Resolution tools for insurers
DNB has four tools that it can use to take a failing insurer into resolution, thereby limiting the impact on policyholders, society, the financial system and the economy.
It can use these tools to pass on an insurer’s losses to the shareholders, creditors and, where relevant, policyholders. The level of losses determines whether a contribution is required from policyholders. The use of resolution tools must not leave them any worse off than in the case of bankruptcy. If they do subsequently prove to be worse off, they are entitled to compensation.
These are the four resolution tools:
In a bail-in, DNB ensures that the insurer is sufficiently recapitalised to continue its activities or to be sold to another financial institution. The losses are passed on to shareholders and creditors. This is in contrast to a bail-out, where the government uses taxpayers’ money to rescue a financial institution.
DNB turns first to the shareholders to cover the losses. Their shares consequently fall greatly in value or become worthless. If this fails to cover all losses, the bank's creditors are expected to step in This involves the full or partial write-off of their claims on the insurer. Finally, policyholders may also have to contribute to a solution, for example through a reduction of the sum insured or a rise in premiums.
The purpose of a bail-in is to enable the insurer’s activities to continue or to enable all or part of it to be sold. If its activities continue, new shares in the insurer are distributed to the parties that have borne the loss. Policyholders can therefore also become shareholders. A sale – in formal terms a “transfer” – is the second resolution tool:
DNB may sell the insurer, or part of it, to a third party. This does not require approval by the Board, the shareholders or a court. The transfer may comprise the insurer’s shares or only the insurance policies and associated assets. A sale of policies to another insurer means that customers retain their insurance. In formal terms this resolution tool is a “transfer of undertaking”.
DNB may transfer all or part of the insurer to a “bridge institution” that is wholly or partly publicly owned. This institution is independent of the old insurer. The part of the insurer remaining behind goes bankrupt. A bridge institution is a temporary measure to facilitate a long-term solution, such as a sale to another market participant. It means that policyholders retain their insurance.
The shares in the bridge institution are held by the bridging foundation. DNB is responsible for appointing its management.
Asset and liability management vehicle
DNB uses an asset and liability management vehicle to transfer loss-making assets, so that they are no longer on the insurer’s balance sheet. This is similar to the use of a bridge institution, in that it also involves DNB transferring part of the failing insurer to another undertaking. The key difference is that this vehicle does not hold any insurance policies. The assets are gradually sold and the vehicle ultimately ceases to exist. The shares in the vehicle are held by the bridging foundation.