Resolution – a tool to manage the risk of uncontrolled failures of insurance companies
The insurance market plays a very important role in the economy and the financial system. The role of insurance companies is to protect the basic values of insured persons: life, health, and property. Due to the specific nature of insurance products and their inverted production cycle, it is extremely important for the insurance market to operate under predictable conditions. The insurance market is based on customer trust and the security of protection. Insurers are also long-term, stable investors.
Maintaining the stability of the insurance market is ensured by several mechanisms, including supervision by state institutions that constantly monitor the activities of insurance companies and the solutions introduced by Solvency II, which allow for the systematic identification and management of risks in insurance companies.
Another element supporting the security system of the insurance sector is the resolution mechanism, which avoids the uncontrolled bankruptcy of an insurer and its negative impact on the economy, the financial system, and society.
As part of the resolution process, plans are developed to deal with the risk of failure of insurance companies. The main purpose of these resolution plans is to remove any obstacles to resolution. The process itself entails:
– protecting policyholders
– ensuring continuity of critical functions
– maintaining financial stability
– protecting public finances.
In this process, sector-wide risks are also identified. Based on the risk profiles of individual insurers, an insurance market risk profile is created. The risks identified in individual entities are analyzed through an additional prism: the risk profile of the entire sector and the insurers’ mutual impact and interactions. This enables the identification of business areas where risks accumulate, multiply, or induce other risks. This provides an additional perspective to identify the consequences of an entity’s bankruptcy on other insurance market participants, on the functioning of the financial system, and the social impact of such an event.
The aim of developing resolution plans is to implement the right mechanisms and actions at the right time and to the optimal extent, allowing the restructuring process to be carried out in an ordered and controlled manner.
Resolution is an expression of responsibility for the security of the insurance market. According to a report by the Polish Chamber of Insurance (https://piu.org.pl/wplyw-ubezpieczen-na-polska-gospodarke-i-spoleczenstwo/), the insurance sector’s share of Poland’s GDP in 2021 was 2.25 percent, which translates into PLN 59 billion of added value in the economy. Insurance companies are the second largest commercial domestic investor in the bond market. The value of claims and benefits paid out in 2021 amounted to PLN 41.3 billion, of which PLN 18.4 billion was from life insurance and PLN 22.9 billion was from non-life insurance.
