Recovery planning: for (re)insurers

KPMG August 2019 2 Recovery planning for (re)insurers 1. Regulators’ approach to recovery planning

Need for (re)insurers to consider recovery planning

From a financial stability perspective, the global financial In October 2014, the FSB adopted sector-specific guidance that crisis exposed the drawbacks of a government bailout and sets out how the Key Attributes should applied for insurers, normal insolvency procedures. For instance, the increase in financial market infrastructures (FMIs) and the protection of sovereign debt associated with a government bailout creates client assets in resolution. substantial costs to taxpayers and increases the risk of At the EU level, the European Union implemented the ; normal insolvency procedures may not always principles set out in the Key Attributes by adopting the Bank provide continuity of critical functions and might not be able Recovery and Resolution Directive (BRRD) in 2014 and the to prevent possible contagion to other parts of the financial European Commission consulted stakeholders in 2012 on the system. possible framework for the recovery and resolution of non-bank At the global level, the G20 and the Financial Stability Board financial institutions, including central counterparties (CCPs), (FSB) has developed an extensive agenda on recovery and central securities depositories (CSDs) and (re)insurers. resolution frameworks. Initially, the focus was on the banking Following the consultation process, the Basel Committee and sector as banks were at the epicentre of the . the European Board (ESRB) issued a report In November 2011, the leaders of the G20 endorsed the in August 2017 that called on the European Commission to recommendations issued by the FSB for a more effective introduce a harmonised legislative recovery and resolution resolution regime to deal with failing financial institutions: framework for insurers and reinsurers: ‘Recovery and ‘Key Attributes of Effective Resolution Regimes for Financial resolution for the EU insurance sector: a macro-prudential Institutions’ (“FSB Key Attributes”). perspective’. Recovery planning for (re)insurers 3

undertakings. A number of (re)insurance authorisation and change of business plans applicants, as well as high and medium-high impact (re)insurers, have been requested to prepare and submit to the CBI a Recovery and Resolution Plan. The CBI believes that effective recovery planning should include “triggers” for implementation, escalation processes, Contents recovery options, and the identification of financial or operational impediments to recovery. It expects (re)insurers to be “formally considering recovery planning as part of strategy setting and capital planning”, including consideration of outsourcing, reinsurance and IT resilience; the CBI also expects undertakings 1. Regulators’ approach to to address impediments to resolution as they are identified2. recovery planning 2 What is meant by ‘recovery’ and ‘resolution’? 2. Recovery plans 3

3. KPMG – your experienced partner 12 As set out by EOIPA in its Opinion, the concepts of ‘recovery’ and ‘resolution’ are often used in crisis management. Although recovery and resolution refer to different stages of a crisis management process, both terms are associated with financial institutions experiencing a significant deterioration in their financial situation. In practice, however, it is difficult to draw a clear line between In July 2017, EIOPA published an ‘Opinion to Institutions of recovery and resolution, which relate to a situation of, the European Union on the Harmonisation of Recovery and respectively, “going concern” and “gone concern”. EIOPA Resolution Framework for (Re)insurers Across the Member 1 proposes a way to differentiate between the two stages; States ’. EIOPA is of the view that a minimum degree of recovery is the stage at which the (re)insurer is still in charge of harmonisation in the field of recovery and resolution for insurers the operations, whereas in resolution a national (supervisory or would contribute to achieving policyholder protection, as well as resolution) authority will have (implicitly or explicitly) taken over maintaining financial stability in the EU. EIOPA also believes that from the (re)insurer. Additionally, in accordance with the FSB such a framework should include a requirement for insurers to Key Attributes, resolution should be initiated when an insurer develop and maintain recovery plans in a pre-emptive manner. is “no longer viable or likely to be no longer viable, and has no More recently, in December 2018, the International Association reasonable prospect of becoming so”. of Insurance Supervisors (IAIS) published the ‘Draft Application EIOPA is of the view that the requirement for (re)insurers to Paper on Recovery Planning’. The Paper provides guidance develop and maintain recovery plans in a pre-emptive manner on the key elements of a recovery plan, and addresses the should be part of a harmonised recovery and resolution relationship between recovery plans and enterprise risk framework. This ‘pre-emptive recovery plan’ differs from the management (ERM) tools, including Own Risk and Solvency recovery plan required under Article 138 of the Solvency II Assessment (ORSA), contingency plans and other preventive or Directive (Regulation 146(2) of the Solvency II Regulations) corrective measures, as well as proportionality. which is required to be submitted to the CBI as soon as the (re) At home, the (CBI) is requesting many insurer observes that the Solvency Capital Requirement (SCR) insurance undertakings to prepare recovery plans as well as is no longer being complied with or where there is a risk of non- advancing its own approach to the resolution of insurance compliance in the following 3 months.

1 https://eiopa.europa.eu/Publications/Opinions/EIOPA-BoS-17-148_Opinion_on_recovery_ 2 https://www.centralbank.ie/news/article/address-to-the-insurance-ireland-deputy- and_resolution_for_%28re%29insurers.pdf governor-ed-sibley 4 Recovery planning for (re)insurers The image below illustrates the different stages of a crisis management flow in a solvency II environment and how a harmonised Recovery and Crisis management flow Resolution framework for (re)insures could be incorporated.

Normal courses of Start of financial problems Solvency position 1 business 2 Intensified supervision 3 deteriorates significantly; Normal supervision likely to breach the SCR • Intensive monitoring Early intervention • Ongoing supervision (Solvency II) • Active dialogue (Solvency II) • Identification and notification of deteriorating –– Recovery and resolution financial conditions by –– Preparation and planning: insurers (Art.136 of SII) –– Pre-emptive recovery plans –– Resolution plans –– Resolvability assessments • Early intervention powers –– Removal of impediments to resolvability

Non-viable or likely to be Non-compliant with the SCR Non-compliant with the MCR non-viable 4 SII ladder of intervention SII ladder of intervention 6 5 Liquidation / Resolution

• Recovery plan (Art. 138 of • Finance scheme (Art.139 • Normal insolvency SII) of SII) procedures (Reorganisation • Restrict or prohibit the free • Restrict or prohibit the and winding-up of insurance disposal of the assets (Art. free disposal of the assets undertakings, Title IV of SII, 138 of SII) (Art.139 of SII) Art.267-296) • All measures necessary • All measures necessary to safeguard interest of to safeguard interest of policyholders(Art.141 of SII) policyholders(Art.141 of SII) OR • Withdrawal of authorisation • Resolution procedures (Art. 144 of SII)

Cross-border Cooperation & Coordination during normal times (SolvencyII Supervisory Colleges, Art.248,249 of SII)

Cross-border Cooperation & Coordination during crisis times

* The articles listed here refer to articles in the Solvency II Directive (2009/138/EC).

Source: EIOPA’s Opinion to Institutions of the European Union on the Harmonisation of Recovery and Resolution Frameworks for (Re)Insurers Across the Member States (EIOPA-BoS/17-148 5 July 2017) Recovery planning for (re)insurers 5 2. Recovery Plans

What are recovery plans?

Recovery plans identify appropriate options that can be executed in the event of a significant deterioration of the undertaking, thereby reducing the likelihood of failure.

The Central Bank’s and EIOPA’s focus on resolution planning will continue to increase. The 2020 Review of Solvency II for example, which the Central Bank is taking an active role in, is wide ranging in scope covering many fundamental areas of the regime, including insurance guarantee schemes and recovery and resolution.

Source:. Address to the Insurance Ireland Annual Lunch – Central Bank of Ireland’s Deputy Governor Ed Sibley, 8 May 2019 6 Recovery planning for (re)insurers

Recovery Plans: key principles and content

A recovery and resolution framework for (re)insurers is not provided for in the Solvency II Directive. However, EIOPA’s ‘Opinion to Institutions of the European Union on the Harmonisation of Recovery and Resolution Framework for (Re)insurers Across the Member States’ and the IAIS’ Draft Application Paper on recovery Planning’ are consistent with the key principles of recovery planning set out in BRRD:

1 Recovery plans should be updated at least annually.

Recovery plans should not assume any access to, or receipt of, 2 extraordinary public financial support.

Recovery plans should include appropriate conditions and procedures 3 to ensure the timely implementation of recovery actions.

4 Recovery plans should include a wide range of recovery options.

Recovery plans should consider a range of scenarios of severe 5 macroeconomic and financial stress.

Recovery plans should include indicators or triggers which identify the 6 point at which appropriate actions referred to in the plan may be taken.

7 Recovery plans should be approved by the before submitting to the Central Bank of Ireland.

For resolution plans, typically the Supervisory Authority is responsible for drafting and assembling the plan based on information already available to them and through interaction with firms. However, we note that this information is typically dispersed across many different sources. It is often more efficient to set out in the Recovery and Resolution Plan the information that the Supervisory Authority would expect to see. Recovery planning for (re)insurers 7

What are the key ingredients of a recovery plan?

Based on KPMG’s experience and in line with recent regulatory guidance and expectations, the key ingredients of a recovery plan for (re)insurers are summarised below:

Executive Abstract 1 The executive abstract or Communication strategy summary sets out the key Business profile 7 This section summarises components of the recovery 2 This section includes the communication needs plan. a summary of the (re) for each recovery option in insurer’s business model different crisis situations. It and risk profile; key covers communication both jurisdictions in which with internal and external it operates; entities stakeholders, including within the scope of the management and staff, recovery plan; functions regulators, key counterparties, and/or services that policyholders and investors. are significant to the continuation of business.

Stress scenario Trigger framework 6 This section includes a Key ingredients of set of stress scenarios; 3 This section describes these scenarios should recovery plan the pre-defined criteria be severe but plausible. which may trigger the For each scenario, the implementation of the impact on solvency, capital recovery plan. and liquidity should be assessed, as well as the impact on policyholders.

Recovery options Governance 5 This section summarises 4 This section includes clear key information on recovery definitions and assignments of options, the time required responsibilities; a description of to implement each recovery the processes for monitoring, option and the risks associated escalating and activating the with their implementation. recovery plan should also be Possible interdependencies of included. recovery options, as well as the effects of the combined recovery options should also be outlined. Source: KPMG 8 Recovery planning for (re)insurers 3. KPMG – Your experienced partner 1 Recovery planning expertise

KPMG’s experienced teams across member firms have a strong understanding of recovery planning and resolution by supporting a broad range of financial services entities, including banks and insurance firms, in the development of their recovery plans, playbooks, dry runs, and in providing responses to the supervisory and resolution authorities. Recovery planning for (re)insurers 9

KPMG can assist (re)insurance undertakings when developing a recovery plan as follows:

1. We can review your recovery plans to ensure 2 3 they are in line with Extensive experience Best practice across Europe regulatory guidance and industry best practice. in the production of recovery playbooks and 2. We can help you prepare dry-runs your recovery plan based on regulatory guidance, KPMG member firms have been By leveraging the insights of the involved in the preparation of recovery KPMG ECB Office and KPMG’s global feedback and expectations. playbooks and in performing dry-runs network, member firms are able to for several European and non-European share expertise and best practice from 3. We can facilitate and Systemically Important Financial working with financial services firms. chair workshops aimed at Institutions (SIFI) and Less Significant identifying, challenging and Institutions (LSI), leveraging multi- selecting recovery options disciplinary capabilities. Our experience and stress scenarios. from assisting insurers and credit institutions is that recovery playbooks are necessary for more complex organisations with extensive Recovery and Resolution Plans to enable appropriate decisions to be executed in a timely manner during crisis situations. 10 Recovery planning for (re)insurers Notes Recovery planning for (re)insurers 11 Contact us

Brian Morrissey John O’Donnell Noel Garvey Head of Actuarial Director of Regulatory Managing Director Advisory Services Advisory Services Actuarial Advisory Services t. +353 1 410 1220 t. +353 1 700 4251 t. +353 1 700 4122 e. brian.morrissey@.ie e. [email protected] e. [email protected]

Brendan McCarthy Leticia Cashin Director Associate Director of Actuarial Advisory Services Regulatory Advisory Services t. +353 1 410 1186 t. +353 1 700 4447 e. [email protected] e. [email protected]

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