Introduction

In April 2021, the Central Bank of Ireland (CBI) published its pre-emptive recovery plan regulations¹ and guidelines,² which required a large majority of insurers regulated in Ireland to put in place recovery plans by Q1 2022. With the first biennial requirement of Probability Risk and Impact SysteM (PRISM) medium-low and low firms to review their plans arising in 2024, i.e., two years since first implementation, this means a large number of companies are now considering their plan reviews. PRISM medium-high and high companies will already have gone through one round of annual review.

In December 2022, the CBI issued detailed feedback to the industry, most notably in the form of a “Dear CEO” letter, following its first review of pre-emptive recovery plans. This briefing note provides an overview of the general requirements and the CBI feedback to support you in updating your company’s recovery plan for board approval.

Reminder of the CBI Requirements

The CBI’s stated objective when introducing regulations requiring a pre-emptive recovery plan was to:

• Promote awareness and allow firms to prepare for a range of possible adverse situations.
• Enable firms to consider and evaluate the most appropriate and effective mitigation without the resulting pressures of actual severe stress.
• Enable firms to take more effective, comprehensive and thoughtful measures to ensure their timely implementation if required.

Insurers are required to prepare a recovery plan which complies with the requirements as set out in the regulations and guidelines. As the regulations do not differentiate between life, non-life and reinsurance companies, the regulations take a ’one size fits all’ approach, which may lead to differing interpretations across the insurance industry. The regulations do, however, incorporate some specific modifications to the requirements for captive insurers and third-country insurers with Irish branches.

The regulations were accompanied by guidelines, the purpose of which is to assist firms in understanding their obligations under the regulations.

The regulations set out the required format of the recovery plan into 10 separate sections as follows:

• PART A — Summary
• PART B — Change since last recovery plan
• PART C — Approval of recovery plan
• PART D — Governance
• PART E — Strategic analysis
• PART F — Recovery indicators
• PART G — Recovery options
• PART H — Scenario analysis
• PART I — Communication plan
• PART J — Information on preparatory measures

There are specific regulations and guidelines in respect of each section above. A key requirement is that the recovery plan is board-approved and regularly reviewed.

For more detail on the regulations and the guidelines, please see our briefing note from June 2021.³

Requirements in relation to reviewing recovery plans

The CBI has imposed specific timing requirements in relation to review of recovery plans.

Insurers with a PRISM impact rating of high or medium-high were required to submit an initial recovery plan to the CBI by 31 March 2022, and for subsequent versions to be submitted within one month of their approval by the board. Newly authorised firms are required to prepare a plan within 12 months of their authorisation. There is currently no requirement for medium-low and low insurers to submit their recovery plans to the CBI automatically, but we note that the CBI has requested a copy of the recovery plan from a number of these companies.

Insurers are required to maintain the plan, with review (and update if required) taking place at least annually for high and medium-high insurers and every 24 months for medium-low and low insurers.

Where a firm has been reclassified to a high or medium-high rating from a medium-low or low rating, a plan review within six months of the reclassification is required. An update to the plan is also required where an insurer’s structure, business or financial position has changed in such a way that it has a material effect, or requires changes, to the existing plan.

CBI feedback on recovery plans

The CBI has given feedback to (re)insurers in respect of the first iteration of recovery plans produced following the implementation of the regulations and guidelines. It conducted a thematic review of 71 recovery plans, including:

• 36 high and medium-high insurers
• 35 medium-low and low insurers

This sample of plans was assessed against the regulations and guidance.

Some high-level feedback was given in the CBI’s December 2022 Insurance Newsletter.⁴ This highlighted some common themes that the CBI was seeing across many recovery plans:

• Misconception around purpose of plans
• Significant reliance being placed on existing risk management function
• Limited shortfall in solvency or liquidity under stresses could lead to reliance on marginal options
• Many plans did not demonstrate the level of formality and urgency which the CBI expects
• Plans were not sufficiently standalone in the case of low and medium-low firms

A more detailed “Dear CEO” letter was issued to insurers. This letter made some similar points to those in the newsletter and also gave quite detailed feedback across a number of specific areas in an appendix to the letter. The CBI gave some general commentary on these areas as well as specific examples of good practice and weaker aspects identified. The table in Figure 1 below summarises this appendix feedback. We have noted in brackets if a particular point was only highlighted to high or medium-high (H/MH) firms.

Overall Recovery Capacity (ORC)

In its Dear CEO letter, the CBI set out an approach to calculating the ORC. The starting point is a list of credible and feasible recovery options that the insurer can utilise in each scenario. The insurer should then include in its recovery plan:

1. For each scenario, the recovery options it proposes to use
2. For each option, the financial impact of the option should be quantified
3. The sum of the impact of each option that is available and feasible, i.e., calculating the scenario-specific ORC for the insurer
4. The ORC range, determined by the lowest and highest ORC values across all scenarios

This is an area that some insurers had not fully developed in the initial versions of their recovery plans. The CBI expects the recovery plan to be a reliable action plan that can be used as a step-by-step guide in a recovery scenario, in which case detailed financial analysis of recovery options is required in advance for the company to have a good understanding of its potential recovery capacity in a specific scenario, or based on a combination of options. A key aim of this calculation is for insurers to understand the maximum realistic financial impact of each recovery option. A further key aim is to understand whether some are mutually exclusive, i.e., the ORC may not amount to the sum of all of the recovery options as there may be some options that cannot realistically be combined.

The Dear CEO letter provides details on how to calculate this. In reality, the ORC for a given scenario may also be a range, especially where the insurer has defined financial impacts as ranges throughout the plan.

Formality and Urgency

The CBI also noted that many plans did not demonstrate the level of formality and urgency expected in the escalation process for an insurer in crisis. It noted that in general there was too much discretion around escalation paths and required actions and a lack of timeliness in communicating to key stakeholders, including the CBI.

In order to address this, insurers really need to understand the steps, and associated timelines, that would be undertaken in a recovery situation. If there was a breach of solvency cover or a liquidity issue, who would be told first? In fact, who is likely to identify a problem in the first instance and do they know the correct protocol? Who are the required stakeholders to make key decisions and how long will it take to get them in the same room? What do you do if a key stakeholder is on leave? How long will it take to get consensus before moving forward with a key decision? And how long after that before a recovery option can be implemented? What are the group timelines? These are the types of questions that need to be answered to ensure that a recovery plan is robust, formal and pre-emptive.

One of the ways to ensure these formalities are sufficiently addressed in the recovery plan is to “war game” specific scenarios, e.g., simulate a scenario that resulted in a solvency coverage breach and work through the plan until the cover is restored. It might be challenging from an operational perspective for companies to simulate this in real time. However, even workshopping this with key stakeholders might help answer the types of questions we have listed above. This type of workshop can help identify gaps, weaknesses or oversights in the recovery plans and allows companies to get a better understanding of the escalation processes and key reliances.

Next steps

It is important to understand when your firm is required to review your recovery plan, and plan resources accordingly, to ensure the requirement is met. It is of course also possible to review your plan sooner than the CBI’s minimum requirement, and it is worth considering whether doing so might add value to your business and provide more useful, timely information for your board. For example, high and medium-high insurers may prefer to align their next recovery plan review with their Own Risk and Solvency Assessment (ORSA) timelines, which may mean a review in less than 12 months. Medium-low or low insurers may see a benefit in reviewing their recovery plans annually rather than biennially and/or also aligning with ORSA timelines.

A number of steps should be taken in order to effectively review your recovery plan:

• Review the CBI feedback, including the detailed points raised in the Dear CEO letter, and identify gaps that need to be addressed, particularly where “weaker aspects” identified by the CBI are applicable to your company’s recovery plan.
• Be aware of any best practices emerging and incorporate any improvements identified within your own company or by advisors.
• Review your strategic analysis and align this to the most recent ORSA, Solvency and Financial Condition Report (SFCR) and risk reports.
• Review choice, calibration and completeness of recovery indicators, recovery options and scenarios chosen. Some changes may be warranted depending on how your business has developed since the previous recovery plan. Are the scenarios still appropriate? Were there any near misses over the past 12 to 24 months that would result in reconsidering these indicators?
• Consider more detailed scenario analysis and workshopping. Also consider war-gaming a recovery situation if this is appropriate given the nature, scale and complexity of the business.
• Update any quantitative elements of your recovery plan to the latest information (typically aligned with the most recent ORSA).
• Review and update for any preparatory measures that have been implemented since the last recovery plan review.
• Ensure your board is sufficiently informed of the updates made to approve the review.

European developments

The Insurance Recovery and Resolution Directive⁵ (IRRD) was proposed by the European Commission in September 2021. It is a comprehensive framework for the insurance sector, covering elements such as recovery and resolution planning, resolution objectives and tools, and cooperation and coordination.

While it will introduce new requirements for firms across Europe, we consider recovery plan requirements in Ireland to already be meeting the requirements of the proposed IRRD. Hence, at this point it looks unlikely that the IRRD will result in any material changes for Irish firms, although it is important to note that the requirements are not yet finalised.

The resolution proposals within the IRRD might be of interest to Irish insurers. Even though they probably won’t have to do any pre-emptive work in this space, the proposals will give a sense of what they and/or the industry might have to do in the event of a failure of an insurer.

How Milliman can help

Our consultants have been involved in advising our clients on pre-emptive recovery planning for a number of years and have spoken on the topic of recovery (and resolution) at a wide range of client and industry events. We have undertaken a range of work for clients in this area, including:

• Gap analysis of current recovery plan to CBI expectations and emerging best practice
• Facilitating recovery planning workshops to identify scenarios to be tested and possible recovery options
• Advising on recovery planning considerations to ensure effectiveness of plans
• Analysing pre-emptive recovery options to ensure that effective preparatory measures are put in place
• Calculation of ORC
• Facilitating war-gaming of recovery situations to assess the operational efficiency of recovery options.
• Designing and implementing recovery indicator frameworks
• Drafting pre-emptive recovery plans for clients
• Independent review of recovery plans

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¹ The full text of the regulations is available at https://www.irishstatutebook.ie/eli/2021/si/184/made/en/print?q=No.+184+of+2021.

² CBI (April 2021). Recovery Plan Guidelines for (Re)Insurers. Retrieved 1 December 2023 from https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/insurance-reinsurance/solvency-ii/requirements-and-guidance/recovery-plan-guidelines-for-(re)insurers.pdf

³ Callaghan, C. & King, E. (June 2021). Central Bank of Ireland Recovery Plan Requirements for Insurers Regulations 2021. Milliman Briefing Note. Retrieved 1 December 2023 from https://ie.milliman.com/en-gb/insight/Central-Bank-of-Ireland-recovery-plan-requirements-for-insurers-regulations-2021.

⁴ CBI (December 2022). Thematic Review of (Re)Insurance Recovery Plans. Insurance Newsletter. Retrieved 1 December 2023 from https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/insurance-reinsurance/solvency-ii/communications/insurance-quarterly-news/the-insurance-quarterly-december-2022.pdf?sfvrsn=83af9b1d_4.

⁵ EUR-Lex – 52021PC0582 – EN – EUR–Lex. Retrieved 1 December 2023 from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0582&qid=1667815736205.