close
Share with your friends

The recent publication of the CBI Regulations for Pre-emptive Recovery Planning for (Re)insurers in April 2021 require (Re) insurers to establish and maintain plans for recovery which set out actions that could be taken to support business continuity in times of financial instability. In this article Patrick Farrell and Claire Heeley of our Risk Consulting practice provide an overview of the regulations, together with considerations and insights gleaned from supporting clients with recovery planning in the banking sector.

Background

Since the 2008 financial crisis, there has been significant focus on recovery and resolution. While the banking sector was of initial regulatory focus, the Central Bank of Ireland (‘CBI’) has now turned its attention to the Insurance sector which, given recent failures, is not immune to crisis.

As a consequence, in June 2020 the CBI issued a Consultation Paper (‘CP131’) “Regulations for pre-emptive recovery planning for (re)insurers” (“the Regulations”). The consultation period ended in October 2020 with the final regulations being published in April 2021. The regulations require (Re)Insurers to establish and maintain plans for recovery which set out actions that could be taken to support business continuity in times of financial instability.

Under the Regulations, all insurers are required to provide a copy of their latest pre-emptive Recovery Plan to the CBI where requested. The Regulations requires that insurers prepare a Recovery Plan by 31 March 2022, or where newly authorised, within 12 months of the date of authorisation. Therefore, pre-empting this request and advanced planning is prudent particularly in the current climate where the effects of COVID-19 continue to significantly impact the market.

Scope & objective

The Regulations apply to all insurance and reinsurance undertakings subject to authorisation by the CBI. The Regulations apply to all (Re)Insurers individually, and while some reliance can be placed on a group Recovery Plan (where relevant), exclusive reliance on this approach is not permitted. We have noted below in Figure 1 the minimum content requirements for a Recovery Plan, as set out in the Regulations.

The key objective of pre-emptive Recovery Planning is to promote awareness and prepare organisations in advance for a number of adverse situations. The key activities in the Recovery Planning process include the development of (i) Recovery Indicators; (ii); Recovery Options; and the performance of (iii) Scenario Analysis to test the appropriateness and effectiveness of the Recovery Options.

The implementation of an effective Recovery Plan will serve to facilitate policyholder protection and financial stability. This approach will enable (Re)Insurers to protect the organisation against failure, while simultaneously reducing the impact failures have on

Figure 1: Minimum Content Requirements for a Recovery Plan

Figure 1: Minimum Content Requirements for a Recovery Plan

Expectations & requirements

The CBI have set out expectations and minimum content requirements to be considered and incorporated into the Recovery Planning process. At a high level these are as follows:

Summary

The Recovery Plan should contain a summary section, outlining at a high level the key elements of the process. This section should summarise the insurer’s conclusion on its overall recovery capacity which should then be described in further detail in the ‘Scenario Analysis’ section of the Recovery Plan.

Approval of summary plan

This section of the Recovery Plan should confirm the date that the plan was approved by the Board (and each version thereof). Frequency of review and approval of Recovery Plans is contingent on an insurer's PRISM rating. For example, a Recovery Plan must be reviewed and (where required) updated every 12 months for insurers with High or Medium- High PRISM ratings.

Strategic analysis

The purpose of this section of the Recovery Plan is to highlight the organisation's core business lines, key services, and critical functions and their respective vulnerabilities. It should therefore include information relating to the Re(lnsurer)'s business strategy, operating model, risk profile; and organisational structure. A comprehensive strategic analysis will enable the Re(lnsurer) to identify key risk areas and impediments to recovery' in the event of a severe stress event.

Recovery options

Recovery Options ('ROs') should be articulated in the Recovery Plan, to facilitate the identification and assessment of a range of actions that the Re(Insurer) may take In order to restore its financial position or maintain its on-going viability In the event of a severe stress event In identifying ROS, an assessment IS required of potential scenarios which may tngger severe stress to the organisation, Including an impact, likelihood and timeliness assessment ROS should include solvency run-off where the insurer closes to new business or an explanation as to why solvent run-off would not be a reasonable RO under any circumstance. 

Communication Plan

The Recovery Plan should set out a clear communication and disclosure plan to be enacted during times of stress and should serve to anticipate potential communication requirements, internally and externally. The communication plan should also provide coverage of effective propositions to manage negative market reaction. 

Changes since last recovery plan

This section of the Recovery Plan serves to highlight any material changes (to the insurer, the Group of which the insurer is part or the Recovery Plan itself) which may have occurred and which are relevant to the insurer's recovery capacity, or have been made to the previously approved version of the Recovery Plan.

Governance

This section of the Recovery Plan should provide information relating to the governance arrangements in place over the Recovery Planning process. It should, at a minimum, outline the roles and responsibilities of Senior Management and the Board in the context of the development, approval and implementation of the Recovery Plan and its integration into the govemance and risk management frameworks of the Re(insurer).

Recovery indicators

The Recovery Plan should outline the Re(Insurer)'s process for monitoring key risk development and progression to support the timely implementation of the Recovery Options in times of severe stress. This section shall Include a framework of Recovery Indicators ('RI's'), each with defined limits and thresholds that will prompt the insurer to take specific action Insurers should consider RI's of both a quantitative and qualitative nature. 

Scenario Analysis

The Scenario Analysis section of the Recovery Plan outlines the testing performed over the effectiveness of the ROS and the adequacy of RI's under a range of scenarios of financial or operational stress. The scenarios applied should move down the risk continuum, beyond ORSA scenarios, which are severe yet plausible to scenarios which are exceptional but plausible. 

Information on Preparatory Measures

Preparatory measures should be incorporated the Recovery Plan to support the organisation's Recovery Plan. These measures include any steps necessary to implement the Recovery Plan or improve its effectiveness. A timeline of these measures should be included here. Such preparatory measures should include any measures necessary to overcome impediments to the effective Implementation of Recovery Options Identified in the pre-emptive Recovery Plan. 

Lessons learnt & regulator feedback from the banking sector

As noted previously, Recovery Planning in the Banking Sector is significantly more mature than the Insurance industry. In this context, outlined below are lessons learnt and common pitfalls identified by both the Financial Institutions and Regulatory Authorities from Recovery Planning activities and practices.

Governance & escalation

  • Overly complex govemance structures for updating, maintaining and invoking the Recovery Plan.
  • Lack of clear escalation routes in the event of Early Warning Indicators and Risk Indicator breaches.
  • Lack of detail on what steps should be taken in very short term (24 hours) and more medium term actions.
  • Lack of clear roles and responsibilities for prepanng, updating and implementing the Recovery Plan.
  • Poor availability and quality of data to assess Recovery Options and impact on Recovery Indicators in times of stress
  • Lack of robust testing of Recovery Plan — govemance and procedures (incl data provision).
  • Lack of sufficient information on how Group and Subsidiary co-ordination and consistency is ensured.

Strategic analysis

  • Lack of detail supporting determination of business lines as core business lines. 
  • Lack of clear mapping of core business lines and functions to legal entities. 
  • Lack of Information or consideration of interconnectedness and dependency of different functions on intra group or extemal services (to support assessment of credibility and viability of Recovery Options). 

Recovery options

  • Lack of detail regarding Valuation Methodology and assumptions and other assumptions regarding impact of Recovery Options ('RO') to demonstrate realistic and plausible. 
  • Insufficient suite of RO's
  • Lack of completeness and quality of information to demonstrate impact and feasibility of ROS (i.e. quantification of impact on solvency, liquidity, profitability etc, consideration of other market participants etc). 

Communication Plan

  • Lack of detail as to how in a crisis situation all stakeholders (local, Group, Regulator) are provided with necessary information in a timely manner to assess the situation. 

Recovery indicators

  • Risk Indicators (Rls') not appropriately calibrated relative to Early Warning Indicators and Regulatory Minima to allow sufficient time to implement Recovery Options. 
  • Lack of a sufficient or appropriate suite of RI's. 
  • Lack of alignment of RIS within Contingency Plan / Business Continuity Plan Indicators or how incorporated In Management Information ('Ml') system. 

Scenario analysis

  • Information for impact and feasibility assessment of ROS in scenarios is not sufficiently granular. 
  • Scenarios not fully developed or calibrated (i.e. plausible and sufficiently severe). 
  • Suite of Scenarios not sufficient or appropriate (e.g. lack of an appropriate combination of an idiosyncratic event and a market- wide stress). 
  • Implementation timeframes, impediments and impacts are not assessed or adapted to the specific scenarios or use of similar options by other institutions. 

Information on Preparatory Measures

  • Lack or limited number of appropriate suite of preparatory measures. 
  • Insufficient information as to how impediments to stated ROS are removed / resolved. 
  • Insufficient consideration of lead time to implement identified ROS. 

Key activities underpinning an effective Recovery Plan

Recovery Indicators (‘RIs’) identify the point in time at which management considers activating the Recovery Plan. RI’s facilitate the identification of key risks and related drivers at the planning stage. In addition, they provide an ability to assess the viability of each Recovery Option.

Indicators should be adapted to the risk profile, business model and strategy of an organisation. The indicators should be aligned to the firms’ governance (i.e. follow current escalation paths) and risk management framework and include, at a minimum, Solvency and Liquidity Indicators. RI’s should include both quantitative and qualitative metrics and should be regularly monitored.

Figure 2: Risk Continuum

Figure 2: Risk Continuum

How Recovery Indicators work in theory

The Risk Continuum outlined in Figure 2 above shows that as the impact of a stress scenario mounts:

  1. The Risk Appetite Statement is breached and then Recovery Plan Early Warning Indicators (‘EWIs’) start flagging signs of oncoming crisis;
  2. If RP EWI’s have been triggered, they should be showing that key limits in Risk Appetite Statement of the firm are likely to be breached; and,
  3. This should trigger crisis governance escalation; and Recovery Options should be considered whilst the crisis is in the early stages.

RIs need to provide enough notice to take corrective action and should, for the most part, be forward looking. Calibration of RIs should be aligned to the firms existing Risk Appetite Statement and reportingframework. Ideally, triggers should be linked to the time taken to implement Recovery Options and allow sufficient time for Recovery Options to be effectively implemented.

The same RI could have different indicator thresholds, for example, higher RI thresholds escalate to a more senior committee. The organisation should recalibrate RIs when necessary and at least annually. RIs pertinent to all material subsidiaries should be monitored and calibrated with the recovery framework.

Recovery options

Key activities required to build an effective Recovery Plan

The Regulator will expect firms to identify a comprehensive list of options that can be implemented in various severe scenarios. The range of possible measures for Recovery Options could include:

  1. Actions to strengthen the capital e.g. capital injections from Group; issuing debt.
  2. Triggering of contingent capital instruments e.g. Securitisation of income streams.
  3. Commercial e.g. limits on minimum and maximum deal sizes.
  4. Changes to reinsurance programme and/or longevity risk transfer.
  5. Changes to the investment strategy and hedging programme e.g. use of derivatives.
  6. Options to enter into new markets resulting in changes to business mix and sales volumes.
  7. Cost Savings e.g. reducing overheads, outsourcing, expense deals.
  8. Possible sales of subsidiaries (if any), sale of block/portfolio of insurance contracts, or spin-off of business units.
Scenario analysis

Scenario analysis

The purpose of the Scenario Analysis is to test if the RIs are appropriately selected and calibrated. In addition, it serves to test if the selected Recovery Options are sufficient in a wide range of scenarios (idiosyncratic, systemic, fast and slow).

Scenarios should be based on the events and factors most relevant to the firm. This analysis should include the concept of severe but plausible moving to exceptional but plausible. All scenarios should take the firm to ‘near-default’ and therefore require the Recovery Plan to be activated. When considering the design and severity, reverse stress testing is suggested as an appropriate starting point from which to design the scenarios.

Organisation should perform assessments over the impact of scenarios on RIs, Operations (Policy Administration and Claims etc) and reputation (Credit rating etc). Management should also determine which ranges of Recovery Options are appropriate to each Scenario. In addition, management should (i) assess the impact of each Scenario on the Recovery Options; (ii) assess the feasibility of each Recovery Option; and, (iii) determine any potential impediments to its implementation and the timeframe.

How KPMG can help

KPMG provide a range supports and across the Insurance and broad Financial Services sector. Examples of how our team of experts can assist include:

  • Providing support in the development of an organisation’s Recovery Plan end to end, or supporting the development of specific elements of the Recovery Plan, such as:
    • The identification of key risks, drivers and Recovery Indicators;
    • The identification of Recovery Options;
    • The performance of Scenario Analysis in the context of Recovery Planning.
  • Providing SME support to review and assess existing Recovery Plans and related processes with a view to providing recommended enhancements.
  • Supporting the integration of Recovery Planning activities into existing Governance and Risk Framework’s and practices.
  • Assisting with the development of a schedule of ‘dry runs’ and facilitation throughout these exercises, including development of ‘playbooks’, recording of key activities and lesson learnt.
One Team, One Vision infographic

Contact our team

More in Insurance