The Insurance Recovery and Resolution Directive (IRRD)

The European Council and Parliament have agreed on a final compromise text for the Insurance Recovery and Resolution Directive (IRRD)¹, released in January 2024. The provisional agreement will lead to the introduction of a new harmonised regime at European level for resolving insurers and enforcing pre-emptive recovery plans. This follows on from the original IRRD proposal² submitted by the European Commission in September 2021, as part of the comprehensive review of the Solvency II framework.

A number of EU member states, including Ireland, France and Germany, have already established domestic recovery and resolution planning requirements. However, many others lack such specific legislation. While these other countries are well protected by Solvency II, insurer failures still occur and pose significant risks to financial stability and to policyholders. The IRRD addresses this gap by creating a harmonised framework for the recovery and resolution of insurance and reinsurance undertakings.

Those familiar with the Solvency II Directive³ might question if the supervisory ladder of intervention⁴ already covers this aspect, given that (re)insurers are required to produce a recovery plan within two months of breaching their Solvency Capital Requirement (SCR). However, the recovery plans mandated by the IRRD are pre-emptive and serve to reinforce the SII Directive. This allows insurers to pinpoint viable recovery options to restore their financial positions during future potential periods of severe stress. The key distinction is that these pre-emptive recovery plans are not solely required when a (re)insurer is non-compliant with their SCR, as they will now form an integral part of the (re)insurer’s regular reporting process.

In this article, we focus on the European Commission’s proposals on:

1. Pre-emptive recovery plans
2. The recovery indicator framework and recovery actions
3. Group pre-emptive recovery plans
4. Simplified obligations for pre-emptive recovery plans
5. The review and assessment of recovery plans
6. Resolution plans
7. What guidance insurers can expect from EIOPA

(Re)insurance undertakings not part of a group are required to draw up a recovery plan and regularly update it. The extent of these requirements for each (re)insurer is based on the eligibility criteria, which are described in a later section. Supervisory authorities must ensure that at least 60% of the respective market is subject to such requirements, with the market coverage level for both the life and non-life markets calculated by the supervisory authority.

If an insurer is required to produce a resolution plan, they will also be subject to pre-emptive recovery planning requirements. However, those considered low risk profile (re)insurers will not be individually subject to these requirements.

(Re)insurers are obligated to update their recovery plans every two years. However, more frequent updates may be needed if there are material changes to the legal or organisational structure, the business or financial situation, or if other significant events arise that could impact the effectiveness of the recovery plan.

The recovery plan should be structured as follows:

1. A summary of the plan’s key elements, including material changes to the most recently approved plan.
2. A description of the undertaking or group, including a summary of material changes since the previous plan.
3. The recovery indicator framework (see next section).
4. How the recovery plan has been drawn-up, how it will be updated and how it will be implemented.
5. A range of remedial actions.
6. A communication strategy.

The obligation for (re)insurers to produce a recovery plan is determined by the potential impact their failure could have on the economy. The recovery plan should be proportionate to:

• The nature of its business.
• Its shareholding structure.
• Its legal form.
• Its risk profile.
• Its size and legal status.
• Its interconnectedness to other undertakings or the financial system in general.
• The scope and complexity of its activities.

If the eligibility criteria are met, (re)insurers may qualify for simplified obligations with respect to:

• The contents and details of the plan.
• The submission date and frequency of reporting such a plan, which may be less.
• The level of information required.
• The level of detail required for the resolvability assessment.

Resolution authorities must draw up resolution plans for (re)insurance undertakings based on similar eligibility criteria to those used for recovery planning. Small and non-complex undertakings will in principle not be subject to pre-emptive recovery planning requirements, except where the resolution authority considers an undertaking to represent a particular risk at national or regional level. Group resolution authorities are responsible for drawing up group resolution plans.

Resolution authorities must ensure that at least 40% of the state’s (re)insurance market be subject to resolution planning. (Re)insurers are required to cooperate fully with the resolution authorities during the drafting of resolution plans, providing all the necessary information.

While producing the resolution plan, (re)insurers and groups will be subject to a resolvability assessment. (Re)insurers will be notified of any significant impediments to resolvability. Upon notification, (re)insurers will have four months to propose possible measures or remove the impediments identified by the resolution authority. The authority will then separately assess whether the proposed measures effectively address or remove the identified impediments.

If the resolution authorities find that the proposed measures are not effective, they will require the (re)insurer to take any of the following alternative measures:

1. Revise intra-group financing agreements, review the absence thereof or draw up service agreements.
2. Limit their maximum individual and aggregate exposures.
3. Impose specific or regular additional information requirements.
4. Divest specific assets or restructure liabilities.
5. Limit or cease specific or existing proposed activities.
6. Restrict or prevent development of new or existing business lines or sale of new or existing products.
7. Change reinsurance strategy.
8. Require changes to legal or operational structures.
9. Set up a parent insurance holding company.
10. Require a mixed-activity insurance holding company to set up a separate insurance holding company to control the undertaking.

The notification is subject to a right of appeal.

• The eligibility criteria for simplified obligations.
• Specifying methods to determine market coverage.
• A minimum list of qualitative and quantitative recovery indicators.
• The range of scenarios for credibility and feasibility assessments.
• Technical standards for the information to be included in the recovery plan, recovery actions and their implementation.
• Technical standards for procedures and a minimum set of standard templates for (re)insurers to provide resolution authorities with the information to draft resolution plans.
• Specify further details on the measures that resolution authorities can take to address impediments to resolvability and the circumstances in which they may be applied.

This will take the form of guidelines, regulatory technical standards (RTS) and implementing technical standards (ITS).

On 18 November 2022, EIOPA held a technical seminar relating to recovery and resolution planning in (re)insurance. The seminar covered a variety of topics, including the differences between the IRRD and Bank Recovery and Resolution Directive (BRRD) frameworks, a practical case study on the resolution process, and the concept of proportionality. Additionally, they discussed the establishment of resolution authorities and shared experiences from Poland, approaches to resolution planning in France, resolution funding, and issues relating to Insurance Guarantee Schemes (IGS).

EIOPA will work closely with the NCAs to develop the technical material and guidelines. In addition to this, they will establish a Committee to promote a harmonised resolution convergence, in which the heads of all the resolution authorities will be represented.