This is the second part of our two-part series on the Insurance Recovery and Resolution Directive (“IRRD” and “Directive“).

In this part, we focus on resolution planning under the IRRD, including the role of resolution authorities, the assessment of resolvability, and the range of resolution tools and measures available where a (re)insurer is failing or likely to fail. The first part is available here.

Resolution Planning

A “resolution plan” is a strategy prepared in advance by the designated resolution authority in an EU Member State to manage the possibility of, or the failure of, a (re)insurer that meets the test for resolution. “Resolution” under the IRRD refers to more “hands-on” direct intervention through a range of potential measures, with the actions taken by the resolution authority itself. Those actions are distinct from actions taken by the (re)insurer under its recovery plan. Such plans are developed for (re)insurers where resolution is deemed to be in the public interest, or where the (re)insurer performs a critical function. A “critical function” is a service performed by a (re)insurer that cannot be easily substituted within a reasonable timeframe or cost for policyholders and other stakeholders.

When preparing a resolution plan, the Central Bank of Ireland (the Central Bank), as resolution authority, must assess the resolvability of the (re)insurer, including the feasibility and credibility of winding-up under normal insolvency proceedings or using resolution tools and powers. If any impediments to resolvability are identified by the Central Bank, as resolution authority, while preparing the resolution plan, the Central Bank and the (re)insurer must agree on measures to address or remove such impediments within a tight timeframe. The IRRD grants resolution authorities significant powers to intervene pre-emptively to remove such impediments, even when the (re)insurer is not close to failure. The powers provided for in the final EIOPA guidelines include:

1. To restrict business lines and product development.
2. To limit a (re)insurer’s individual and aggregate exposures.
3. To change the legal or organisational structure of a (re)insurer if the resolution authority assesses that the structures of the (re)insurer or group are too complex or too interconnected to be able to maintain continuity of access to critical functions in resolution.
4. To require a (re)insurance group to restructure legal entities along geographical business lines.
5. To require a significant branch of a third country (re)insurer to set up a subsidiary.
6. To require a (re)insurer to divest illiquid or not commonly traded assets held in its portfolio prior to resolution.

Concerns had been raised during the consultation period about the proportionality of these powers, particularly considering the low likelihood of resolution being required. The draft EIOPA guidelines on the removal of impediments to resolvability did not explicitly clarify that such measures should be exceptional and applied only as a last resort. EIOPA in their response (given in the final document) felt there was sufficient safeguards in the Directive itself. Some of the proposed interventions such as restructuring requirements or forced asset sales could have immediate and adverse financial consequences for in-scope (re)insurers. These impacts may, in turn, affect product value and market competitiveness.

Resolution Tools and Measures

It is important to note that the likelihood of a (re)insurer entering resolution under the IRRD framework is considered remote. Several limiting factors contribute to this, including:

• The 99.5% Value at Risk confidence level under Solvency II;
• That the test for resolution requires the following three criteria to be met:
  • the in-scope undertaking is failing or likely to fail;
  • there is no reasonable prospect that supervisory action or private sector measures could prevent the failure within a reasonable timeframe; and
  • the resolution is necessary in the public interest;

• That only 40% of each EU Member State’s life and non-life (re)insurance markets will need to be subject to resolution planning;
• The principle that no creditor should be worse off than under normal insolvency proceedings.

Resolution authorities are equipped with five resolution tools (broadly similar to the tools in the BRRD) and additional resolution powers to manage failing (re)insurers. The write-down and conversion tool allows the reduction of the principal amount of capital instruments and other eligible liabilities on the (re)insurer’s balance sheet and the conversion of outstanding debts into equity. The sale-of-business tool enables the transfer of shares or all or part of the assets and liabilities of the (re)insurer to a purchaser on commercial terms.

The Central Bank will also be able to restructure insurance claims of the (re)insurer, cancel and modify contracts, exercise shareholder and director rights or replace the management of a (re)insurer. They may also override contractual clauses triggered by the exercise of resolution powers and stay the performance of obligations, termination of contracts or enforcement of security interests for a short period after taking resolution actions.

The Directive acknowledges that the use of these tools and powers may interfere with shareholder and creditor rights. In particular, the transfers of shares without shareholder consent affects the property rights of shareholders. In this regard, the IRRD cautions the necessary and proportionate use of these tools giving due consideration to the objective of protecting the collective interest of policyholders, beneficiaries and claimants. The ‘no creditor worse off’ principle ensures affected parties do not incur greater losses than under normal insolvency proceedings. Shareholders and creditors that have received less than the amount that they would have received under normal insolvency proceedings are entitled to the payment of the difference.

Conclusion

The IRRD introduces a powerful new framework that will reshape how (re)insurers prepare for and respond to financial distress. While the likelihood of the use of resolution measures under the new regime remains low, the Directive grants the new resolution authorities sweeping powers that could impact business models, product offerings and group structures. Irish (re)insurers already familiar with domestic recovery planning will find some continuity, but the IRRD’s group-level focus and cross-border implications demand renewed attention. The IRRD must be transposed into Irish law by 30 January 2027 meaning early engagement is essential to manage compliance, protect commercial interests, and influence the evolving regulatory landscape.

For further information on recovery planning or the IRRD more generally, please contact Ian Murray or a member of the Insurance and Reinsurance Group.