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What do CBI regulations on recovery and resolution mean for insurers?

05 May, 2021

In 2020, the Central Bank of Ireland (CBI) set out its plans for a domestic recovery and resolution regime. This was in line with its strategic objective to promote stability in the financial system. The content of consultation Paper 131 (CP131) flagged the CBI intention to heavily leverage the Bank Recovery and Resolution Directive (BRRD) and to mirror the regime currently applicable to Credit Institutions and Investment Firms. Now, we look at how the newly published CBI regulations compare to CP131 and what they will mean for (re)insurance undertakings in 2021 and 2022.

Photo of the Central Bank of Ireland on the bank of the river Liffey.

The Central Bank (Supervision And Enforcement) Act 2013 (Section 48(1)) (Recovery Plan Requirements For Insurers) Regulations 2021 ('the regulations') were published on 27 April 2021 and closely follow the measures contained in CP131. CP131, which we analysed in detail in 2020, represented a long-standing ambition of the CBI to broaden its recovery and resolution framework and the publication of the regulations signal the CBIs eagerness to strengthen the (re)insurance sector, particularly when considered against the EUs plans to develop a similar regime in the near future.

Moving ahead of Europe

The lack of a comprehensive recovery and resolution framework and regulatory guidance for (re)insurers was flagged by European supervisory authorities several years ago. In 2017, EIOPA published an opinion on the harmonisation of resolution and recovery planning frameworks. This was followed in 2019 by the publication of a consultation paper called "Opinion of the 2020 review of Solvency II''. That paper included a proposal to establish a European recovery and resolution framework for the industry but to date, no firm plans for a European regime emerged. Through the new regulations and perhaps demonstrating a degree of frustration with delays, the CBI has effectively pre-empted any European measures. While that prepares Irish regulated firms for an inevitable European regime in the future, it could also result in a double implementation should the European regime differ materially.

Final regulation

The regulations faithfully reflect the CP131 draft and still requires firms to produce recovery plans which incorporate Recovery Indicators (RI), Recovery Scenarios (RS) and Recovery Options (RO). (Re)Insurance Undertakings will need to develop and monitor a suite of KRIs, to consider stress scenarios and to perform the various activities associated with managing capital, liquidity and other risk sources. Similarly, the final regulations are still heavily focussed on organisational descriptions, an area where both banks and investment firms consistently fail to meet expectations. It's important that (re)insurers dedicate a large portion of the effort to describe their organisation, their place in a larger group (including their legal and contractual rights and obligations with the group), their products and business functions, and how they interact with customers and markets.

Notable changes from consultation phase

Individual requirements in the regulations reflect over 90% of those contained in CP131 with relatively minor changes to the remaining 10%. The core departure from the CP131 provisions sees the removal of the requirement to include a Recovery Scenario where the (re)insurer is closed to new business. This means that firms need only include three Recovery Scenario types identical to BRRD: a system-wide scenario, firm-specific scenario and combined scenario with systemic and firm-specific characteristics.

Planning ahead

The creation of a recovery plan is a resource intensive and time-consuming process. As with any regulatory change project, it is essential the appropriate project governance and management procedures are in place from the beginning to ensure the necessary support is available to create a suitable recovery plan. Stakeholder input from each line of defence will be required throughout the design of the plan.

Similar regimes introduced in the Netherlands, Romania and France have seen firms face challenges in two key areas. Firstly, a reluctance to apply a sufficiently critical lens to recovery scenarios resulted in plans that didn't go far enough in terms of acknowledging the threats firms faced. Secondly, firms approached recovery planning as an "add on" to the ORSA. While there are some broad similarities, the documents that the CBI will expect are very different.

Implementation window

The Recovery Plan will be another item added to the already extensive list of approvals the Board are required to make and the regulations will create a challenging timeline for (re)insurers. Board approved recovery plans must be in place by 31 March 2022 meaning firms must act to mobilise in Q2 and Q3 2021. Firms should therefore immediately consider how best to engage Board and senior management personnel to enable them to mobilise the right team from across the firm.

Five key actions to take now

Inform and engage executive stakeholders

Recovery planning is an enterprise wide process. Informing and engaging senior leaders early will enable firms to mobilise and empower the right people.

Identify a cross-functional recovery and resolution team

Recovery planning requires a broad skill set, it's not just a risk exercise. SMEs from Finance, Actuarial, Risk, Operations and legal all have a vital role to play developing a robust recovery plan.

Review existing collateral to leverage and perform gap analyses to the regulations

Much of the material used in the ORSA is relevant for recovery planning, as are risk metrics, financial plans and organisational descriptions. Establishing the inventory of existing material can provide firms with a strong foundation to build on.

Understand the requirements already in place for banks and investment firms

Recovery planning for insurers closely mirrors the regime for banks and investment firms. Supervisors have already opined on what's good and what's bad in those sectors and understanding those expectations should be a priority for insurers.

Develop an implementation plan

Developing a robust recovery plan takes time and resources. Placing the activity on the firm's regulatory road map and developing an implementation plan will help them meet their regulatory deadlines.

We are here to help you

We know that aligning your recovery plan with your risk management framework, risk appetite, strategic plan and the ORSA will be a challenge. Our extensive experience in helping firms produce recovery plans means we have the knowledge to help you implement with confidence. Contact us today.

Contact us

Ronan Mulligan

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 7505

Trisha Gibbons

Director, PwC Ireland (Republic of)

Tel: +353 1 792 8664

Niall Naughton

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6314

Des Crofton

Senior Manager, PwC Ireland (Republic of)

Tel: +353 1 792 7235

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