The BoE also adds that enhanced resolution requirements may be imposed not only on the two UK insurers designated as globally systemically important – Prudential and Aviva – but also on other institutions considered domestically significant. This comes after the Financial Stability Board (FSB) published a consultation paper on August 23 on extending the key attributes of the resolution regime for too-big-to-fail banks to the insurance sector.
The Basel-based coordinating body says traditional tools, such as run-off and portfolio transfer, are not always appropriate to resolve an insurer without causing disruption to the financial system and the economy, and calls for authorities to be given enhanced powers.
The introduction of a bail-in tool in the context of resolution played a major part in the regulatory response to the financial crisis, as policy-makers said bondholders should share the burden of resolving systemically important banks before any taxpayers' money was used.
The Prudential Regulation Authority, part of the BoE, has been considering a special resolution regime for insurers for some months. In the consultation paper, the FSB recommends that resolution authorities should have the power to restructure or limit liabilities, including insurance and reinsurance liabilities, and allocate losses to creditors and policyholders, in a way that is consistent with the statutory creditor hierarchy. These might include reductions to benefits and guarantees, suspension or termination of contract options, and reductions on the value of inwards reinsurance contracts.
Legal experts admit the proposals could have some implications for insurers' business models. "A broader implication for insurers' business models and pricing may arise from the FSB's proposed guidance on the restructuring of liabilities in a resolution", says Rob Curtis, global regulatory leader for insurance, at financial services firm KPMG in London.
There may also be some negative effects on insurers' ability to raise capital and transact with counterparties, but the problems in this instance are different from those suffered by banks.
In addition to calling for the introduction of bail-in tools, the FSB's consultation also sets out heightened requirements, including the requirement to carry out resolvability assessments and put in place recovery and resolution plans.
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