UK to implement resolution framework for insurance firms

Sign up to receive free updates on the UK insurance industry.

Get a daily email digest of the latest news in the UK insurance industry with myFT Daily Digest.

The UK is moving forward with its plans to establish a resolution regime for dealing with the failure of large insurance companies. This decision comes after the successful rescue of Silicon Valley Bank’s UK arm, highlighting the importance of such arrangements.

The government has announced its intention to legislate, granting the Bank of England new powers and flexibility to manage the demise of a major insurer. This resolution regime for insurance companies will mirror the one established for banks in 2009.

Following a public consultation, the Treasury has stated that the insurance regime will enable the central bank to take swift action in stabilizing or managing a failing or likely-to-fail insurer, while ensuring appropriate safeguards.

“The resolution of Silicon Valley Bank UK demonstrated how the UK’s existing resolution framework enhances financial stability in the banking sector,” the Treasury added.

After the collapse of Silicon Valley Bank, HSBC purchased the UK branch for £1. The Bank of England is currently reviewing its resolution regime for smaller banks in light of this event.

The proposed insurance regime aims to maintain insurance coverage for policyholders, prevent significant value loss in the sector due to insolvency, and instill public confidence in insurers.

The Association of British Insurers has welcomed the government’s plans, emphasizing the focus on creating a level playing field for insurers.

The industry still carries the burden of the Equitable Life failure, which resulted in policyholders losing billions of pounds and the government paying over £1 billion in compensation.

The UK’s insurance resolution regime, similar to the EU’s framework announced two years ago, allows for the writedown of customer benefits and other liabilities. Consumer groups have expressed concerns about these proposals.

However, both the EU regime and the UK plans include a “no creditor worse off” safeguard to ensure that customers are not put in a worse position than they would be in the event of insurer insolvency.

The UK plans also include top-up payments for customers protected by the Financial Services Compensation Scheme, which provides redress in specific cases of insurer failure.

The Treasury noted that the public consultation received almost unanimous support for aligning the resolution regime with international standards.

The government clarified that Lloyd’s of London, the global insurance marketplace, will not be subject to the regime. Alternative resolution arrangements mitigate any potential risks posed by Lloyd’s as a systemic marketplace rather than an insurance firm or group.