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Adjustments to Recovery and Resolution Act on insurers adopted

Adjustments to Recovery and Resolution Act

On November 27th, the adjustment of the Dutch recovery and resolution Act for insurers has been adopted by the Senate of the Dutch Parliament.

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On November 27th, the proposed adjustment of the Dutch recovery and resolution Act for insurance companies has been adopted by the Senate of the Dutch Parliament. The new law results in adjustments, strengthening and expansion of the existing toolkit of the Dutch Central Bank (DNB) to intervene at (nearly) insolvent insurers and also calls for action of the sector. The bill not only applies to insurers, but also to Dutch insurance holding companies, mixed financial holding companies and mixed insurance holding companies.

Main goal of the new law is the protection of the interests of policyholders and limiting the social impact of insolvency of an insurance company. Core of the new law is the idea that no creditor is worse off in resolution, as compared to their position during a potential bankruptcy. The position of the policyholders is protected further by requiring that, in case losses for creditors become unavoidable, first the shareholders and other creditors have to take their loss and only if that is not sufficient, the rights of the policyholders will be affected.

Part of the law is the requirement for every insurance company to periodically submit a preparatory recovery plan to DNB. This plan provides the regulator with an overview of the measures the insurance company could take in case their solvency position deteriorates. Insurers have to question themselves if they have all the required information to draft this plan readily available and which recovery strategy has their preference.

In addition, insurers that pass the so-called 'public interest test', will be subject to resolution planning, implying that DNB will draft a resolution plan for them. The resolution plan contains amongst others various strategies for DNB to apply in case of resolution of the insurer and the limitations of each of these scenarios. The resolution plan should enable the regulator to act promptly in the case of insolvency. Therefore, if DNB is of the opinion that there are substantial impediments to the resolvability of the insurer, the insurer will be required to take measures to remove these obstacles. To prevent DNB taking the lead, larger insurers in the Netherlands should prepare themselves for resolution planning by drafting resolution strategies themselves. In our experience, performing a strategic analysis to determine the criticality of business, business units, entities and dependencies between them is a fundamental step in drafting both recovery and resolution plans.

The resolution instruments that are available for DNB are:

  • Bail-in; the ability of DNB to write down or convert equity or debt, or restructure insurance policies.
  • Sale of business; sell the shares of an insurance group or troubled entity within the group.
  • Bridge institution; temporarily transferring (part) of an insurance company to a semi public entity, giving DNB time for a sale of the business.
  • Asset separation; allows DNB to transfer assets, rights or liabilities to a semipublicly owned asset management vehicle.

In addition, the bankruptcy trustee may grant advances to policyholders on their payment from the estate of the bankrupt insurer. Currently, policyholders may also be entitled to such a payment, however policyholders often have to wait a (very) long time.

As the existing landscape of national recovery and resolution frameworks within Europe is fragmented, EIOPA has called for a minimum and harmonized approach to Recovery and Resolution framework for (re)insurers. With this Act, The Netherlands is one of the first countries in Europe to address this call. Implementation of the new Recovery and Resolution Act is expected in January 2019.

If you would like to know more about the Act or about how our experience with recovery and resolution planning in both the insurance and banking sector can benefit you, please contact Helen Stijnen, Veronique de Boer-Achmad or Bianca Meijer.

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