UK Insurer Decision Regime – HMT response to session revealed

On 2 August 2023 HM Treasury revealed the response to its January 2023 session on a brand new Insurer Decision Regime (IRR).

In its session HM Treasury set out its proposal for legislative necessities that may give regulators extra instruments and powers to handle the failure of (re)insurers in an orderly method (to “resolve” an entity) the place such a failure would have a wider influence on the monetary system and policyholders. Importantly, the IRR would sit on high of present company and (re)insurer particular insolvency preparations which have been lately up to date as a part of the Monetary Providers and Markets Act 2023. See our earlier publish on the session right here.

The session response addresses lots of the factors raised by the business and commits to offer additional steerage on the factors that stay unaddressed.

As anticipated, responses to the session have been largely supportive of the proposals, and subsequently HM Treasury plans to legislate “when parliamentary time permits”. HM Treasury recognises {that a} lead-in time might be required for corporations to implement any new necessities and acknowledges that almost all of respondents instructed not less than a 12-month interval.

Nonetheless, various the proposals within the session required additional clarification or additional consideration in gentle of the specificities of the (re)insurance coverage sector, specifically:

  1. how the IRR decision situations and the write-down energy beneath part 377 FSMA work together;
  2. whether or not contractual recognition of bail-in can be required;
  3. how compensation in respect of the No Creditor Worse Off (NCWO) safeguard would work in apply; and
  4. whether or not there can be any duplication with present decision planning necessities beneath the present UK regulatory regime.

The desk beneath offers a high-level overview of HM Treasury’s responses to a number of the key areas of uncertainty.

Space of consideration HM Treasury’s response
Scope of IRR
  • UK branches of overseas (re)insurers – in scope – however no decision planning necessities might be required
  • Holding firms – in scope – however the focus will stay on the regulated entity
  • Area of interest (re)insurers – in scope – the place there are monetary stability dangers however decision planning necessities are to use proportionately to their smaller dimension
  • Mutuals – in scope – however they’re unlikely to set off decision subsequently no decision planning necessities ought to apply
  • Lloyd’s – out of scope – on account of its authorized type and relevant guidelines which ought to present sufficient safeguards in case of monetary misery
  • Gibraltar (re)insurers with UK branches or that in any other case present providers within the UK – in scope
Course of
  • Decision set off – this isn’t tied to the Solvency II ladder of intervention and the PRA ought to as a substitute have flexibility in figuring out ‘failing or prone to fail’ – extra steerage is to comply with as soon as the IRR has been carried out
  • Overlap between the IRR and the FSMA write-down energy – the Authorities has clarified that every set of necessities ought to in precept apply to several types of (re)insurers:
    • the IRR would solely apply to systemic (re)insurers; whereas
    • the FSMA write-down energy is prone to apply to help mid-sized (re)insurers on a short lived foundation to facilitate continuity of canopy. The Authorities intends to amend part 377H(2) FSMA so as to stop overlap between the regimes
Position of FSCS
  • FSCS high up – FSCS protected policyholders might be eligible to obtain top-up funds following a bail-in as much as the conventional limits
  • Alignment with write-down – the top-up and associated mechanism might be aligned to these within the FSMA write-down energy
  • Contractual recognition necessities – contractual recognition of bail-in powers and stays might be required in “related” contracts ruled by non-UK legislation. This requirement would require repapering of present contracts. The contractual recognition of bail-in powers requirement appears like it’ll apply extra broadly whereas the contractual recognition of stays requirement can be restricted to monetary contracts
  • Secured collectors – can be excluded from a bail-in the place they maintain a set cost or a monetary collateral association – floating cost holders can be written down
  • Shareholders to soak up losses earlier than collectors – the statutory hierarchy might be set out in laws and use of bail-in powers will comply with this
  • Pay-as-paid – pay-as-paid clauses to be overridden
  • Statutory ideas – pre-resolution valuation ideas might be devised together with detailed steerage
  • Definitive point-in-time – following the pre-resolution valuation, subsequent unbiased valuations would require a set point-in-time to find out NCWO compensation
  • Decision Authority planning engagement – systemically important UK-headed (re)insurers might be required to help the Decision Authority decision planning however on a proportionate foundation taking into consideration present planning which will have been undertaken so far
  • Synergies – PRA and Decision Authority planning work to be rigorously thought-about to establish synergies with additional steerage to be offered for these corporations which are required to provide restoration plans
Ancillary powers
  • Give up and switching – give up and switching rights could also be briefly restricted by the Decision Authority
  • Current courtroom accredited schemes – could also be amended by the Decision Authority beneath a brand new legislative energy
Non-public Switch
  • CMA and PRA – would wish to think about the competitors and public curiosity implications of a non-public switch
Regulatory Guidelines
  • Amendments to guidelines – could also be made the place wanted to help decision which might in any other case breach regular regulatory guidelines

It needs to be famous that the IRR is separate from however related in sure respects to the EU’s proposal for an Insurance coverage Restoration and Decision Directive.


Key contacts

Geoffrey Maddock

Grant Murtagh

Kelesi Blundell

Alison Matthews

James Bourne

Ioannis Asimakopoulos

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