The Insurance Recovery and Resolution Directive

The European Commission published its legislative proposal for the IRRD in September 2021 as part of the Solvency II Review. Building on the prudential framework established by Solvency II, the IRRD introduces measures to ensure that, even in cases of significant financial difficulty, authorities can act swiftly and effectively to protect policyholders, maintain financial stability, and minimise reliance on public funds.

The directive addresses the fragmented landscape of national recovery and resolution rules, offering a harmonised approach across EU Member States. This alignment is important given the cross-border operations of many insurance groups, which have historically faced legal and procedural uncertainties during financial crises. By requiring recovery and resolution planning, the IRRD emphasises the importance of preparation, early intervention, and coordinated responses to potential crises. Through this dual role and its alignment with Solvency II, the IRRD establishes a forward-looking framework that strengthens the insurance sector’s role as a foundation of the European financial system. In this regard, the European Insurance and Occupational Pensions Authority (EIOPA) has been assigned with several additional tasks and is (also) responsible for developing specific technical standards and guidelines for the insurance sector.

The Bank Recovery and Resolution Directive (BRRD), which was established earlier, served as a model for the IRRD, providing a framework for the management of failing banks with the objective of ensuring financial stability. While the BRRD focuses on banks and certain investment firms, the IRRD will apply to insurers/reinsurers, reflecting the characteristics of the insurance sector. The structure of the IRRD was inspired by the earlier implementation of the BRRD, which emphasised preparation, resolution, and cross-border cooperation.

The current Dutch legal framework

Since January 2019, the Netherlands has had a recovery and resolution framework for insurers, known as the Dutch Recovery and Resolution of Insurers Act (Wet herstel en afwikkeling van verzekeraars). This act requires insurers to prepare a recovery plan in advance for crisis situations. The Dutch Central Bank (De Nederlandsche Bank, DNB) is the competent Dutch regulator in this respect. Now, with the application of the IRRD on the horizon, the Dutch legislator will try to align the implementation of the IRRD as closely as possible with the existing legal framework.

Scope of the new Insurance Recovery and Resolution Directive

The entities that fall within the scope of this legislation are EU insurance and reinsurance undertakings covered by Solvency II, their EU parent companies, EU insurance holding companies and EU mixed financial holding companies and branches of insurance and reinsurance undertakings outside the EU that meet the specified conditions. The IRRD also lays down rules and procedures relating to essential service providers where the relevant insurance or reinsurance undertaking enter into resolution. With regard to insurance groups, the resolution authority will be that of the EU Member State in which the parent company or group supervisor is located.

Changes to the Dutch regulatory framework

Where a recovery and resolution framework already existed under Dutch law, this was not the case for most of the EU. The current Dutch regulatory framework is largely aligned with the IRRD, emphasising the importance of orderly resolution and the continuity of insurance portfolios. However, there are some areas where divergence from the IRRD is evident, including the introduction of broader requirements for crisis and resolution planning, as well as a lower threshold for resolution application. Also new compared to the Dutch framework is that the IRRD introduces the solvent run-off as a new resolution tool. The implementation of the IRRD will replace or supplement all or parts of the current framework within the Dutch Financial Supervision Act (Wet op het financieel toezicht, Wft).

The IRRD also introduces new requirements, such as ensuring that at least 60% of the national market is subject to pre-emptive recovery plan requirements. DNB remains both the National Resolution Authority (NRA) and the National Supervisory Authority (NSA) and will incorporate new tools, like a run-off tool, into their existing toolkit. The IRRD stipulates that DNB must separate its insurance resolution function from its insurance supervision function to avoid actual and potential conflicts of interest. The EIOPA suggests this can be achieved with a separate budget and reporting lines.

Obligation to produce pre-emptive recovery plans

The IRRD states that the NSA must ensure that at least 60% of the Dutch insurance market is subject to the obligation to prepare pre-emptive recovery plans. A recovery plan must include elements such as a summary, including material changes, a description of the entity or group, prudential financial information on the firm, a recovery indicators framework, and a range of possible remedial actions. The insurer must also include information on how this recovery plan has been established and how it will be updated, implemented and communicated. The NSA has nine months to review and assess the recovery plan based on specific criteria. The NSA must evaluate whether the recovery options are reasonably likely to maintain or restore the insurer’s financial position, can be implemented quickly and effectively, and avoid significant adverse effects on the financial system to the greatest extent possible.

The NSA will inform the insurance firm if there are material deficiencies in the plan. The insurance firm will then be required to submit a revised plan within two months, which may be extended by one month on request. The NSA may direct the insurance firm to make specific changes. If the insurance firm fails to remedy the deficiencies, the NSA may instruct the applicant to make changes to the business model or to take any other action it deems necessary.

The recovery framework indicator must be assessed to cover severe macroeconomic and financial stress events. It should be regularly monitored and integrated into existing governance structures. If monitoring triggers a recovery action, the insurer must inform the supervisor. They must also inform the NSA if there is such a trigger but they decide not to take action.

The parent company of a group is responsible for drawing up a group preventive recovery plan. The degree to which subsidiaries must be included in this plan is primarily determined by their relevance to the group and the market in their respective Member State. If one of the subsidiary insurers is significantly larger or different from the rest of the group, it may be required to prepare its own pre-emptive recovery plan.

The requirement for the insurer to have a recovery plan depends on the potential impact its failure could have on the economy and its policyholders. The plan must be proportionate, taking into account the nature of the business, its legal form and structure, risk, size and complexity. If appropriate criteria are met, insurers may also qualify for a simplified plan requirement in terms of content and detail, submission date and frequency.

Obligation to produce resolution plans

The NRA must ensure that at least 40% of the Member States’ insurance market is subject to resolution planning. During the creation of this plan, the applicant is also subject to a resolvability test. On notification, insurers will have four months to propose possible measures or remove the impediments identified by the resolution authority. Resolution is considered if an insurer fails or is likely to fail.

The IRRD outlines that an insurer/reinsurer is considered to fail or likely to fail under several conditions: if it breaches or is likely to breach the Minimum Capital Requirement without a reasonable expectation of restoration; if it no longer meets authorisation conditions or seriously fails to meet legal obligations, warranting potential withdrawal of authorisation; if it cannot meet its debts or obligations, including payments to policyholders, or is likely to be in such a situation soon; or if extraordinary public financial support is needed.

Resolution is deemed necessary in the public interest if it achieves resolution objectives proportionately and more effectively than liquidation under normal insolvency proceedings. These objectives include protecting policyholders, beneficiaries and claimants; preserving financial stability by preventing contagion and maintaining market discipline; ensuring continuity of critical functions; and protecting public resources by minimising the need for extraordinary public financial support.

Possible resolution tools

If the NRA finds the proposed measures by an insurer/reinsurer ineffective in addressing resolvability issues, they can mandate alternative actions. These include revising intragroup financing agreements, limiting exposures, imposing additional information requirements, and divesting assets or restructuring liabilities. The NRA may also require the insurer to limit or cease certain activities, restrict business line development, alter reinsurance strategies, or change legal or operational structures. Additionally, they might mandate the establishment of a parent insurance holding company or require a mixed-activity insurance holding company to set up a separate entity to control the undertaking. These measures are designed to enhance the insurer’s resolvability and ensure financial stability. They are subject to a right of appeal, providing insurers/reinsurers with an opportunity to contest the decisions made by resolution authorities.

Technical standards and guidelines  

EIOPA will develop technical standards and issue guidelines on several key aspects and specific topics of the IRRD, including but not limited to the definition of methodologies for determining market shares and a minimum list of quantitative and qualitative recovery indicators.

Conclusion and next steps

The IRRD introduces significant regulatory changes with the objective of enhancing the stability and resilience of the insurance sector across the EU, including the Netherlands. The directive establishes uniform standards for recovery and resolution planning with the objective of protecting policyholders and minimising reliance on public funds during crises. EIOPA will play a prominent role in developing regulatory technical and implementing technical standards to ensure consistent implementation across Member States.

As the Netherlands prepares to transpose the IRRD into national law, it will need to align its existing frameworks with the new requirements, integrating new resolution tools and procedures to strengthen the available crisis management capabilities. The IRRD will come into force on 28 January 2025. Member States will have until 29 January 2027 to transpose the IRRD into their national laws.

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