What is IRRD?
The Insurance Recovery and Resolution Directive (IRRD) ensures effective management of insurance failures. This legislation aims to establish harmonized recovery and resolution tools and procedures, ensure that insurers and relevant authorities in the European Union are better prepared for situations of significant financial distress, and facilitate the early and quick intervention of the authorities, especially in cross-border contexts.
Recovery regulations in the insurance sector within the EU
Currently, every country has its own rules and practices in the insurance industry, which can create challenges, particularly for insurers operating across borders. This patchwork of national regulations may complicate the orderly resolution of cross-border insurers, and such a situation can lead to legal uncertainties, unequal treatment of policyholders, and potential spillover effects.
The Insurance Recovery and Resolution Directive (IRRD) establishes tools and mechanisms designed to:
- Reduce the likelihood of an insurance failure and mitigate the impact in case it finally happens.
- Encourage coordination and cooperation among authorities.
The IRRD complements the regulatory framework for the insurance sector while other topics such as IGS remain on the political agenda.
Recovery and resolution plans
Depending on the situation, either a Pre-emptive Recovery or a Resolution Plan will be implemented.
Pre-emptive Recovery Plans:
- Developed for normal business operations, these plans are mandatory for insurers identified by supervisors based on factors such as size and interconnectedness.
- At least 60% of the market in each Member State must have these plans, which will be assessed by supervisory authorities.
Resolution Plans:
- This prepares for scenarios where a company is non-viable and cannot recover, ensuring public interest.
- Managed by the Resolution Authority, insurers are selected based on criteria like size, risk profile, and cross-border activity, ensuring at least 40% coverage in each Member State.
Resolution aspects
To initiate a resolution for an insurer, several conditions must be met: the insurer must be experiencing failure or is likely to fail; there must be no reasonable prospect that supervisory or private sector measures can prevent the failure within a reasonable timeframe; and the resolution must be necessary for the public interest.
The IRRD contains several safeguards:
- Independent (or provisional) valuation,
- Ensure that no creditor is worse off than they would be in a liquidation scenario,
- Secure the right to appeal.
Resolution tools
- Write down and conversion
Resolution authorities can use the write-down or conversion tool to achieve specific objectives, such as recapitalizing entities that meet certain resolution conditions and maintaining their authorization.
- Solvent run-off
Solvent run-off involves servicing existing policies without writing new business. It is prohibited to underwrite new business and the undertaking is limited to only administering the existing portfolio until its activities are terminated.
- Sale of business
The sale of all or part of a business to third parties involves the transfer of ownership. This can include shares or other forms of ownership issued by the business under resolution, as well as any assets, rights, or liabilities associated with that business.
- Asset and liability management vehicle
Impaired or problematic assets and liabilities may be transferred to a publicly controlled management vehicle, which is not allowed to transfer shares or ownership instruments of the undertaking under resolution. This vehicle aims to maximize the value of such assets through sale or orderly winding down.
- Bridge institution
A temporary legal entity created to manage assets and liabilities of a firm undergoing resolution. It can involve shares or other ownership instruments and must be controlled by one or more public authorities, such as a Resolution Authority (RA) or an Investor Guarantee Scheme (IGS).
Tentative timeline for instrument development
EIOPA primary focus is on developing new instruments, specifically 19 RTS/ITS/guidelines and a framework for a cooperation agreement, for this purpose, it has set up the necessary arrangements to develop and deliver the material on time according this tentative timeline.
EIOPA has grouped instruments and will run public consultations on all the instruments.
- From April 2025
Batch 1 instruments (6 instruments)
•RTS on content of pre-emptive recovery plan and remedial action
•RTS on market share for recovery planning
• RTS on contents of the resolution plans (incl. groups)
• Guidelines on the identification of critical functions
• Guidelines on matter and criteria for the assessment of resolvability
• Guidelines on removing impediments to resolvability
- From July 2025
Batch 1 instruments (2 instruments)
• RTS on operational functioning of resolution colleges
• ITS on procedures and information (forms and templates)
- From December 2025
Batch 2 instruments
• Guidelines to specify further scenarios (with ESRB) and the qualitative and quantitative indicators contained in the pre-emptive recovery plans
• Guidelines on how information should be provided in summary or collective form for the purpose of confidentiality requirements
• Guidelines specifying further details on the criteria for application of simplified obligations
• RTS on independence of values
• RTS on contents of the contractual term on recognition of resolution stay powers
• RTS, in consultation with ESMA, specifying methodologies and principles on the valuation of liabilities arising from derivatives
- From July 2026
Batch 3 instruments
• RTS on methodologies for assessing the value of the assets and liabilities of the (re)insurance undertaking in the context of resolution
• RTS on separation of resolution valuation and NCWOL valuation
• RTS on the methodology for assessing the treatment that shareholders, policy holders, beneficiaries, claimants, and other creditors, would have received if the undertaking under resolution had entered insolvency proceedings and the methodology for the estimation of the replacement costs
• RTS on methodology for calculating the buffer for additional losses to be included in provisional valuations
Resources
EIOPA organized a series of events focusing on specific aspects of the ‘Insurance Recovery and Resolution Directive’ (IRRD). These events aim to inform participants about the implications of the IRRD and to foster dialogue with stakeholders regarding the associated challenges and opportunities.
Event presentations
- 17 JANUARY 2025
- 28 JANUARY 2025
- 7 FEBRUARY 2025
- 21 FEBRUARY 2025