Working together on resolvability
The new Act is inspired by the European Bank Recovery and Resolution Directive, which was implemented in 2015 following the financial crisis. In collaboration with the European Single Resolution Board (SRB) and the Dutch banks, DNB has made significant progress in promoting the resolvability of banks. The main objective of the directive is to minimise the negative repercussions of failing banks for the economy and for society and to reduce the likelihood of the government having to intervene. A similar resolution regime for insurers, with the same objective, will now be implemented at a national level.
Of course, the primary aim of supervision remains to prevent insurers from sailing into dire straits in the first place. If an insurer does run into difficulties, however, the new Act ensures that both the institution and DNB are better prepared. The new Act provides DNB with more powers to resolve insurers and the liquidator with additional instruments to protect policyholders in case the insurer fails after all.
Well begun is half done
The Act introduces two new plans to help Dutch insurers and DNB prepare for crisis situations: the crisis preparation plan and the resolution plan. All insurers must compile a crisis preparation plan, which lists the recovery measures they can take in crisis situations. DNB will review the crisis preparation plans and discuss them with the insurers.
In addition, DNB compiles resolution plans for part of the sector, describing the way in which failing insurers can be resolved in an orderly fashion and the measures needed to promote the resolvability of an institution. A resolution plan is only compiled if an insurer's failure could have serious implications for the economy, financial markets or society. While bankruptcy remains the starting point, resolution planning can be a solution for insurers that cannot go bankrupt without severe repercussions for society or the economy.
In order to determine whether this is the case, DNB will have to assess an insurer's specific situation, including its size, whether its insurance products are a source of income (e.g. pensions and life insurance) and whether its bankruptcy would have a material impact on the market or other insurers.
Policyholders: well-covered, but not fully protected
If the impact of bankruptcy is considered to be too substantial and the insurer qualifies for resolution, DNB has various resolution instruments at its disposal. For example, the insurer can be sold wholly or in parts to another party, transferring the responsibility of its insurance products to a new owner. Alternatively, the insurer's assets and liabilities can be written off and converted to new capital.
The first losses must always be borne by the insurer's shareholders and creditors. If this proves insufficient to settle the bankruptcy, part of the value of policyholders’ entitlements may also have to be written off, for example by adjusting the policy conditions, guarantees or accrued entitlements. DNB cannot prevent policyholders from incurring losses in an insurer's bankruptcy at all times. In any event, policyholders must never be worse off than in the case of bankruptcy. If DNB decides to resolve a large insurer, policyholders are likely to be better off as a collective, since the aim of resolution is to limit the material impact on the economy, financial markets and society. Resolution aims to ensure that existing insurance contracts can be continued. In that case, policyholders can be assured of coverage retention and do not have to take out new policies under other terms and conditions at new costs.
More options for liquidators
Liquidators too are provided with additional powers. In the event of bankruptcy, the liquidator may in some cases make interim payments to policyholders. This means that insurance policies that function as a direct source of income can continue to be paid during the settlement of the bankruptcy. Effective from 1 January 2019, liquidators can also transfer insurance contracts to another insurer, which means that policyholders do not have to take out a new insurance policy in the event of bankruptcy.The new Act provides for better protection of policyholders in the event of liquidation and resolution. The Act enables the sector to prepare for crisis situations and allows DNB to resolve insurers in an orderly fashion. At the same time, liquidators have been given more options to ensure continuity during liquidation.