The Prudential Regulation Authority (PRA) has asked firms to map sources of interconnectedness within their groups and assess the impact of these in a major stress event, according to experts familiar with supervisory discussions.

 

Recovery and resolution plans (RRP) are a key component of the enhanced regulatory regime developed for systemically important financial institutions in the aftermath of the financial crisis. They are intended to ensure no firm is too big to be allowed to fail.

 

Before now, only global systemically important insurers (G-Siis) have been required to work on RRPs, under an initiative led by the Financial Stability Board (FSB). But large and complex domestic insurance companies look to be next in line.

 

In January, the PRA consulted on changes to its rulebook that would require insurers to undergo a resolvability assessment and take action to reduce any significant barriers to possible resolution. The regulator is yet to publish an updated version of the rulebook, but even before doing so is asking complex firms to address areas of their business that pose more serious concerns.

 

A recovery plan is a menu of extraordinary measures to restore solvency ratios if they fall below a predetermined threshold. A resolution plan is implemented by supervisors after a firm has been deemed beyond recovery. It allows for a rapid and orderly resolution.

 

Supervisors are expected, in future, to require some insurers to make changes to their business structure in response to RRPs. These might include the ring-fencing of risky activities, measures to mitigate sources of contagion and the removal of barriers to resolvability. But there is little clarity at this stage on the fine details of regulators' plans.

 

The FSB is yet to publish a document finalising the key attributes for insurance resolution, which will be an adjusted version of the standards applied in a parallel initiative to global systemically important banks. When published, this document will spell out the circumstances in which the terms of insurers' contracts could be changed and counterparties, such as creditors or reinsurers, bailed in.

 

The attributes will inform the development of RRPs by G-Siis such as Aviva and Prudential, which must be completed before the end of the year. The attributes are also expected to form the basis for national authorities to impose recovery and resolution requirements on domestic insurers.

 

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