Resolution tools for insurers
De Nederlandsche Bank (DNB) has four options for resolving a failing insurer, thereby limiting the impact on policyholders, society, the financial system and the economy. These four options are also referred to as resolution tools.
Creditors and shareholders pay for the losses
If we use one of these tools, we effectively pass on an insurer’s losses to its shareholders, creditors and, where relevant, policyholders. The magnitude of losses determines whether a contribution is required from policyholders. The use of a resolution tool must not leave them any worse off than in the event of bankruptcy. If they subsequently prove to be worse off, they are entitled to compensation.
Resolution tool 1: bail-in
In what is termed a bail-in, we make sure that the insurer is sufficiently recapitalised to continue its activities or to be sold to another financial institution. We pass on the losses to shareholders and creditors. This is in contrast to a bail-out, in which the government uses taxpayers’ money to rescue an insurer.
We first turn to the shareholders to cover the losses. Their shares consequently fall greatly in value or become worthless altoghether. If this fails to cover all losses, the insurer'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 their insured sum or a rise in premiums.
The purpose of a bail-in is to enable the insurer’s relaunch or the sale of parts of its business. If its activities continue, new shares are distributed to the parties that have borne the loss. This means policyholders can also become shareholders.
Resolution tool 2: sale of business
A sale – in formal terms a “transfer” – is the second resolution tool. We may sell the insurer, or part of it, to a third party. In resolution,his does not require approval by the management board, the shareholders or a court. The transfer may comprise the insurer’s shares or only its insurance policies and associated assets. If we sell only the policies to another insurer, customers retain their insurance.
Resolution tool 3: bridge institution
We can transfer the failing insurer's business or part of its activities to a bridge institution. This is a wholly or partly publicly owned institution. Setting up a bridge institution is a temporary measure to facilitate a long-term solution, such as a sale to another market operator. It means that policyholders retain their insurance. The shares in the bridge institution are held by the bridge foundation, whose management is appointed by DNB. If only part of the insurer is transferred to the bridge institution, the remaining part will be wound up in bankruptcy proceedings.
Resolution tool 4: asset and liability management vehicle
We may transfer an insurer’s loss-making assets to an asset and liability management vehicle 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 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 bridge foundation.