Central Bank of Ireland Feedback on Recovery Plans

These requirements apply to insurers, reinsurers and captives (collectively (re)insurers), including branches of third-country insurance undertakings authorised by the Central Bank under the Solvency II Regulations.

Following submission of the first set of recovery plans by High and Medium-High Impact firms, the Central Bank carried out a thematic review and the main observations were communicated to firms focusing on four key elements of the plan:

• Governance;
• Scenario Analysis;
• Recovery Options; and
• Recovery Indicators.

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What is recovery planning?

Recovery planning is a risk management tool that is intended to help prevent companies from having to resort to implementing resolution plans. It is part of the system of governance under the Solvency II Regulations and is closely interlinked with the Risk Appetite Statement and Own Risk and Solvency Assessment (ORSA).

The recovery plan’s primary purpose is to ensure that there is a credible and feasible recovery plan in place which is capable of being implemented in a crisis to restore the insurer’s financial position. Its purpose is not to assess the likelihood of the plan being needed.

Observations

The Central Bank noted that there was variance in the quality of the recovery plans submitted and stressed that it expects these will develop and mature in future iterations.

Many plans did not demonstrate the level of formality and urgency expected in an escalation process for an insurer in crisis; escalation paths and required actions were not sufficiently prescribed and the Central Bank noted a concerning lack of timeliness in communicating to key stakeholders, including to the Central Bank.

Further, future iterations of the recovery plan should include details on what would prompt an ad-hoc update of the plan.

While the scenarios selected were sufficiently tailored to the specific insurer in many cases the stresses were not sufficiently severe to cause failure in the absence of recovery actions and the timeframe was not sufficiently described. Additionally, the section on Overall Recovery Capacity[1] requires further development.

There was a wide range of recovery options selected across the recovery plans reviewed. However, there was a heavy reliance on group support, with limited consideration of alternatives if group support was not forthcoming. The Central Bank expressed concerns that many plans did not include a description of how recovery options would be operationalised and how the continuity of operations would be ensured when implementing a recovery option.

Further work is required to ensure there is a robust recovery indicator framework capable of alerting the firm in a timely manner. Firms are expected to evolve the indicator frameworks to better reflect specific vulnerabilities, and to be more explicit on the basis for the calibration of thresholds including an explanation of any underlying assumptions. Consideration should be given to incorporating relevant lead indicators in recovery plans going forward.

A minority of undertakings did not include any liquidity indicator as required by the Regulations. The Regulations also require that the framework of indicators should include, if relevant, the point at which the insurer would consider solvent run-off as the most appropriate recovery option; however, some plans did not reference it at all even when closure to new business was identified as being a potential recovery option

What next?

Now is the time for mature reflection and consideration of what improvements need to be made for future iterations of the recovery plan. The logical first step will be to complete a gap analysis comparing the submitted recovery plan to the Central Bank feedback and the guidance, this may result in some firms making potentially significant revisions to their recovery plans.

In advance of the next submission to the Central Bank, consideration should be given as to whether the recovery plan should be subject to Internal Audit or external review, taking into account the undertaking’s nature, scale and complexity.

How can we help?

Grant Thornton recognises that implementing the feedback may prove to be onerous and time consuming for (re)insurers. With an experienced Insurance Regulatory team, including ex-CBI insurance regulators, we understand the practical operational aspects and can assist firms in the interpretation of regulatory requirements, guidance and feedback.

[1] The extent to which an insurer could restore its capital and liquidity in exceptional but plausible crisis situations by implementing recovery options