Due to the low interest rate climate, the strict Solvency II regime and the unfavorable characteristics of certain legacy insurance products, certain insurers may face increased supervision and scrutiny from their financial regulators. Will the new resolution legal regime for Dutch insurers provide relief for Dutch insurers facing solvency issues for example as a result of legacy issues in insurance portfolios?
The new Dutch Insurers Recovery and Resolution Act
On 1 January 2019, the new Dutch Insurers Recovery and Resolution Act (the "Act") came into force. The Netherlands is one of the first countries in Europe to implement a resolution regime for insurers. One of the reasons for the Netherlands to move forward on a national level was that the intervention measures available did not provide an effective framework to protect the interests of policyholders. This came interalia to light when the Dutch financial group SNS REAAL ran into problems in 2013 and the whole group (the bank and insurance company) was nationalised by the Dutch Minister of Finance.
The Act is not based on EU legislation; however, the Dutch legislator drew inspiration from the recovery and resolution framework for banks (directive 2014/59/EU BRRD1 and Directive 2017/2399 BRRD2).
Applicable to all insurers
The Act applies to all insurers (life and non-life insurers) under supervision of the Dutch Central Bank ("DNB"). This also includes Dutch branches of insurers established in non-EU countries. The Act also applies to Dutch parent holding companies and entities performing critical activities for the daily business within an insurance group. There are a few exceptions and special rules for insurers with a limited risk profile.
The Act distinguishes two phases:
• Planning phase; and
• Resolution phase.
In the planning phase, the insurers will need to draw up a preparatory crisis plan in preparation for a deteriorating financial position. This plan needs to be submitted to DNB, and is comparable to the recovery plan in the banking sector.
The purpose of the preparatory crisis plan is to make clear what recovery measures could be taken if the financial position of the insurer deteriorates. The preparatory crisis plan is drawn up during the normal course of business.
In addition, DNB will need to draft a resolution plan for every insurer or insurance group. In this resolution plan, DNB will, inter alia, describe how it intends to deal with the resolution of the insurer or insurance group, the resolution tools and powers it may use and which obstacles are hindering the resolution. The plan also describes the important characteristics of the insurer that are relevant for resolution (for example, the existence of unit-linked insurance).
If DNB takes their view that there are obstacles hindering the resolution, it can require the insurer to take measures to remove these obstacles. These measures can be far-reaching. For example, DNB can request:
• selling assets;
• limiting existing or proposed activities; and/or
• changing the legal or operational structure.
DNB is for example not required to draw up a resolution plan if the resolvability of the insurers has been sufficiently safeguarded.
DNB must decide to resolve an insurer if the following conditions are met:
1. the insurer is failing or is likely to fail (capital requirements Solvency II);
2. there is no reasonable prospect that a private solution will prevent this from happening; and
3. the resolution is in the public interest.
In this phase, the following resolution measures will be available to DNB:
• bail-in: DNB's power to write down or convert equity or debt, or restructure insurance policies;
• sale of business: sell the shares of an insurance group or troubled company within the group;
• bridge institution: temporarily transferring either the insurer's shares or (part) of its assets and liabilities to a bridge institution. DNB will use this tool if no alternative solution involving market parties can be found in the short term; and
• asset separation: this tool allows DNB to transfer assets and liabilities to an asset management vehicle. This measure can only be used in combination with one of the other measures
In addition, the Act also grants DNB supporting resolution powers. These supporting resolution powers are: (i) DNB can take over control of the insurer in resolution, (ii) DNB can appoint a special managing director to take control, (iii) DNB can change the legal form of the insurer, if necessary to apply the bail-in measure and (iv) DNB can terminate or modify the terms of an agreement to which the insurer is a party.
The Act foresees a number of safeguards to protect the interests of creditors and policyholders. For example, the Act underpins the 'no creditor worse off' principle. This means that creditors should not be worse off than they would be in normal bankruptcy proceedings of the insurer.
The Bankruptcy Act
Finally, the Act also amends the Dutch Bankruptcy Act to improve the position of policyholders in cases where DNB decides not to apply resolution measures but to apply for bankruptcy of the insurer.
This is a high level overview of the Act. Do not hesitate to contact us should you wish to get further information about the Dutch Insurers Recovery and Resolution Act.