Pre-emptive recovery planning: A first-timer's guide

Currently expectations are that the new Insurance Recovery and Resolution Directive (IRRD) will be approved by the European Commission in the near future. One consequence is that most European insurers will soon need to have a pre-emptive recovery plan in place. To assist these insurers, we wrote a briefing note that provides an overview of what they can expect when implementing such a plan for the first time along with lessons learned from jurisdictions where insurers already have pre-emptive recovery plans in place. Below, we outline the key takeaways of the paper.

Scope and structure of the plan

1. In some EU countries insurers already have pre-emptive recovery plans in place. Out of them, we consider plans in Ireland best practice as they are very much in line with the IRRD and EIOPA proposals. The Central Bank of Ireland^1,2 requires insurers to use a predefined document structure for recovery planning exercise, with a fixed set of guidelines to comply with. The main elements of this structure are shown in Figure 1. Insurers that do not yet have a pre-emptive recovery plan in place can use them as an example of what to expect in the near future.
2. The plan ideally includes recovery indicators and options and scenarios covering solvency, liquidity and operational events. This does not only ensure that most of the key risks and vulnerabilities of the insurer are covered, but it also enables the plan to link in with areas of increasing regulatory focus, such as operational resilience, emerging risks, third-party outsourcing and business continuity management.
3. Drafting a pre-emptive recovery plan requires considerable amounts of time and resources. Although the principle of proportionality does hold, realistically it can be applied to only a few specific areas of the plan. Careful planning and discussion as to whether the plan should be seen as a management tool, or merely as a compliance exercise, are therefore key before implementing the pre-emptive recovery plan for the first time.
4. Recovery planning can contribute to the further improvement of an insurer’s risk management framework. Risk monitoring and reporting is improved by adding recovery indicators and limits. Capital management plans are revisited and expanded, and the organisation is further future-proofed by resolving risks and impediments identified throughout the recovery planning cycle.

Recovery indicators and options

5. Recovery indicators and options, and their surrounding governance and processes, require more attention than recovery scenarios. The main purpose of scenario analysis in recovery planning is to test the effectiveness of the recovery options, the adequacy of recovery indicators and triggers, and to identify any pre-emptive measure(s) to be taken to increase or ensure the effectiveness, feasibility and timelines of the options and triggers.
6. Recovery indicators should be such that they support the monitoring and progression of key risks so that if deployment of a recovery option is necessary it can be implemented in a sufficiently timely manner. For this to hold, indicators should be in place that are forward-looking in nature. In practice, the number of this type of indicators available is typically limited and meeting this requirement can therefore be challenging.
7. One of the uses of the plan is that senior management has an exhaustive and concise menu of options already at hand, on which they can base their decisions in times of distress. Using a structured approach for the assessment of each option supports this decision making as it ensures completeness, allows for better comparability between available options and enables senior management to have the appropriate bird’s-eye view.
8. For financial and liquidity scenarios, recovery options can be considered more as one-size-fits-all. For operational risk scenarios, however, options are typically bespoke to the scenario they are applied to. Describing operational recovery options and scenarios in an exhaustive and at the same time concise manner, therefore, requires some initial thoughts on how to structure the pre-emptive recovery plan document that needs to be drafted.

Scenario analysis

9. It is very likely that the scenario causing an actual recovery situation differs from the ones included in the pre-emptive recovery plan. Combined with the (very) extreme nature of these situations, we feel there is a limit as to how much effort should be put into quantifying the recovery scenario impacts. It is likely that a high-level impact assessment is still sufficient for recovery planning purposes.
10. Considering extreme scenarios where what at first appears to be a small risk or vulnerability leads to distress, when done correctly, can force insurers to evaluate their risk profiles in an in-depth manner that is different from most (if not all) existing risk management processes. Recovery planning can therefore yield some invaluable insights into the operations of the business as an ongoing viable concern. This, of course, is the focus of executive senior management and the board of directors, and hence can potentially contribute to strategic management decisions.
11. The pre-emptive recovery plan is by no means an Own Risk and Solvency Assessment (ORSA). The ORSA tests the adequacy of a company’s current and prospective overall solvency needs and, by doing so, aims to prevent an insurer from breaching its Solvency Capital Requirement (SCR) and coming under severe stress. The pre-emptive recovery plan on the other hand, envisions the insurer as confronted with severe stress and contemplates the actions needed to mitigate that stress and restore financial strength and viability.

Figure 1: The CBI recovery planning cycle and its interlinkeage with other processes in the risk management framework

Getting started

Implementing a pre-emptive recovery plan can include many of the steps listed below.

• Organizing recovery planning workshops to identify scenarios to be tested and possible recovery options
• Implementing governance and processes to ensure the effectiveness of plans
• Analysing pre-emptive recovery options to ensure effective preparatory measures are put in place
• Designing and implementing recovery indicator frameworks
• Setting up an appropriate structure of the pre-emptive recovery plan document
• Gap analyses of existing plans with the previous draft and finalised guidelines and regulations
• Ensuring an independent review of the recovery plan.

For a deeper dive discussing what an insurer can expect when implementing such a plan for the first time, along with lessons learned from jurisdictions where insurers already have pre-emptive recovery plans in place, download our full report.

¹ CBI (April 2021). Recovery Plan Guidelines for (Re)Insurers. Retrieved 10 May 2023 from https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/insurance-reinsurance/solvency-ii/requirements-and-guidance/recovery-plan-guidelines-for-(re)insurers.pdf.

² The formal text of the regulations is available at: https://www.irishstatutebook.ie/eli/2021/si/184/made/en/print.