Applying resolution entails the use of one or more of the following resolution tools.
Tool 1: Sale of business
Under resolution, it is possible for the resolution authority to sell the insurer or part of it (e.g., all or part of its insurance portfolio) to another entity. Such a decision by the authority will not require the consent of the board of directors or shareholders of the insolvent insurer. Only the acquiring entity needs to consent to the acquisition. The transfer of business may include the shares of the insurer or only its policies and related assets. A portfolio transfer is a beneficial solution from the customers’ perspective. It ensures the continuation of protection under the existing terms and conditions. The sale of all or part of the business to another entity may involve a subsidy from the resolution authority or other financial incentives (e.g., a guarantee of loss coverage). This type of action is designed to provide a business advantage to the entity that takes over the business of the financially troubled company.
Tool 2: Bridge institution
If, at the time that an insurer is threatened with insolvency, there is no entity interested in taking it over, but there is the potential to sell at least part of its business, then the resolution authority may decide to transfer temporarily the failing insurer or part of it to a bridge institution. During this time, a key part of the insolvent entity’s business can continue. The bridging institution gives the resolution authority time to find a buyer. A bridge institution is a separate entity, managed by the resolution authority, with the regulatory approvals required to operate.
Tool 3: Separation of problem assets and liabilities
Resolution is also an option for managing an insurer’s loss-making assets. The resolution authority transfers those assets to another entity, thus removing them from its balance sheet. This ensures that the losses of the restructured entity do not increase. This solution is similar to a bridge institution. The key difference is that only the so-called toxic assets are transferred to another entity, not the healthy part of the business. These assets are gradually sold and, once all are sold, the management entity ceases to exist.
Tool 4: Withdrawal of authority to conclude new insurance contracts (solvent run-off)
A solvent run-off is a prohibition on the insurer from entering into new contracts. Its activities are then limited to the administration of its existing policy portfolio. This tool is designed to maximize the coverage of insurance claims on existing contracts. At the same time, the insurer does not increase its risk exposure as it does not sell new policies.
Tool 5: Bail-in
A bail-in is the compulsory write-off or conversion of capital or liabilities by a decision of the resolution authority. In practice, it is the transfer of the insurer’s losses to its shareholders, stockholders, or unsecured creditors. In the past practice of resolution, the shareholders were the first to bear the losses. This is done by reducing the value of the shares or by cancelling them. If this does not cover all the losses, creditors are then charged next. Such action involves the full or partial write-off of their claims against the insurer (unless these are secured) or their conversion into capital. Most of the liabilities of insurance companies are indemnities and benefits to policyholders, claimants, and victims. The order in which liabilities to individual stakeholder groups are written off is determined by insolvency law.
