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 may transfer all or part of a failing insurer to an institution that is wholly or partly publicly owned. The bridging institution is an independent entity with its own licence. If part of the insurer is transferred, the remainder of the insurer will go into liquidation. A bridging institution is a temporary solution pending the sale of the insurer’s principal activities to a financially sound market operator. In the meantime, the insurer can continue to provide its main services. In principle, the bridging institution must be sold within two years.
The shares in the bridging institution are held by the bridge foundation, which is set up by DNB and whose directors we appoint. A bridge foundation can be the shareholder of multiple bridging institution.
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.