ICP 12 Exit from the Market and Resolution

Legislation provides requirements for:
  • the voluntary exit of insurers from the market; and
  • the resolution of insurers that are no longer viable or are likely to be no longer viable, and have no reasonable prospect of returning to viability.


Voluntary exit from the market


12.1

Legislation provides a framework for voluntary exit from the market that protects the interests of policyholders.

 


12.1.1    

Voluntary exit from the market is initiated by the insurer.

12.1.2    
The supervisor should require the insurer which voluntarily exits from the market to make appropriate arrangements for the voluntary exit (eg, run-off or portfolio transfer), including ensuring adequate human and financial resources to fulfil all its insurance obligations.

12.1.3    
The supervisor should require the insurer which voluntarily exits from the market through run-off to submit a run-off programme to the supervisor. The programme should include at least the following information:
  • expected timeframe;
  • projected financial statements;
  • human and material resources that will be available;
  • governance and risk management of the process;
  • communication with policyholders about the insurer’s exit from the market; and
  • communication to the public.

12.1.4    
Insurers that exit from the market on a voluntary basis should continue to be subject to supervision until all insurance obligations are either discharged or transferred to succeeding insurers. Legislation should provide for appropriate requirements for these exiting insurers.


Objectives of the resolution of insurers


12.2
Legislation provides a framework for resolving insurers which:
  • protects policyholders; and
  • provides for the absorption of losses in a manner that respects the liquidation claims hierarchy.


Planning


12.3
The supervisor and/or the resolution authority requires, as necessary, insurers to evaluate prospectively their specific operations and risks in possible resolution scenarios and to put in place procedures for use during a resolution.


Cooperation and coordination


12.4
The roles and responsibilities of relevant authorities within a jurisdiction that are involved in exit of insurers from the market or their resolution are clearly defined.


12.5
The supervisor and/or resolution authority shares information, cooperates and coordinates with other relevant authorities for the exit of insurers from the market or their resolution.


Triggers


12.6
Legislation provides criteria for determining the circumstances in which the supervisor and/or resolution authority initiates resolution of an insurer.


​12.6.1    
Resolution should be initiated where an insurer is no longer viable, or is likely to be no longer viable and has no reasonable prospect of becoming so, even if the entity is solvent in light of financial reporting standards. Criteria that determine or help determine when the supervisor and/or resolution authority initiates resolution should be considered in light of the insurer and the circumstances of its resolution. Criteria for determining whether resolution processes should be initiated may include:
  • the insurance legal entity is in breach of the minimum capital requirement (MCR) and there is no reasonable prospect of restoring compliance with MCR;
  • the consolidated own funds of the insurance group are lower than the sum of the proportional shares of the MCRs, or minimum capital requirements of the regulated legal entities belonging to the insurance group (eg due to double-gearing);
  • the insurer is in breach of other material prudential requirements (such as a requirement on assets backing technical provisions) and there is no reasonable prospect of compliance being restored;
  • there is a strong likelihood that policyholders and/or other creditors will not receive payments as they fall due;
  • intra-group transactions impede or are likely to impede the ability of the insurer to meet policyholder and/or creditor obligations as they fall due; or
  • measures attempting the recovery of the insurer have failed, or there is a strong likelihood that such proposed measures will: i) not be sufficient to return the insurer to viability; or ii) cannot be implemented in a reasonable timeframe.

Powers


12.7
Legislation provides an appropriate range of powers to resolve insurers effectively. These powers are exercised proportionately and with appropriate flexibility.


12.7.1    
Powers to resolve insurers should be exercised in a proportionate manner that resolves the insurer most effectively in light of the circumstances and objectives of resolution. Some powers may not be needed for all insurers but only for insurers that are, for example, of systemic importance in the jurisdiction. Some powers may only affect the insurer, while others may impact contractual rights of third parties (such as a suspension of policyholders’ rights or restructuring of policies).

12.7.2    
Some resolution powers are exercised with the aim to stabilise or restructure an insurer and avoid liquidation. Liquidation can be used in conjunction with other resolution powers. Creditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the insurer under the applicable insolvency regime (NCWOL principle).

​12.7.3    
If a court order is required for the resolution authority to exercise resolution powers, the time required for court proceedings should be taken into consideration for the effective implementation of resolution actions.

​12.7.4     
Powers to resolve insurers that may be exercised, subject to adequate safeguards, should include the following. This list is not exhaustive and the resolution authority should have discretion to apply other available powers. The order of presentation of the powers is not an indication of the sequence in which these powers could be exercised.
  • prohibit the payment of dividends to shareholders;
  • prohibit the payment of variable remuneration to, and allow the recovery of monies from, Members of the Board, Senior Management, Key Persons in Control Functions and major risk taking staff, including claw-back of variable remuneration;
  • prohibit the transfer of the insurer’s assets without supervisory approval;
  • retain, remove or replace the Board, Senior Management and Key Persons in Control Functions;
  • take control of and manage the insurer, or appoint an administrator or manager to do so;
  • withdraw the license to write new business and put all or part of the insurance business contracts into run-off;
  • sell or transfer the shares of the insurer to a third party;
  • ​restructure, limit or write down liabilities (including insurance liabilities), and allocate losses to creditors and policyholders, where applicable and in a manner consistent with the liquidation claims hierarchy and jurisdiction’s legal framework;
  • override rights of shareholders of the insurer in resolution, including requirements for approval by shareholders of particular transactions, in order to permit a merger, acquisition, sale of substantial business operations, recapitalisation or other measures to restructure and dispose of the insurer’s business or its liabilities and assets;
  • terminate, continue or transfer certain types of contracts, including insurance contracts;
  • transfer or sell the whole or part of the assets and liabilities of the insurer to a solvent insurer or third party;
  • transfer any reinsurance associated with transferred insurance policies without the consent of the reinsurer;
  • temporarily restrict or suspend the policyholders’ rights of withdrawing their insurance contracts;
  • stay rights of the reinsurers of the ceding insurer in resolution to terminate or not reinstate coverage relating to periods after the commencement of resolution;
  • impose a temporary suspension of payments to unsecured creditors and a stay on creditor actions to attach assets or otherwise collect money or property from the insurer; and
  • initiate the liquidation of the whole or part of the insurer.

​12.7.5     
The choice and application of the powers set out above should take into account whether an insurer’s disorderly failure would potentially cause significant disruption to the financial system and real economy, the types of business the insurer is engaged in, and the nature of its assets and liabilities.

​12.7.6     
Where the resolution authority takes action which leads to another person taking control of an insurer with a view to restoring, restructuring or running off the business, the resolution authority should continue to be responsible for the orderly resolution of the insurer. In particular, the resolution authority should continue to exercise functions which ensure that the objectives of resolution are met, notwithstanding any additional responsibilities which the person appointed may have to the insurer or to the courts.

​12.7.7     
Resolution powers should be exercised in a manner that does not discriminate between creditors on the basis of their nationality, the location of their claim, or the jurisdiction where it is payable.

​12.7.8    
Mechanisms should be in place to (i) enable continuity of cover for policyholders where this is needed and (ii) ensure timely payment of claims to policyholders of the insurer in resolution, with the aim to minimise disruption to the timely provision of benefits to policyholders. A PPS can be one of the mechanisms that can help ensure timely payments to policyholders and minimise disruption.

​12.7.9    
When requiring contracts to be transferred to another insurer, the resolution authority should satisfy itself that the interests of the policyholders of the transferor and of the transferee are safeguarded. In some cases this may be achieved through varying, reducing or restructuring the transferred liabilities.

​12.7.10     
  Portfolio transfers and transfers of other types of contracts of the insurer in resolution should not require the consent of each policyholder or party to the contract.

12.7.11    
Consistent with the liquidation claims hierarchy, insurance liabilities should be written down only after equity and all liabilities that rank lower than insurance liabilities have absorbed losses, and only if the resolution authority is satisfied that policyholders are no worse off than in liquidation after compensation, where necessary.

​12.7.12    
Information on the period during which policyholders are prohibited from withdrawing from their insurance contracts should be available to policyholders in a transparent manner for the purposes of policyholder protection.

​12.7.13     
The exercise of stay powers, their scope of application and the duration of the stays should be designed to address the specific situation of the insurer in resolution. For example, the duration of the stay could depend on the type of the insurance or financial contract.


Group and Branch Perspectives


​12.7.14    
There may be circumstances where resolution powers will need to be exercised at the level of the head of the insurance group and/or non-regulated entities. Resolution authorities should have the capacity to exercise resolution powers directly on such entities within their jurisdiction to the extent necessary and appropriate. Where resolution powers need to be exercised on entities outside of their jurisdiction or legal authority, the resolution authority should cooperate and coordinate with relevant supervisors and resolution authorities in the relevant jurisdictions, to the extent necessary and appropriate.

​12.7.15    
Unless otherwise specified by the resolution authority, resolution powers exercised on an insurance legal entity (for instance to cease writing business) should also apply to the legal entity’s branches. However, the resolution authority responsible for a branch can also exercise powers toward the branch. In either case, the resolution authorities responsible for the branch and the insurance legal entity should consult and cooperate with one another.

​12.7.16     
The resolution authority may choose which power, or which combination of powers, is applied to which entity within the group. Different types of powers may be applied to different parts of the entity’s business.

CF 12.7.a    
The powers that the supervisor and/or resolution authority may exercise, subject to adequate safeguards and proportionality, for the resolution of an IAIG include, at least, the following:
  • prohibit the payment of dividends to shareholders;
  • prohibit the payment of variable remuneration to, and allow the recovery of monies from, Members of the Boards, Senior Management, Key Persons in Control Functions and major risk taking staff, including claw-back of variable remuneration;
  • prohibit the transfer of the IAIG’s assets without supervisory approval;
  • retain, remove or replace the Members of the Boards, Senior Management and/or Key Persons in Control Functions;
  • take control of, and manage, the IAIG, or appoint an administrator or manager to do so;
  • withdraw the licence to write new business and put all or part of the insurance contracts into run-off;
  • sell or transfer the shares of the IAIG to a third party;
  • restructure, limit or write down liabilities (including insurance liabilities), and allocate losses to creditors and policyholders, where applicable and in a manner consistent with the liquidation claims hierarchy and jurisdiction’s legal framework;
  • override rights of shareholders of the IAIG in resolution, including requirements for approval by shareholders of particular transactions, in order to permit a merger, acquisition, sale of substantial business operations, recapitalisation, or other measures to restructure and dispose of the IAIG’s business or its liabilities and assets;
  • terminate, continue or transfer certain types of contracts, including insurance contracts;
  • transfer or sell the whole or part of the assets and liabilities of the IAIG to a solvent insurer or third party;
  • transfer any reinsurance associated with transferred insurance policies without the consent of the reinsurer;
  • ​temporarily restrict or suspend the policyholders’ rights of withdrawing their insurance contracts;
  • stay rights of the reinsurers of the ceding insurer in resolution to terminate, or not reinstate, coverage relating to periods after the commencement of resolution;
  • ​impose a temporary suspension of payments to unsecured creditors and a stay on creditor actions to attach assets or otherwise collect money or property from the IAIG;
  • ​establish a bridge institution;
  • ​take steps to provide continuity of essential services and functions including:
    • ​requiring other legal entities within the IAIG (including non-regulated entities) to continue to provide these essential services to the entity in resolution, any successor, or an acquiring entity;
    • ​ensuring that the residual entity in resolution can temporarily provide such services to a successor or an acquiring entity; or
    • ​procuring necessary services from unaffiliated third parties;
  • ​temporarily stay early termination rights associated with derivatives and securities financing transactions; and
  • ​initiate the liquidation of the whole or part of the IAIG.​

CF 12.7.a.1    
In some jurisdictions, PPSs can be utilised as a bridge institution to which insurance contracts of the IAIG are transferred.

​CF 12.7.a.2    
Essential services mentioned under CF12.7a include, in particular, IT.


Liquidation


12.8
Legislation provides that the supervisor is involved in the initiation of the liquidation of an insurance legal entity (or a branch of a foreign insurer in its jurisdiction).


12.8.1    
Legislation should define the involvement of the supervisor in a liquidation, which promotes the protection of policyholders. The supervisor should be authorised to initiate, or should be involved in the liquidation of an insurance legal entity, or a branch of a foreign insurer in its jurisdiction.

12.8.2    
In many jurisdictions, all resolution actions, including liquidation, may only be initiated by the supervisor and/or resolution authority. However, in some jurisdictions, the liquidation process can be initiated by another person (such as a creditor of the insurance legal entity, the insurance legal entity itself, or the court). If legislation permits another person to initiate liquidation, it should: i) require prior approval of the supervisor, or ii) at a minimum, require prior coordination with the supervisor. If legislation permits another person to initiate liquidation without such prior approval or coordination, it should provide that the supervisor may challenge the person’s action.

12.9
Legislation provides a high legal priority to policyholders’ claims within the liquidation claims hierarchy.


Safeguards


12.10
The resolution authority exercises resolution powers in a way that respects the liquidation claims hierarchy and adheres to the NCWOL principle. If the resolution authority departs from the general principle of equal treatment of creditors of the same class (pari passu), the resolution authority substantiates the reasons for such departure to all affected parties.

12.10.1    
While respecting the liquidation claims hierarchy, the resolution authority could treat certain types of creditors differently from others in the same class of creditors’ hierarchy. In such cases, the reasons for such a treatment should be transparent and clearly explained. Concerned creditors should be protected by the NCWOL principle and where they do not receive at a minimum what they would have received in a liquidation of the entity they should have a right to compensation.

​12.10.2    
For instance, different types of creditors could be:
  • two categories of policyholders ranking pari passu where one is covered by a PPS while the other is not; or
  • two categories of creditors ranking pari passu but the creditors are different in nature (eg direct policyholders versus cedants).

​12.10.3    
For instance, different treatment of a creditor could be:
  • settling contracts ranking pari passu at a different pace; or
  • reducing (writing down) contracts ranking pari passu at a different rate.

​12.10.4    
These options could be used provided this does not infringe the NCWOL principle. For instance, Figure 12.2 illustrates the insurance liabilities (ILs) of an insurance legal entity consisting of two portfolios (A and B), where the total assets amount to 120 but the ILs of each portfolio amount to 100. Assuming that these two portfolios rank pari passu, each policyholder would receive 60% of their credit in liquidation. The resolution authority could reduce the ILs of A to 80 and the ILs of B to 70 (for instance, in the event where a sound insurer or sound insurers accepted to fund part of but not the whole shortfall). However, if the resolution authority reduces the ILs of B to 40, the resolution authority will need to provide compensation to policyholders of portfolio B (in the amount of 20) in order to meet the NCWOL principle. This simplified example does not take account of potential PPSs which could pay some claims.
 
Figure 12.2
 

12.10.5     
The resolution authority could take actions which could worsen the position of some creditors, provided that said creditors receive compensation sufficient to meet the NCWOL principle. Figure 12.3 illustrates this approach – it would be beneficial to policyholders in portfolio B to have their policies transferred, but the portfolio transfer worsens the position of policyholders in portfolio A. Policyholders in portfolio A therefore should receive appropriate compensation to ensure that they are not worse off compared to a liquidation scenario prior to the portfolio transfer. This example does not take account of potential PPSs which could pay some claims.
 
Figure 12.3
 

12.11
Legislation provides whether insurance liabilities may be restructured and whether policyholders may absorb losses.


Issues specific to groups and branches


12.12
Where the insurance legal entity belongs to a group and the head of the insurance group is located in the same jurisdiction as the legal entity, mechanisms are in place through which the head of the insurance group is able to be resolved.


​12.12.1     
When an insurance legal entity is resolved, the resolution of, or the application of some resolution powers to, the head of the group may support or aid the orderly resolution of the insurance legal entity and best ensure the protection of policyholders.

     

​CF 12.12.a.1    
ICP 12 and the ComFrame material integrated in ICP 12 may be applicable, where appropriate, to the resolution of:
  • the Head of the IAIG, and any intermediate holding company within the IAIG;
  • non-regulated operational entities within the IAIG that are significant to the business of the group;
  • non-insurance financial institutions within the IAIG; and
  • branches of insurers within the IAIG.
This guidance is not intended to override any existing sectoral requirement (eg for banks).

​CF 12.12.a.2    
Resolution actions should be taken for legal entities and branches within the IAIG, that fall within the scope stipulated above, as necessary and appropriate.

12.13
The resolution authority has the authority to resolve a branch of a foreign insurer located in its jurisdiction and, in such circumstance, coordinates and cooperates with the supervisor and/or resolution authority responsible for the insurance legal entity.


​12.13.1     
The resolution authority responsible for a branch should have the ability to support a resolution carried out by the resolution authority of the insurance legal entity which owns the branch or by the resolution authority responsible for the resolution of the insurance group to which the branch belongs.

12.13.2    
The resolution process may differ in the jurisdiction of the branch and in that of the insurance legal entity, due, among other things, to different insolvency laws and creditor hierarchies.

12.13.3    
Where the resolution authority of the insurance legal entity which owns the branch or the resolution authority responsible for the resolution of the insurance group to which the branch belongs are not taking action, or are acting in a manner that does not take sufficient account of the objectives of resolution in the branch jurisdiction, the resolution authority responsible for the branch may need to take actions of its own initiative.

12.13.4    
Where the resolution authority for a branch takes resolution action of its own initiative, it should give prior notification and consult the supervisor or resolution authority of the insurance legal entity which owns the branch and/or the supervisor or resolution authority of the insurance.