The United Kingdom is taking decisive steps towards establishing a resolution framework designed to effectively address the potential failure of major insurance companies.
The UK boasts the world’s fourth-largest insurance sector, making a substantial annual contribution of £29.1 billion to the nation’s economy. While the industry operates under robust oversight by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), unanticipated financial turmoil can lead to insurer collapses, impacting policyholders and the broader economy.
The current approach involves the PRA overseeing a distressed insurer’s recovery plan, potentially suspending new business activities, and winding down operations. The UK government’s IRR aims to address limitations in current insolvency procedures, offering tools to navigate complex insurer failures, particularly in scenarios involving major firms or specialized coverage providers.
The Bank of England is poised to be the dedicated Resolution Authority, leveraging its expertise in resolution frameworks.This decision comes in the wake of a swift and successful intervention that salvaged Silicon Valley Bank’s UK division in March, a move that underscored the urgency of such a mechanism.
According to the outcome of the government consultation (which ran from January 2023 to April 2023), the proposed regime encompasses UK-authorized insurers, with exclusions for smaller insurers and friendly societies. Resolution objectives prioritize system stability, public confidence, fund protection, policyholder welfare, and adherence to human rights.
The IRR’s deployment will hinge on stringent conditions, evaluated by regulatory authorities in consultation with stakeholders such as the PRA, FCA, and HM Treasury.