What Does Resolution Mean for Insurers?
Resolution is a structured approach designed to protect policyholders if an insurance company is failing or at risk of failure. It proactively safeguards confidence in the industry, upholds financial stability, and minimizes disruption, all while ensuring policyholder commitments are honoured, even in times of financial distress.
The concept of resolution for financial institutions gained prominence following the 2008 global financial crisis, when the failure of major banks exposed significant gaps in crisis management and depositor and creditor protection. Initially focused on banks, now, similar efforts are underway for insurers, recognizing their critical role in financial security and the need for proactive measures to protect policyholders in times of distress.
Why Does Assuris Prioritize Resolution Planning?
Resolution encompasses both planning and preparedness to ensure that pre-determined mechanisms are in place to stabilize the situation if an insurer faces insolvency. This article will focus on the topic of resolution planning in case of a life and health insurance company failure. For more information on resolution preparedness, please refer to “The Role of Assuris’ Resolution Preparedness Centre in Protecting Policyholders“.
Resolution planning is not about predicting failures – it’s about preparing for them. This highlights the need to distinguish between the risk of failure and the risk of resolution:
- Failure risk refers to the probability that an insurer may become insolvent or unable to meet its financial obligations due to factors such as weak risk management, inadequate capital, or adverse market conditions.
- Resolution risk, on the other hand, reflects the potential complications or negative outcomes during the resolution of a failing insurer – post-recovery phase – such as challenges in protecting policyholders, maintaining financial stability, or executing an orderly exit from the market.
+ Low Resolution Risk
+ High Resolution Risk
+ Low Resolution Risk
+ High Resolution Risk
The crisis continuum below illustrates the various stages an insurer might traverse before reaching the resolution stage. It also outlines the capital ratio position, sources of financing, relevant legislation, and lead authority at each stage of the crisis continuum, including the concepts of failure and resolution risks. Resolution is the final stage, and the exit from the market must be executed effectively to protect policyholders and maintain confidence in the industry. As the leading authority, Assuris plays a critical role in ensuring a smooth and well-managed resolution process.
How Does Assuris Lead Resolution Planning?
Assuris leads the resolution planning work by collaborating with the supervisors to ensure no duplication in the analyses and to ensure the demands on the industry are reasonable and not overly burdensome. As illustrated in the figure above, supervisors oversee insurers’ operations at each stage of the crisis continuum to prevent them from reaching the point of non-viability. Meanwhile, Assuris focuses on working with higher resolution risk life and health insurance companies to develop advance resolution planning to mitigate the impact if non-viability occurs.
Assuris takes the lead in developing the resolution planning analysis with the objective of having useful information to make decisions in a crisis. As illustrated in the graphic below, life and health insurers provide information and input to the analysis, and supervisors review a summary of the resolution risks to ensure it meets their supervisory expectations.
- Develop resolvability risk analysis to identify risks in executing the resolution strategy
- Develop strategies to manage resolution risks
- Collaborate with Assuris and provide the information needed for resolvability risk analysis
- Support Assuris in the development of risk mitigation strategies
- Review and provide input from the supervisory perspective on the resolvability assessment
- Review and provide input from the supervisory perspective on the resolution risk mitigation
How Does Assuris Assess Resolution Risks?
Since the resolution of a life and health insurance company involves transferring its business to a solvent company, Assuris assesses resolution risks by analyzing the company’s salability. This evaluation is reflected in the following risk categories.
- Business profile – the risk of an unattractive business to potential buyers due to factors such as lack of scale, poor distribution channels, weak brand value, and limited growth initiatives.
- Financial resources – the risk of insufficient financial resources to keep the business running in resolution without exposing taxpayers to loss.
- Business continuity – the risk that transferring and maintaining business operations may be challenging due to complex financial and operational arrangements.
- Resolution framework suitability – the risk that the business complexities may not align with the existing resolution framework within its operating jurisdiction.
Considering the above risk categories, and given their size and complexity compared to smaller local Canadian insurers, Assuris applies a more detailed resolution analysis to Internationally Active Insurance Groups (IAIGs)1. This approach ensures that while IAIGs require a more tailored framework to reflect their global operations, the same high level of stability and policyholder protection is maintained across all Assuris member companies.
What’s Next for Resolution Planning?
The life and health insurance industry plays a vital role in providing financial security to millions of policyholders in Canada. Through resolution planning, we are taking proactive steps to safeguard policyholders’ financial future and maintain confidence in the industry.
As we advance this work, Assuris will continue collaborating with life and health insurers, supervisors, and industry partners to refine and enhance the resolution framework. Stay tuned for more updates as we progress in building a stronger, more resilient life and health insurance sector!
1 Assuris’ member companies identified by the International Association of Insurance Supervisors (IAIS) as insurance groups that operate and write premiums in multiple national jurisdictions while also meeting size criteria.
