution process; and considers cross-sectoral and cross-border implications and contagion channels that arise when resolution tools are applied.

The report finds that the contribution of the insurance sector to systemic risk has increased since the financial crisis. Thus, the regular insolvency procedure might be unable to manage a failure in the EU insurance sector in an orderly fashion. A broad set of tools, in addition to those related to insolvency proceedings, may enable authorities to be better prepared to deal with situations involving the distress and default of insurers. The report reveals that an EU-wide policy strategy addressing risks related to the insurance sector is lacking. Filling this regulatory gap will require a broad range of stakeholders in Europe to work together, including EU and national legislators, EIOPA, macro-prudential authorities, and micro-prudential regulators. The report advocates the development of a harmonized effective recovery and resolution framework for insurers across the EU, including the following:

Existing recovery and resolution frameworks should be evaluated and, if appropriate, enhanced and harmonized at the EU level. Furthermore, efforts should be made to ensure their consistent implementation.

The existing recovery and resolution toolkit should be expanded and should include giving resolution authorities the power to modify the terms of existing contracts as a measure of last resort and subject to adequate safeguards (as per the majority of ESRB member institutions).

The recovery and resolution framework should cover the whole insurance sector, while allowing for proportionality.

The financial stability objectives of the framework should be recognized and the interactions of the resolution authority with the macro-prudential authorities should also be clarified.

Work on recovery and resolution frameworks should go hand-in-hand with a discussion of how resolution should be funded.

Related Link: Report (PDF)
Keywords: Europe, EU, Insurance, Recovery and Resolution Framework, Solvency II, Report, ESRB

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