On 12 February 2013, the FSA Director of Insurance, Julian Adams, gave a speech on the lessons for insurance supervisors from the financial crisis, in which he commented on the resolution framework for insurers.
One of the key issues discussed was the challenge of reconciling the need to maintain the provision of insurance (in order to protect policyholders and avoid disruption to economic activity) with allowing insurers to fail. The FSA wants insurers to be able to exit the market in an orderly fashion which provides continuity of access to critical services. To address this challenge, the FSA needs to have confidence that no insurer is too big, too complex or too interconnected to fail.
It was noted that, although the current system whereby failing insurance firms go into run-off (possibly combined with a scheme of arrangement) has generally proven adequate for dealing with general insurance companies, the FSA has no experience of large failures, particularly with regard to life insurance groups.
The FSA considers that continuity of cover could be at risk in the event of an insurer insolvency. Particular concerns are: (i) run-off involves a trans-generational risk for policyholders whose contracts mature later; (ii) schemes of arrangement are complex and court led processes and Part VII transfers are dependent on the existence of a third party purchaser; and (iii) the value of a firm is significantly destroyed as it descends towards insolvency, leaving less for policyholders and possibly meaning the overall net cost cannot be absorbed by the Financial Services Compensation Scheme (“FSCS”). At a domestic level, the FSA is exploring ways to improve the FSCS’s operations and to ensure insolvency arrangements allow the best chance of continuity for the most critical policies.
At an international level, the Financial Stability Board (“FSB”) has set out minimum standards that should apply to any financial institution that could be systemically significant or critical if it fails. In addition, the chair of the FSB’s group on resolving large and complex financial firms is setting up a workshop on insurance resolution. An assessment will then be made of whether a special resolution regime may be needed for insurers and, if so, what characteristics it would require.