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(1) Distress of insurance undertakings can have substantial repercussions on the economy and social welfare in Member States should such distress lead to a disruption of the protection provided to policy holders, beneficiaries or injured parties. The role of reinsurance undertakings in the economy, their interconnectedness with primary insurance undertakings and financial markets more broadly, as well as the relatively concentrated reinsurance market require an appropriate framework to deal with their distress or failure in an orderly fashion. The recovery and resolution of both primary insurance undertakings and reinsurance undertakings should therefore be addressed, taking into account their respective specificities.

(2) The global financial crisis of 2008 exposed the vulnerabilities of the financial sector and its interconnectedness. Causes of distress and failure appeared to be linked to, inter alia, the evolution of financial markets and the intrinsic nature of insurance or reinsurance activities. In that regard, underwriting risks, that is under-provisioned claims, mispricing, that is underestimated premiums, asset-liability mismanagement and investment losses are often referred to as main sources of concern for insurance and reinsurance undertakings. In that context, taxpayer money has been used to restore the deteriorated financial conditions of several insurance undertakings. Although Directive 2009/138/EC of the European Parliament and of the Council aimed at strengthening the financial system in the Union and the resilience of insurance and reinsurance undertakings, it did not completely eliminate the possibility of failures of such insurance and reinsurance undertakings. High market volatilities and prolonged low levels of interest rates could be particularly harmful for the profitability and solvency position of insurance and reinsurance undertakings. The sensitivity of insurance and reinsurance undertakings to market and economic developments therefore calls for particular caution and an adequate framework to manage, including in a pre-emptive manner, potential deteriorations of the financial position of such undertakings. Some recent failures and near-failures, in particular of a cross-border nature, illustrated weaknesses of the current framework that need to be addressed to organise adequately the orderly exit from the market of insurance or reinsurance undertakings.

(3) Activities, services or operations performed by insurance or reinsurance undertakings that cannot be substituted easily within a reasonable timeframe, or at a reasonable cost for policy holders, beneficiaries or injured parties, need to be seen as critical functions that need to be continued. Such activities, services or operations can be critical at Union, national or regional level. The continuity of insurance or reinsurance protection is often preferable to the winding down of a failing undertaking as such continuity delivers the most favourable outcome for policy holders, beneficiaries or injured parties. It is therefore crucial that adequate tools be available to prevent failures and, where failures occur, to minimise negative repercussions by preserving the continuity of those critical functions.

(4) Ensuring effective resolution of failing insurance and reinsurance undertakings within the Union is an essential element in the completion of the internal market. The failure of such undertakings has an impact not only on policy holders and possibly the real economy and financial stability of the markets on which those insurance and reinsurance undertakings operate directly, but also on the trust in the internal market for insurance. The completion of the internal market in financial services has reinforced the interplay between the different national financial systems. Insurance and reinsurance undertakings are active on financial markets to manage their investment portfolio and the risks related to their activities. In that context, the inability of Member States to address the failure of an insurance or reinsurance undertaking and resolve it in a way that is predictable and harmonised and would effectively prevent broader systemic damage, can undermine the stability of financial markets and, consequently, the internal market in the field of financial services.

(5) The global financial crisis of 2008 highlighted the need to develop an appropriate recovery and resolution framework for insurance and reinsurance undertakings. At international level, the Financial Stability Board published in October 2011, and updated in October 2014, the document ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, encompassing considerations on the resolution of any insurance undertaking that could be systemically significant or critical if it fails. In June 2016, the Financial Stability Board released complementary guidance on developing effective resolution strategies and plans for systemically important insurers. In parallel, the International Association of Insurance Supervisors adopted in November 2019 ‘Insurance Core Principles’ for all insurance and reinsurance undertakings, a ‘Common Framework for Internationally Active Insurance Groups’ detailing standards for pre-emptive recovery planning, and actions that authorities are expected to take towards an insurance or reinsurance undertaking that would exit the market and enter into resolution. Those developments should be taken into account when laying down a framework for the recovery and resolution of failing insurance and reinsurance undertakings.

(6) Many insurance and reinsurance undertakings are operating beyond national borders. A lack of coordination and cooperation between public authorities to prepare for and manage the distress or failure of an insurance or reinsurance undertaking operating across borders would undermine Member States’ mutual trust, result in a suboptimal outcome for policy holders, beneficiaries and injured parties and affect the credibility of the internal market for insurance.

(7) There is currently no harmonisation of the procedures at Union level for resolving insurance or reinsurance undertakings in a coordinated manner. Instead, considerable substantive and procedural differences between national laws, regulations and administrative provisions that govern the failure of insurance and reinsurance undertakings are observed across Member States. In addition, corporate insolvency procedures might not always be appropriate for insurance or reinsurance undertakings, as those procedures might not always ensure an adequate continuation of the critical functions for the benefit of policy holders, beneficiaries and injured parties, the real economy or financial stability as a whole.

(8) It is necessary to ensure the continuity of the critical functions of failing insurance or reinsurance undertakings, or of insurance or reinsurance undertakings that are likely to fail, while minimising the impact of such an undertaking’s failure on the economy or the financial system. It is therefore necessary to lay down a framework to provide authorities with a credible set of tools to intervene sufficiently early and quickly in insurance or reinsurance undertakings that are failing or likely to fail. Such framework should ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than they would have incurred if the insurance or reinsurance undertaking had been wound up under normal insolvency proceedings in accordance with the principle that no creditor should be worse off than under normal insolvency proceedings (the ‘no creditor worse off’ principle). In order to ensure that the treatment that affected shareholders, policy holders, beneficiaries, claimants and other creditors would have received if the undertaking under resolution had entered into normal insolvency proceedings is accurately reflected, all the relevant occurrences that would be triggered either by or before the opening of normal insolvency proceedings as well as all the relevant occurrences related to the opening of such proceedings, including those linked to the protection of injured parties under Directive 2009/103/EC of the European Parliament and of the Council in respect of damage resulting from accidents in the case of the insolvency of an insurance undertaking, should be taken into account.

(9) Building on Directive 2009/138/EC, the framework to be laid down should enable authorities to ensure the continuity of insurance protection for policy holders, beneficiaries and injured parties, transfer viable activities and portfolios of the insurance or reinsurance undertaking where appropriate, and apportion losses in a manner that is fair and predictable. Those objectives should help avoid unnecessary losses or social hardship falling on policy holders, beneficiaries and injured parties, mitigate negative impacts on the real economy, minimise negative effects on financial markets and minimise the costs for taxpayers.

(10) The review of Directive 2009/138/EC, and in particular the introduction of more risk-sensitive capital requirements, strengthened supervision, enhanced liquidity monitoring and better tools for macro-prudential policies, should further reduce the likelihood of failures of insurance or reinsurance undertakings and enhance the resilience of those undertakings to economic stress, whether caused by systemic disturbances or by events specific to the individual undertaking. Nevertheless, despite a sound and robust prudential framework, situations of financial distress cannot be completely excluded. Member States should therefore be prepared and have adequate recovery and resolution tools in place to handle situations involving both systemic crises and failures of individual undertakings. Such tools should include mechanisms that enable authorities to deal effectively with undertakings that are failing or likely to fail. The use of such tools and the exercise of such powers should take into account the circumstances in which the failure occurs.

(11) Some Member States have already introduced pre-emptive recovery planning requirements, and mechanisms to resolve failing insurance or reinsurance undertakings. However, the absence of common conditions, powers and processes for the recovery and resolution of insurance or reinsurance undertakings across the Union is likely to constitute a barrier to the smooth operation of the internal market and hinder cooperation between national authorities when dealing with distressed or failing cross-border groups of undertakings. That is particularly true where different approaches mean that national authorities do not have the same level of control or the same ability to resolve insurance or reinsurance undertakings. Those differences in recovery and resolution regimes might affect the level playing field and potentially create distortions of competition between undertakings. That barrier should be eliminated and rules should be adopted to ensure that the internal market is not undermined. To that end, rules governing the pre-emptive recovery and resolution of insurance or reinsurance undertakings should be made subject to common minimum harmonisation rules. In order to ensure consistency with existing Union legislation in the area of insurance services, the pre-emptive recovery and resolution regime should apply to insurance or reinsurance undertakings that are subject to the prudential requirements laid down in Directive 2009/138/EC.