INTERNATIONAL ASSOCIATION OF
INSURANCE SUPERVISORSISSUES PAPER ON RESOLUTION OF CROSSBORDER INSURANCE LEGAL ENTITIES ANDGROUPS
1 JUNE 2011

This document was prepared by the Insurance Groups and Cross-Sectoral Issues Subcommittee in
consultation with IAIS members and observers. Under the classification of IAIS paper, issues papers
are meant to provide background on particular topics, describe current practices and/or identify
related regulatory and supervisory issues. Issues papers often form part of the preparatory work fordeveloping standards
This publication is available on the IAIS website (www.iaisweb.org).

© International Association of Insurance Supervisors 2011. All rights reserved. Brief excerpts may
be reproduced or translated provided the source is stated.

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Contents
1.

Introduction and purpose............................................................................................. 4

2.

Scope and definitions................................................................................................... 5

3.

Financial Stability Board developments ..................................................................... 6

4.

Causes of non-viability................................................................................................. 7

5.

General challenges and considerations in the resolution of cross-borderinsurance entities.......................................................................................................... 96.

Approaches to resolution of insurance entities....................................................... 14
6.1 Resolution regimes on legal entity basis.......................................................... 14
6.2 Resolution regimes for cross-border insurance groups................................. 18
6.3 Policyholder protection schemes...................................................................... 18

7.

Meeting the challenges of resolution of cross-border insurance entities............. 19

8.

Next Steps.................................................................................................................... 20

ANNEX I ............................................................................................................................... 22
Broad comparison of resolution frameworks in selected jurisdictions ............... 22
ANNEX II .............................................................................................................................. 26
CASE STUDY 1: Confederation Life Insurance Company, Canada........................ 26
CASE STUDY 2: Lumbermens Mutual Group, USA ................................................. 30

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1.

Introduction and purpose

1.
Since its inception in 1994, the IAIS has developed a number of principles, standards
and guidance papers to help promote the development, globally, of well-regulated insurance
markets, consistent with one of its objectives under the IAIS By-laws. A further objective of
the IAIS under the By-laws is to contribute to broader stability of the financial system.
To support these objectives, the IAIS Insurance Core Principles 1 establish thefundamental requirements on all aspects of insurance supervision. Of particular relevance tothis Issues Paper, the existing ICP 16 states that “The legal and regulatory framework
defines a range of options for the orderly exit of insurers from the marketplace. It defines
insolvency and establishes the criteria and procedure for dealing with insolvency. In theevent of winding-up proceedings, the legal framework gives priority to the protection ofpolicyholders”.

2.

3.
It is acknowledged that the failures (i.e. not meeting policyholder’s obligations) ofinsurers cannot be prevented in all circumstances and indeed an orderly failure of an insurer
may actually help to foster market discipline and avoid moral hazard on the part of theinsurers and policyholders. ICP 16 sets out the benchmark for the necessary supervisory
requirements that are expected to be in place for the orderly winding-up of an insurance
legal entity but does not address this issue from a cross-border insurance entity/groupperspective. Given that the winding-up of a cross-border insurance entity / group is more
complex, this Issues Paper is aimed at identifying the complexities involved and proposing
the way forward in addressing these challenges at the international level.
4.
The near collapse of a comparatively few number of large financial conglomerates
including operating cross-border insurance entities / groups in the financial crisis that began
in 2007, though primarily caused by problems in the non-insurance entities, underscores theneed to identify the obstacles to orderly resolution that are currently present.2 This will allow
remedies to be considered and put in place in order to enhance the preparedness of
insurance supervisors to deal with the next financial crisis whenever it arises. The disorderly
resolution of certain cross-border financial institutions during the financial crisis exacerbatedthe situation by adversely affecting market confidence, heightening risk aversion andnegating the resolution efforts of individual jurisdictions. The question arises whether thetools available to insurance supervisors to resolve financial problems for entities withincross-border insurance groups have kept up with the evolution of the groups themselves interms of their complexity, geographical and cross-sectoral interconnectedness. Further,
there is currently no international insolvency framework for insurance entities.
5.
Although the scarcity of actual resolution experience of cross-border insurance
entities may indicate effective regulation and supervision, it presents challenges in
identifying the issues that are commonly encountered when dealing with such situations.
This Issues Paper therefore draws on the limited experience of insurance supervisors (froma survey among IAIS members conducted in April 2010 with 27 jurisdictions responding) andalso relevant reports from the Basel Committee on Banking Supervision Cross-Border Bank
Resolution Group and the IMF report on Resolution of Cross-border Banks – A Proposed
Framework for Enhanced Coordination. It is, however, emphasised that the resolution
mechanisms in the banking sector do not read across to the insurance sector due todifferences in business models, products and resolution process.

1

2

At the time of publication, the Insurance Core Principles (ICPs) were being reviewed. The
revised set of ICPs will be available in October 2011.
The paper is intentionally silent on naming specific institutions as they may still be inexistence currently.

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2.

Scope and definitions

6.

For the purpose of this paper, cross-border insurance entities include insurancegroups operating in multiple countries. The primary focus of this issues paper is on
insurance groups with subsidiaries (i.e. legal entities) in multiple jurisdictions. Aspects ofcross-border insurance entities with branch offices in multiple jurisdictions are also covered
to the extent relevant. This paper does not deal with issues relating to financial
conglomerates (except to the extent of insurance groups belonging to a financial
conglomerate) which are under the purview of other rules.

7.
The term “resolution” is defined broadly as any action by an authority, with or without
private sector involvement, to deal with serious problems in an insurer or cross-borderinsurance group that imperil the viability of the insurer or the cross-border insurance group 2 .
Non-viability includes not only insolvency but also triggers of regulatory solvency control
levels as well as other serious financial or non-financial compliance failures, e.g. governanceissues.. In a group-wide context this raises issues of the relationship between viable andnon-viable entities and the implications of this for the viability of the group as a whole. It also
raises issues regarding the relationship between insurance and non-insurance entities
including cross-sector regulated entities and non-regulated entities such as holding
companies.
8.

The term “insolvency” has different meanings since it may relate to various financial
positions. There may also be differences in the legal effects of an insolvency, and there may
be differences in impacts on legal entities and/or groups. In most jurisdictions, the definitionof insolvency is specified in the corporate and/or bankruptcy law and relates to the legal
entity. The group as such does not become insolvent but, through contagion, an insolvency
problem for one group entity can lead to the insolvency of some other, or all, legal entities of
the group.

9.
“Insolvency” is usually defined in terms of excess of liabilities over assets (no surplus
or equity left) (see Section 1 of Annex I for survey findings). Once an insurance legal entity
reaches the status of insolvency (irrespective of whether it is standalone or part of a group),bankruptcy proceedings, including possibly in some cases corporate reorganisation, areinitiated. Actions will then be taken by the supervisor or by the liquidator. The decision
making authority of the management is at least restricted, if it not replaced by another body.
The practices vary across jurisdictions (see section 2 of Annex I for survey findings).
10.

The focus of this issues paper is therefore on the stage at which an insurance legal
entity or group is considered to be no longer viable in its existing form. This may occur at any
point before or when the insurer becomes insolvent (as defined by accounting, corporate
and/or bankruptcy law) or when it breaches its regulatory capital requirements (as defined by
the solvency regime). It is important to highlight that the underlying causes that may result in
an insurer becoming non-viable not only relate to a deteriorating financial position but also toother factors, for example significant weaknesses in risk management and governance.

11.
Earlier stages of financial difficulty when problems are building-up are addressed in
the IAIS Standard on Cross-border Cooperation on Crisis Management.
12.

In most jurisdictions, the supervisor will intervene with a range of measures if there
are issues which may pose serious threats to the viability of the insurance group and/or
insurance legal entities, including if the solvency of the insurance group or insurance legal
entities is inadequate. The supervisor will usually attempt to take prompt corrective actions
well before the insurance legal entity or group becomes non-viable as the scope of actions

2

This definition is consistent with the BCBS Cross Border Bank Resolution Group publication.

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available to the supervisor will become more limited as the situation of the insurance legal
entity or group deteriorates. These corrective actions can be taken by the supervisor in
conjunction with the management of the insurance legal entity or group. Regulatory capitalrequirements are often used as triggers for supervisory intervention as discussed in ICP 17.

13.

The different phases of an insurance legal entity or group moving towards a point of
non-viability need to be distinguished. The following diagram illustrates the phases frombeing viable to becoming non-viable:
Prevention

RecoveryResolution

Intervention
phase

Control overinsurance
legal entity/
group

Windingup and exit
fromthemarketSupervisor
andinsurer
lose
controlSupervisory control increases; insurer management control reduces

ViableNon-viable

State ofinsurance
legal entity/
group

3.

Financial Stability Board developments

14.
The Group of Twenty Leaders (G20) in their communiqué of November 2008 called
for standard setters, regulators and other relevant authorities as a matter of priority tostrengthen cooperation on crisis prevention, management and resolution. Further to this, theFinancial Stability Board (FSB) published the Principles on Cross-border Cooperation on
Crisis Management in April 2009 that set out expectations on how the relevant authorities
should cooperate in making advanced preparations for dealing with financial crises andmanaging them. The IAIS translated these FSB Principles into an insurance context andadopted the Standard on Cross-border Cooperation on Crisis Management in October 2010.
15.
At the G20 Toronto Summit in June 2010, the G20 countries committed themselvesto design and implement a system where they will have the powers and tools to restructure
and resolve all types of financial institutions in crisis without taxpayers ultimately bearing theburden. They also agreed to support changes to national resolution and insolvency
processes and laws where needed to provide the relevant authorities with the capacity tocooperate and coordinate resolution actions across borders. The G20 has also endorsed the
FSB’s policy recommendations to address problems associated with, and resolve,
systemically important financial institutions (SIFIs) at the Seoul Summit in November 2010.
The FSB’s recommendations aim at making SIFI resolution a viable option as part of theoverall policy framework to reduce moral hazard risk posed by SIFIs. The recommendations
cover three key areas:Comprehensive resolution regimes and tools (designating resolution authorities ineach country; restructuring and recapitalisation mechanisms)

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Effective cross-border coordination mechanisms (mandates that allow resolution
authorities to cooperate and share information across borders, institution-specificcooperation agreements)



Sustained recovery and resolution planning.

16.
Although this Issues Paper is not focused specifically on potentially systemicallyimportant insurers (but rather cross-border insurance entities more generally), it is expected
to be used as basis for insurance input in the follow-up work by the FSB in close cooperation
with the IAIS, BCBS, IMF and IOSCO to develop criteria for assessing the resolvability of
SIFIs by mid-2011.

4.

Causes of non-viability

17.

Experience has shown that the major underlying cause of insurance company nonviability is related to failures of corporate and internal governance, although even a wellmanaged company can become non-viable in extreme circumstances. Within a group, thenon-viability of one subsidiary may adversely impact other parts of the group or in extreme
cases lead to the non-viability of the group as a whole. An excessive level of growth and a
failure to understand and manage risk can also be causes of insurance company nonviability.
At a more detailed level, there are a number of factors 3 that could potentially cause
the financial distress of an insurance company which in the absence of effective recovery
actions by the firm’s management or supervisors may result in it becoming non-viable. At
the insurance legal entity level, some examples of such factors include one or more of:

18.




Poor risk management.

Actual underwriting results lower than expected due to premium deficiencies.



The impact of external events such as improving mortality experience on acompany specialising in annuity business, or the unexpected inflation of medicalcare costs.

Actual expenses exceeding expense assumptions due to poor expense control.






Investment returns being lower than reserving or pricing assumptions.

Actual incurred claims that exceed expected claims due to random variations inclaim amounts or frequency.
Actual claims paid and/or future expected claims relative to reserving
assumptions.

Actual expenses exceeding expense assumptions due to the impact of fixed
costs and lower than assumed business volumes.
Investment losses on funds backing the solvency margin requirement.
Failure to monitor credit risk
The impact of having to compensate policyholders following a specific event,such as mis-selling.

3

For
a
more
detailed
analysis,pleaserefer
tothe
SharmaReporthttp://ec.europa.eu/internal_market/insurance/docs/solvency/impactassess/annex-c02_en.pdf.

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

The impact of a catastrophe or asbestos type loss, where there is a concentrationof risk.



Litigation



Failure to adequately identify and manage risks arising from other entities within
the group.







Operational failures such as the mispricing of unit-linked investment contracts.

Incorrect valuation of assets and liabilities due to errors, fraudulent practices or
criminal acts.

Reputational damage.
Failure to adequately identify, price and provide for the risks inherent in thebusiness.

A failure to allow sufficiently for the impact of taxation.
Failure to receive reinsurance recoveries.
Failure to receive reimbursement of funds lent to third parties.
A lack of liquidity leading to an inability to pay current claims if illiquid assets
cannot be realised within the required timeframe.

19.
At the group level, the potential non-viability of a member of a group is often able tobe mitigated by support from within the group, such as transfers of funds or granting ofguarantees from other group entities, including a holding company. Non-viability at a grouplevel normally only arises when the failure of one or more legal entities of the group is sosignificant that support from within the group is insufficient to make up any shortfall in funds.
Typically this can arise when there is one dominant company in the group with a number ofsmaller companies. The non-viability of the dominant company can result in the non-viabilityof some or all the smaller companies if they are relying on support from the larger company
or if the smaller companies have loaned funds to the larger company. Reputational issues
impacting one part of a group can also have a knock-on impact on other parts of a group andin an extreme case result in non-viability.
20.
The approach to the resolution of a non-viable group depends to some extent upon
the cause of the failure. If the non-viability was caused by an unexpected number of large
insurance claims or investment losses but the business is still deemed to have value, it may
be possible to arrange for the business to be taken over, or for portfolios to be novated ortransferred, either as a whole or in parts, to another insurer. If on the other hand the nonviability was caused by a major corporate governance failure which resulted in fraud,systematic under-reserving or under pricing of risk, the chances of the business being soldas a going concern are reduced and either run-off or winding up is likely to be required. If
the non-viability was caused by a loss of reputation, the purchase of some or the entire
group by another entity could lead to a successful resolution as the troubled business would
often trade under a different name or the name of the purchaser.

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5.

General challenges and considerations in the resolution of cross-borderinsurance entities

21.
There are a number of additional challenges that have been identified for theeffective resolution of cross-border insurers within an insurance group as opposed to theresolution of insurers or groups situated in a single jurisdiction. These challenges stem fromthe existence of different legal and regulatory requirements as well as different practices
among jurisdictions. These differences may lead to conflicts among the involved supervisors
and to a sub-optimal resolution outcome for the group as a whole. Many of these differences
stem from legal systems over which supervisors have limited influence, or competing
liquidators. This is particularly the case once the entity actually exits from the market or iswound-up. In the near future, it is unlikely that legal systems will be amended in favour ofmultilateral arrangements because national Governments then need to relinquish national
powers. Orderly resolution of cross-border insurance groups and insurers therefore depends
crucially on appropriate actions prior to the non-viability stage, ideally to avoid non-viability ofparts of, or the entire group, in the first place or to ensure an orderly resolution of thebusiness if involuntary market exit is unavoidable. This section of the paper identifies
differences between jurisdictions and the challenges they pose.
22.
There are various insurer or group structures which can create cross-border issues.
These include,i.

Groups with subsidiaries and activities in several countriesii.

Single insurers with activities in several countries via
a. Branches (usually regulated and with certain tied asset requirementsin each host country)
b. Reinsurance (which may be regulated and have tied asset
requirements in some host countries but which may not be regulated
in other host countries and only home country laws apply)

23.

The main focus of this paper lies on foreign subsidiaries within an insurance group.
However, there are also cross-border issues with branches. The legal implications aredifferent as there is no separate balance sheet for a branch. Also, branches may besupervised differently from legal entities. Insurance branches are usually regulated andcertain tied assets may be required to be held or “localised” in the host country. Reinsurance
branches are regulated in some countries but some jurisdictions do not supervise them on
the basis that reinsurance is a business to business arrangement and there is no direct
policyholder protection needed. Further, reinsurance is often cross-border, even if it is done
directly from one legal entity on a worldwide basis. Many countries do not have any
regulation for this. However, there might be some regulatory collateral requirements in place(e.g. in Canada and USA).

24.
The resolution of insurers is complicated when they operate cross-border and/or arepart of an insurance group. While financial difficulties may initially or primarily impact only
one aspect of an entity’s (or group’s) operations, depending on the nature or severity of
those difficulties, they may spread or ripple through other operations of the entity or group.
For example, financial difficulties in a major business of the entity may spread to other areasof the entity or group as a result of reputational issues, diminished financial capacity or intragroup support measures. This may make it difficult to raise new capital, attract new businessor dispose of operations in other areas of the entity or group. On the other hand, thedifficulties might be readily isolated and resolved on their own without impact on the larger
entity or group. Further, difficulties felt at the group level may not mean that all entities in thegroup need be resolved. Indeed some successful subsidiaries (for example) may be able tocontinue operating with fresh sources of capital, independent of any actions being taken to
resolve other parts of the group.
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25.

Examples of areas that can differ betweeni.

Jurisdictions:a. Measurement of assets and liabilities
b. Regulatory capital requirements
c. Insurance lawsd. Insolvency laws
e. Administrative and civil laws and criminal laws
f. Priorities given to policyholders in wind-up
g. Scope and coverage of insurance guarantee schemes and pledged
assetsh. The existence of other types of policyholder protection schemes
i. International private and public law

ii.

Supervisors:a. Intervention processes and powers
b. Bilateral/multilateral recognition/agreement between home and hostregimesc. Planning for stress and resolution situations

26.
Differences stem from both national supervisory and regulatory frameworks as wellas corporate or bankruptcy law. Insolvency legislation applies to individual legal entities
within a jurisdiction and triggers statutory actions, including closure to new business andwinding-up, usually by officially appointed national administrators. The role of the relevantgroup-wide supervisor and involved supervisors in insolvency proceedings is likely to belimited. The principle of policyholder priority may be subject to the rights of secured creditors
in relation to certain assets (e.g. in the EU). Where such assets are held in anotherjurisdiction the rights will be governed by the law of that jurisdiction. In this case, protectionof policyholders may be achieved through deposit-back or other security arrangements infavour of a firm’s policyholders.
27.
Policyholder protection schemes often vary significantly between jurisdictions. Someschemes only cover life business while others cover non-life as well. The proportion ofclaims covered also varies significantly. Within the EU, consideration is being given todeveloping a coherent framework for insurance guarantee schemes (July 2010 White Paper)
but consistency of schemes internationally is a long way off.
28.
While efforts to bring national arrangements more into line are to be encouraged,
progress is unlikely to be rapid. In these circumstances supervisory actions prior to nonviability which would trigger a winding-up are of key importance. Broadly two types ofsupervisory actions are available.
29.
If necessary, cross-border insurance groups could be required to structure their local
entities to fit more closely into existing national insolvency laws and related legal structures
so as to facilitate resolution if the need arises. However, given that insurers and insurancegroups generally experience longer term resolutions than banks due to their different coreproduct and business model such requirements should be applied flexibly andproportionately to the nature, size and complexity of the group as well as its systemic
relevance.
30.
More immediately important is the need for coordination and cooperation
arrangements between involved supervisors of cross-border insurance groups to be in place
on an on-going basis in order, particularly, to manage issues of intra-group connectivity (seeparagraph 33). This would include bilateral and/or multilateral agreements between involved
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supervisors covering the exchange of information and also supervisory cooperation andcoordination arrangements including planning for stress and resolution situations. In
particular, effective supervisory college and/or other supervisory coordination arrangements
need to be in place prior to any insolvency proceedings to ensure necessary channels exist
for the exchange of information and that there is appropriate cooperation and coordination ofsupervisory actions. In this regard the recent IAIS Preliminary Views on the FSB Policy
Recommendations on SIFI Resolution includes the following statement on cross-bordercoordination:“As stated in the IAIS supervisory materials, insurance supervisors are expected tocooperate with other supervisors (including from other sectors) on a legal entity andgroup-wide basis. The IAIS strongly supports the use of supervisory colleges as asupervisory cooperation tool for international insurance groups. In addition, insurance
supervisors are expected to develop and maintain plans and tools for dealing withinsurers in crisis and seek to remove any practical barriers to efficient andinternationally coordinated resolutions. The designated group-wide supervisor is
expected to coordinate crisis management preparations with involvement from otherrelevant supervisors.
On information exchange, insurance supervisors are expected to put in place efficient
cooperation procedures and share the relevant information regularly. The IAIS would
like to emphasize the importance of respecting jurisdictional confidentiality
requirements under such arrangements. Multilateral Memorandum of Understandings(MMoU) are useful to facilitate such information exchange.”

31.

The IAIS Preliminary Views also refers to recovery and resolution planning:“Insurance supervisors are expected to maintain plans and tools for dealing withinsurers in crisis. Recovery and resolution plans should not be limited to only liquidity
and capital arrangements.
While not specifically targeted for resolution, the Insurance Core Principles doprovide for insurance supervisors to deny/withdraw the license when theorganisational (or group) structure hinders effective supervision which could beapplied in a crisis situation.
Insurers are expected to be capable of supplying, in a timely fashion, the information
required by supervisors in managing a financial crisis.”

32.
However it should be noted that, in contrast to a number of proposals from the FSB,
this statement is made in the context of arrangements between involved supervisors rather
than a requirement for firms and groups themselves to maintain Recovery and Resolution
Plans (RRP). In this respect awareness of potential actions by involved supervisors triggeredby supervisory control levels and other early warning solvency tools on insurance legal
entities within a group is essential to avoid or limit insolvency of group entities. Awareness ofgroup risks or solvency control levels established by jurisdictions within the group is also
important. For example, information within an Own Risk and Solvency Assessment (ORSA)
could help to assess and, if necessary, respond to the assessment of the solvency positionof a group as a whole. Ultimately, awareness by involved supervisors of potential
supervisory intervention triggers (group or legal entity) will help facilitate coordination andpossible action on a group-wide basis. This could be particularly helpful if there are potential
constraints due to different entity-specific or national legal requirements.
33.
There are a number of specific aspects related to insurance groups, and particularly
their inter-connectedness, which should be taken into account in the event of a need for
resolution. Some common intra-group transactions and exposures are:

Reinsurance transactions among group entities
Loans or letters of credit made among group entities

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Cross shareholdingsDividends

Guarantees or letters of support between group entities
Other agreements such as cost sharing, profit & loss sharing, etc.

34.
In contrast to the banking sector, individual insurance entities within an insurancegroup are, in principle, able to continue business despite stresses in other group entities.
This is due to the nature of insurers’ core product and business model mentioned above.
However reinsurance transactions and other intra-group transactions, including loans,guarantees and letters of support, are common features of insurance groups which have led
to increased inter-connectivity between group members. Such transactions can be a sourceof strength to a group which is fundamentally healthy even though certain members of thegroup are experiencing stress. However they can also create contagion and complicate theprocess of unwinding transactions in the event of insolvency.
35.

Increasing complexity of group structures, including non-insurance and non-regulated
entities and non-operating holding companies, has become a major consideration withrespect to resolution of insurance groups. The IAIS Guidance Paper on the Treatment of
Non-regulated Entities in Group-wide Supervision (April 2010) highlights the financial
contagion and reputational risks resulting from intra-group transactions and exposures. In
particular intra-group relationships between regulated entities and non-operating holding
companies and non-regulated operating entities may negatively affect regulated entities
within a group or the group as a whole.

36.

In these circumstances, access to and exchange of information, subject toconfidentiality requirements, on group structures and intra-group transactions is essential.
Supervisors have traditionally been reluctant to impose requirements regarding groupstructures but in the wake of the financial crisis insurance groups should at least be able todemonstrate to supervisors how they would address problems arising from complex groupstructures.

37.

Other issues specifically related to the cross-border aspects of resolution include:

Legal requirements or political pressure resulting in priority being given to theprotection of local policyholders.

Inability of some jurisdictions to recognise decisions made by foreign courts.

Jurisdictions have different powers to deal with companies that do not meet theirminimum solvency margin requirements in terms of their ability to stop thecompany writing new business or forcing a merger or other restructuring.

Some group structures are overly complex which would increase the difficulty ofresolution.

Ring-fencing: If assets of an insurance legal entity are insufficient to cover certain
claimants within a jurisdiction, such claimants as well as politicians might put
pressure on the government and supervisory authority to keep assets and cash
inside the country. Thus, obligations arising from intra-group transactions may bedeferred. The worse the insolvency, the more likely jurisdictions may seek to ringfence the local assets, even after supervisors have assessed adequate capital.

The ability or willingness of insurance supervisors to share information with othersupervisors.

38.
Corporate and bankruptcy legislations are usually legal entity specific as well as
nationally or regionally based. This factor could present fungibility of capital risks for a groupeven though this has not been tested due to limited experience on non-viability involving
cross-border insurance groups. Nevertheless, there is a strong need for jurisdictions to
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coordinate on how they intend to protect all policyholders and claimants in line with therespective jurisdictional laws and frameworks that afford certain rights to those policyholders
and claimants. In these circumstances, supervisory intervention measures prior to nonviability are crucial.

Insolvency Legislation

39.

Insolvency legislation can take different forms in different jurisdictions. In particular:

The insurance supervisor could have the responsibility for acting as receiver or
liquidator of an insurer or alternatively a private firm could be appointed either by
the insurance supervisor or by a Court.

Specific legislation may exist in respect of the resolution of insurance companiesor alternatively resolution may rely on general insolvency law.



The initiation of a resolution process can be made by some or all of the following
parties: insurance supervisor, company management, creditors, shareholders andpolicyholders.



The legislation in some jurisdictions permits the recognition of a decision by aforeign court whilst in others it does not.

Localized Resolution Frameworks

40.

While many insurance groups operate globally, the frameworks for addressing theirdistress and failure are local and apply to distinct parts of the group rather than to the groupas a whole. By allowing insurers under their supervision to establish presences in a range ofjurisdictions, home authorities expose themselves to the reality that the legal frameworks forfacilitating cross-border insurance in stable periods are typically more effective than the
cross-border resolution arrangements that are available in times of distress.

41.
While the existing localised approach is due to a number of factors, a fundamental
reason is the fact that resolution frameworks are established by national law and, absent thecooperation of the national authorities of other jurisdictions, are only enforceable vis-à-vis
those institutions—or branches of institutions—operating in their territory. In the absence ofan international legal framework that empowers a supranational entity to resolve global
institutions, the resolution of such institutions are subject to different national or regionalframeworks and, accordingly, authorities must proactively coordinate their actions to avoid
the significant costs and risks of an uncoordinated approach.
42.
Moreover, the legal frameworks of many jurisdictions do not sufficiently facilitate oreven allow coordination. Legal frameworks in some jurisdictions do not sufficiently empower
their supervisors or the relevant resolution authorities to share information with theircounterparts in other jurisdictions. In the context of an ailing insurance group, the ringfencing of assets by host jurisdictions may undermine an effective resolution. Court or
regulator appointees may face difficulties in having certain recovery operations, such as“purchase and assumption” transactions, implemented in the host jurisdictions of insurance
branches.
43.
Effective coordination is also hampered by the absence of a minimum level ofharmonization. National or regional legal and regulatory frameworks often differ in key areas.
In the context of insurance insolvency, there is no universally-agreed approach to questions
such as triggers for the commencement of insolvency proceedings or powers available to thesupervisors to deal with an insolvent insurer.
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44.
Even where there is at least a minimum degree of harmonization, the multiplicity of
involved regulatory bodies may make coordination difficult. Overlapping competencies anddifficulties in discerning the scope of various national supervisors’ responsibilities could
emerge.
45.
Finally, ring-fencing can be used as a critical tool that allows a supervisor tosafeguard assets, until appropriate global due diligence, coordination and collaboration canbe appropriately evaluated. When supervisors are faced with the distress or failure of an
insurer within their jurisdiction, they could give primary consideration to the potential impact
on their own stakeholders: namely, policyholders and/or creditors to branches or subsidiaries
located within their jurisdiction and local taxpayers. In these circumstances, national
priorities translate into a "territorial" approach that could effectively preclude coordination
where in the event of failure of a domestic branch of a foreign insurer, local assets are "ringfenced" for the benefit of policyholders and creditors of the branch only and are not available
to the insurer as a whole. Thus, the practice of ring-fencing could be geared to protect theinterests of policyholders and creditors in an insurer's local market to the detriment of
stakeholders in other jurisdictions. While the principle of universality implies no ring-fencing
and places all similarly ranked international claimants and creditors on an equal footing, thepractical issue is that to achieve this universality every jurisdiction would need to agree on
the ranking of claimants and the level of equitable distribution that is deemed fair for varying
insurance products and debts.

6.

Approaches to resolution of insurance entities

6.1

Resolution regimes on legal entity basis

46.
This section discusses resolution regimes on a legal entity basis. There is a wide
disparity in the principles underlying insurance resolution regimes throughout the world.
These differences are attributable to the pace of economic development, fundamental
cultural differences, legal environments, varying products and public policy decisions (e.g.
what a jurisdiction deems to be fair).
47.
In many jurisdictions, traditional court proceedings are available for the winding-up
resolution of insurers. However, distinctions need to be drawn between a resolution in theface of an insolvency and resolution in the face of a potential problem that imperils theviability of the legal entity and which may be remedied by recovery measures. In either case,most regimes do not allow policyholder interests to be compromised by the interests of otherparties.
Winding-up as a resolution tool48.
An example of a traditional winding-up resolution is the U.S. liquidation proceeding,where an insurer that is not deemed susceptible to a successful conservation or
rehabilitation may be placed in liquidation. The liquidation process ordinarily includes theseizure, marshalling, and liquidation of the insurer's assets; a determination of the insurer's
liabilities; collection of reinsurance recoverables based on the approved claims; anddistribution of the insurer's assets to claimants with approved claims. All parties' rights andliabilities are fixed as of the date of a liquidation order, all actions against the insurer otherthan the filing of proofs of claims are stayed, and the claims need to be settled at the values
they would have if the insurer had not needed to be liquidated. The entire business, parts ofthe business, insurance operations or assets may be sold or the corporate shell dissolved at
any point in the proceedings.

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49.
The Canadian insurance insolvency regime is another traditional winding-up
resolution. Characteristics include:Distinct statute for financial institutions;Federal statute, so there is one law consistently applied across Canada;General bankruptcy legislation does not apply;

In Ontario and in some other provinces, there is a specialized Commercial List
Court supervision;"Single-proceeding" is the theme: virtually all matters/disputes relating to theinsolvency are dealt with by the one designated court;

By statute, the Canadian regulator may authorise the liquidator to send Canadianassets and claimants to the head office insolvency, if the Canadian court
approves.



Canadian court will enforce and collect reinsurance of Canadian liabilities, even if
the treaty is a non-Canadian head office treaty;Canadian insolvency set-off law is restrictive in terms of timing requirements;



Canadian priority scheme gives priority to policyholder claims including
reinsurance.

There are also specific characteristics for Canadian branches of Non-Canadian insurers aswell:

Distinct regulatory and insolvency regime for Canadian branches;Conservative capital adequacy and deposit rules;



Non-Canadian receiver/liquidator may be allowed access to the assets or at least
the surplus in Canada.

50.
In many jurisdictions there are also legal powers to appoint interim examiners,
controllers, administrators or legal processes. An example is Chapter 11 in the U.S. thatallows non-insurance entities that are part of an insurance holding company system tooperate with court protection while options are being explored. Additional broad comparisonsof resolution frameworks can be found in ANNEX 1.
51.
Common characteristics that can be found within most winding-up resolution regimes
include:

Changes to policies or reductions to policy claims or benefits cannot be effectedwithout either the informed and voluntary consent of the individual policyholders,applicable court approval and/or the express legal authority provided to thesupervisor.



Writing new or renewing existing policies.



Maintaining reinsurance coverage and corporate insurances.



Guidance on the settlement of claims.



Adherence to priority distribution schemes set by law.

Consistent and timely notice to policyholders and creditors.

Procedural safeguards to ensure court and/or supervisory approval for all
significant actions.

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

Desire to safeguard insurer assets for the payment of claimants.

Provisions adopted by the United Nations Commission on International Trade
Law(UNCITRAL).
Link:
http://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_Ebook_eng.pdf

Winding-up proceedings are pursued when all preventative actions andproceedings have been exhausted.

Winding-up proceedings can be instigated by the supervisor, groups ofpolicyholders or commercial creditors.

An insurer may be deemed to have inadequate capital if it is unable to meet its
regulatory capital requirements.

52.
There are key considerations that should be evaluated when analyzing winding-up
resolution regimes on a legal entity basis. Evaluation of how these considerations are
addressed at a legal entity level in a particular jurisdiction’s resolution regime may enable
IAIS members to better understand potential challenges that could arise with cross-borderresolutions.
53.

Examples of key considerations of legal entity winding-up resolutions are as follows:

Whether policyholders may have a right to vote or comment on the resolution(e.g. restructuring plan or liquidation proceeding). Usually that right is available
when the plan or proceeding does not require that policyholder contracts befulfilled in their entirety.



Whether the resolution provides sufficient transparency.

Whether the entity in charge of the resolution is held accountable to thesupervisor or courts.



How and by whom the authority/authorities in charge of resolution is/aredetermined.

Whether there is a legal framework which allows a forced resolution.



Whether it is possible for policyholders and reinsureds to be compelled to accept
a resolution that requires that they make economic concessions. The plan may
require approval upon the votes of creditors, or it may simply require regulatory
or court approval.



Whether a jurisdiction has provisions establishing a framework if a policyholder
cannot find acceptable coverage to replace that provided by the resolution.



Whether policyholders have claim priorities over other unsecured creditors andthis priority is strictly observed.



Whether reinsureds are treated as general creditors.

Whether a resolution may entail insurance cover being transferred to otherinsurers or reinsurers with whom policyholders and reinsureds had no priorrelationship.



Whether a jurisdiction has provisions which allow for claims acceleration andestimation in a proceeding.



Different requirements or legal processes may apply to long term business as
opposed to general insurance business.

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

Whether a jurisdiction has a policyholder protection scheme or other similar
mechanisms to protect policyholders.

Run-off

54.
Run-off is the process of discontinuing the writing of new business while continuing toadminister existing contractual policy obligations for in-force business. Claims are paid
against the existing reserves of the insurer. The decision to cease writing new business canbe taken by the insurer for various business reasons (e.g. business is no longer attractive) or
can be imposed by the supervisors because the viability of the insurer is threatened. A runoff can be solvent or insolvent, depending on the sufficiency of reserves and capital to pay
off all claims. A solvent run-off is often managed by the insurer’s management under thecontrol or supervision of the supervisors. An insolvent run-off is usually managed by theauthority, an administrator or another third party.
55.
The duration of the run-off depends on the portfolio (property vs casualty vs life
insurance) and the strategy chosen. Supervisors should monitor the different run-off
strategies.
56.
In the context of an insurance group, the run-off may be done for some or all
insurance legal entities in the group. During this process, supervisors of the jurisdictions
involved need to cooperate in order to guarantee a smooth process. Special considerationneeds to be given to intra-group transactions in order to ensure that they are not misused tothe disadvantage of certain insurance legal entities in the group.
Other forms of resolution tools

57.

Some regimes allow alternative schemes or mechanisms that can have advantages
to winding-up proceedings. These alternatives may offer a faster resolution of the underlying
financial challenge, or provide a less costly implementation process; and/or serve topreserve coverage that might otherwise have to be terminated in the context of formal windup proceedings. However it is important to ensure that they do not reduce supervisor and/or
judicial oversight or compromise policyholder interests.

58.

Examples of such alternative schemes include:i.

Schemes of Arrangements: These schemes are essentially statutorycompromises or arrangements between an insurer and its creditors requiring
majority creditor approval, confirmation by regulators of no objections, andcourt sanction. The process has evolved over the years and includes aprocess for both insolvent and solvent insurers.

ii.

Portfolio Transfers: A number of jurisdictions allow such transfers. Typicallythis enables an insurer to move all or certain of its insurance business toanother insurer without the consent of each and every policyholder subject toapproval by the regulatory authorities and other interested parties. Suchtransfers may, in full or in part, allow the maintenance of insurance contracts
beyond insolvency and therefore safeguard the interest of the policyholder toa maximum.

iii.

Merger, transfer of ownership or take-over by state-owned insurer(s) or otherparties

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6.2

Resolution regimes for cross-border insurance groups

59.
Winding-up proceedings can trigger a number of unique technical measurements in agiven jurisdiction (e.g. preferential treatment considerations), but may not receive the same
treatment in other regimes. The extent to which economic support may be obtained fromparents and/or other entities of a group in cross-border jurisdictions is governed primarily by
the laws of the jurisdictions of those parents and other entities. However, ultimately thejurisdiction in which the parent or affiliate is domiciled is particularly influential over the fateof subsidiaries in other jurisdictions. Thus, a common goal between supervisors tocommunicate and coordinate in cross-border resolutions to the best of their legal ability isimperative.
60.
Lastly, it has been noted that an emerging trend is to defer to the jurisdiction with thecentre of main interest and/or to the jurisdiction with a legal framework and precedent able tohandle such unique situations. Such situations might not necessarily result in the domiciliary
jurisdiction of the non-viable insurer leading the resolution. While further discussion of theseissues is beyond the scope of this issue paper, the subject merits careful consideration incircumstances where it may be considered and/or actually implemented.
61.
At present, resolution is rarely possible at the group level, but usually possible at thelegal entity level. Resolution of a group as a whole is rarely possible due to a number of legal
obstacles, especially significant differences in resolution regimes in various jurisdictions. The
issue of powers and responsibilities allocated in particular jurisdictions and a lack ofpossibility to transfer them is also the case.
6.3

Policyholder protection schemes

62.
There are different forms of policyholder protection schemes in place in various
jurisdictions. For an overview, see the OECD paper 4 on policyholder protection schemes.
63.
The presence of policyholder protection schemes provides additional or alternative
assurance to policyholders that their contractual obligations will be met when due. A
policyholder protection scheme may be more important for jurisdictions that grant weakerprivileges to policyholders in the insolvency procedure of insurance companies.
64.

4

Their presence has several implications for insurance supervisors, including:Protection schemes have a direct interest in any payments from the scheme
and can provide detection and intervention assistance. Such assistancewould be complementary to the direct role of the supervisor. Any assistancewould need to be subject to appropriate confidentiality and/or MOU
agreements.

Protection schemes can contribute to the predictability and availability ofprocedures which contribute to an orderly resolution of a non-viable insurer.

Conversely, the presence of multiple protection schemes for an insurer
operating in multiple jurisdictions contributes additional complexity to theresolution process as a result of differing scheme design and stakeholderinterests.

Refer to the OECD website for further information: www.oecd.org.

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7.

Meeting the challenges of resolution of cross-border insurance entities

65.

Due to the particular characteristics of insurance business models and products,
which in general allow a longer time-frame for addressing problems than, for example, in thebanking sector, a wide range of potential approaches to resolution of cross-border insurance
entities and groups is available. At the same time the wide range of structures andarrangements for conducting cross-border insurance activities means that particularapproaches to resolution are not necessarily appropriate in all circumstances. Measures
might need to be distinguished between life and non-life insurers and possibly credit insurers
and also between subsidiaries and branch structures. This section set out some areas forconsideration in relation to resolution of cross-border insurance entities and groups without
attempting at this stage to provide specific recommendations for particular courses of action.

i.

Harmonisation of insurance restructuring and insolvency lawsii.

Harmonization of insurance regulation and supervisory approach in respect torestructuring and insolvencyiii.

Acknowledgement of insolvency laws and regulations in various jurisdictions

iv.

Supervisory collegesv.

Crisis core collegesvi.

Recovery and Resolution Plans

vii.

Contingency Funding Plans

viii.

De-Risking Plansix.

Ring-fencingx.

Rankingxi.

Licensing66.
Harmonisation of insurance restructuring and insolvency laws: Ideally, there would bea global insolvency and recovery law which would deal with cross-border resolution andwhich would allow an orderly exit for an insurance group with entities in multiple jurisdictions.
However, this is, as already stated earlier in this paper, unrealistic to achieve in a short timeframe, if at all. Nevertheless any progress towards aligning the appropriate laws in thevarious jurisdictions as far as possible will be of benefit to effective resolution outcomes.
67.
Harmonization of insurance regulation and supervisory approach in respect torestructuring and insolvency: Progress towards a common approach by different jurisdictions
to regulation and supervision of cross-border insurance groups is likely to facilitate effective
resolution outcomes. Further, supervisors need to have the legal basis and power to takemeasures before an issue threatens the viability of an insurance group.
68.

Acknowledgement of insolvency laws and regulations in various jurisdictions: This
would facilitate group-wide application of measures taken by one authority as it becomes
possible to accept a measure taken by another supervisor in its own jurisdiction. Of course,such supervisory measures should be taken in cooperation with other involved jurisdictions.
Ideally, they can be discussed and decided within the supervisory college or the crisis corecollege.

69.
Supervisory colleges: The existence of an effective and well-led supervisory college
helps early identification of problems within an insurance group and facilitates fastercommunication in crisis situations. Contingency planning amongst supervisors and theexistence of MoUs (ideally in the form of the IAIS MMoU) will serve as preparation for
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handling a crisis. (Reference is also made to the IAIS guidance paper on the use of
supervisory colleges in group-wide supervision from October 2009.)

70.
Crisis core colleges: A standing subset of the supervisory college consisting of themost important supervisors of an insurance group may on the one hand prepare for crisis
situations (e.g. establishing recovery and resolution plans) and be in a position to act quickly
in a crisis situation.
71.
Recovery and Resolution Plans: Timely consideration of potential recovery as well as
resolution plans by both insurance groups as well as authorities is likely to promotesatisfactory recovery and resolution outcomes. A recovery plan may, amongst other things,
include how a portfolio transfer would work taking time issues, legal issues, costs &resources (staff, systems, etc.) into consideration.
72.
Contingency Funding Plans: The insurance group together with home and hostsupervisors (maybe within the supervisory college or crisis core college) should consider
contingency funding strategies in order to address liquidity issues in various potential crisis
scenarios.
73.

De-Risking Plans: The insurance group together with home and host supervisors(maybe within the supervisory college or crisis core college) should consider de-risking
strategies in order to address capital issues in various potential crisis scenarios.

74.
Ring-fencing: The issues of ring fencing should be analyzed with all their advantages
and disadvantages (reduction in contagion vs privileging some policyholders over others).
75.
Ranking: The legal ranking of policyholder funds in the event of insolvency needs tobe taken into consideration.
76.
Licensing: During the licensing process of a new insurer belonging to a cross-borderinsurance group, or at a later stage if appropriate, supervisors should consider theinterconnectedness of the applicant with the rest of the financial group. In particular, a clear
understanding of implicit and explicit intra-group guarantees and capital flows should beacquired before granting the licence. Further, additional collateral or deposits may beconsidered at the time of licensing as a way to gain the needed level of comfort to deal withthe group structure in a potential crisis situation. In addition, comprehensive reporting
information such as the capital adequacy of the main insurers within the group should betaken into account and be available on a regular basis. The licensing authority should
coordinate with the group-wide supervisor throughout the licensing process including
discussion on the reporting requirements.

8.

Next Steps

77.
This paper highlights that there are a number of important issues and challenges tobe considered in establishing effective resolution regimes for cross-border insurance legal
entities and groups.
78.
One of the recurring key points set out in this paper is for supervisors to act
proactively in supervising insurance legal entities and groups as the ability to intervene
effectively and the likelihood of the insurer recovering becomes less as it approaches thestage of non-viability.
79.

It is expected that this paper will serve as a basis for the IAIS to contribute relevant
insurance perspectives to international discussions on resolution of complex cross-borderfinancial institutions.

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80.
The exploration undertaken in this paper is preliminary and it is recognised that there
is a clear need for further analysis and consideration within the IAIS on this complex topic intaking forward the broader agenda on group-wide supervision. In particular, there are
significant challenges for the resolution of branch insurance operations and this paper has
focused mainly on the resolution of groups which operate via subsidiaries in either the same,or various, jurisdictions.

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ANNEX I

Broad comparison of resolution frameworks in selected jurisdictions 5
1.

No common definition for regulatory insolvency

Minimum Capital Requirement (MCR) is defined differently in the different jurisdictions. Thismeans that the point at which insurance legal entities, though potentially part of the same
insurance group, are wound up is different in different countries. However, given that almost
all of the respondents to the IAIS survey have adopted the IFRS, there seems to beconvergence on the definition of insolvency from an accounting perspective.
Figure 1: Illustration of differences between regulatory and accounting insolvency

Minimum Capital
Requirement (MCR)

Required
Capital

Accounting insolvency(Assets<Liabilities)
Involuntary market exit

Prescribed Capital
Requirement (PCR)

Voluntary market exit

Regulatory insolvency(CR<MCR)

CapitalResources(CR)
Risk Margin
AssetsTechnical
Provisions
and Other
Liabilities

Insurer’s
Financial
Position

Liabilities

Current
Estimate
Other
OtOther
Liabilities
likabilities

Regulatory
CapitalRequirements

Public Financial
ReportingNone of the surveyed jurisdictions has a definition for regulatory insolvency at the insurancegroup level.

5

Information provided in this Annex is based on the results of a survey carried out among IAIS
Members in April/May 2010. The sample of jurisdictions is meant to illustrate the different ways thesejurisdictions deal with threats to the viability of an insurer. They are intended to be purely forillustrative purposes only and are not meant to be comprehensive. Note that the jurisdictions listed
here are not meant to represent the wider harmonized framework to which they may belong.

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2.

A simplified resolution process for involuntary exit from the market

The resolution process of an insurance legal entity differs across jurisdictions. The different
early intervention stages could potentially result in different supervisory actions or triggers
being applied on an insurance legal entity depending on its location. Effectively, insurance
legal entities with the same financial situation may receive different supervisory treatments indifferent jurisdictions.
Figure 2: An example of a resolution process

Early
Intervention

CR falling
close to MCR
Directions to restore
viability
Regulatory
insolvency
Assumes control

Resolution

Underadministration
Liquidator takes over
responsibilities
Liquidation

Insurance
Legal Entity

3.

Insurance
Supervisor

Similarities of legal authority and supervisory power to deal with regulatory
insolvency

Insurance supervisors have largely similar legal authority and supervisory power to takevarious possible actions when an insurance entity becomes insolvent. These similarities
provide opportunities and scope to coordinate on a cross-border basis should the needarises to resolve insurance entities operating in multiple jurisdictions.
Legal Authority/Supervisory
Power

Australia

CanadaJapan

Switzerland

UKUSforeign













Request and obtain the necessary
information













Carry out emergency examinationof the insurance group













Restrict sale of products













Share information
authorities

withProvide guarantees

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Legal Authority/Supervisory
Power
Force
mergers
insurance entity
insurance entity

Australia

CanadaJapan

Switzerland

UK

US


betweenanand a non-Force mergers between insurance
entitiesForce the winding down or
restructuring of certain operations
or businesses













Provideneutralspaceforinterested institutions to discuss
potential resolutions













Facilitate the group’s effort to seekan acquirer













Limit intra-group transactions













Imposeasset
maintenancerequirements for branches in local
jurisdiction













Delay immediate operation
contractual terminal clause

of











Void
intra-grouptransactions
carried out over “suspect period”
just before insolvency proceedings











Shield a solvent insurance entity
from a failing parent company





















Recover monies from responsible
individuals or entities
Remove directors or senior
management and hold them toaccount

4.











Supervisory toolkit to wind-up an insolvent insurer

Similarities are observed on the supervisory tools available in the different jurisdictions that
could be used to wind-up an insurance legal entity which is being forced to exit the market
on an involuntary basis.
Tools

Australia

CanadaJapan

Switzerland

UK

Restructuring of liabilities













Transfer of assets











Sale of assets









Transfer of liabilities



US

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ToolsAustralia

CanadaJapan

Switzerland

UK

US


Termination of contracts
Long-term solvent run-off under
supervisory managementLong-term solvent run-off undercurrent management or ownership













Liquidation





























Bankruptcy proceedingsMerger with another non-insurance
financial institution
Merger with another insurer

5.



Other key features

Not all jurisdictions have the legal authority or supervisory power to resolve an insurancegroup totally or partially. Most of the surveyed jurisdictions require insurance groups to haveand maintain contingency plans.
Australia

CanadaPower to resolve an insurancegroup totally or partiallyPower to force subsidiarisation



Japan

Switzerland

UK

US



*



Requirement for insurance groups
todevelopandmaintaincontingency plans
Recognition of resolution decisions
by foreign courts or authorities







Institution specific arrangementswith foreign authorities



Regulatory/supervisory incentives
toreducecomplexitiesof
insurance groups

Availability of insurance guarantee
schemes











* Redomesticate

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ANNEX II

CASE STUDY 1: Confederation Life Insurance Company, Canada
Overview
The liquidation of Confed was one of the largest and most complex liquidation of a life
insurance company in North America. In August 1994, Confed’s policyholder liabilities wereapproximately $12.4 billion worldwide and it had in excess of $10 billion of assets underadministration in various funds. In addition to its life insurance business, Confed operated
other financial services businesses in a number of jurisdictions. Over a million people
depended on Confed for income support of all kinds, including life insurance, health anddisability benefits, and pensions. Confed operated in the US and the UK through both abranch and subsidiaries and in Bermuda and Cuba through branches. It sold commercial
paper of hundreds of millions of US dollars and of subordinated notes in British pounds andLuxembourg francs. After the failure of concerted efforts to rescue Confed and avoid aliquidation, winding-up orders were made in August 1994.
Results:

all policyholders in all jurisdictions received their full policy benefits;all ordinary creditors were paid in full, together with interest;

all subordinated debt holders will receive payments of about 95% of their claims;and

the creditors of Confed’s treasury and depositors and creditors of its trust
company subsidiary were paid in full, together with interest.

In total, payments of $900 million will have been made after all policyholders received full
benefits.
Factors Contributing to the Success included:a) The building of a co-operative relationship with the US Rehabilitator and his
regulatory and credit constituencies from the outset that allowed both estates
to make progress before they reached a settlement, and then to reach asettlement, avoiding litigation that could have seriously delayed the liquidationand prejudiced the results;b) The establishment of a governance structure that enabled major stakeholder
groups to contribute expertise, and that built credibility for the process among
stakeholders and in the Canadian and international business communities
that were the market for billions of dollars in assets and policy liabilities; andc) Immediate action at the beginning of the liquidation that preserved goodwill in
the individual life and group life and health block, leading to substantial
benefits to the policyholders and the estate;
Overview of Approach to the Major Jurisdictions
United States
As noted, Confed did business in the U.S. as a branch and through a subsidiary
Confederation Life Insurance and Annuity Company (“CLIAC”). Through Confed, CLIAC
provided the annuities that funded structured settlements in tort actions. Close to (U.S.) $1
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billion of structured settlements, providing income to the victims of accidents, in some cases,
catastrophic, were funded by CLIAC. CLIAC was totally dependent on the annuities issued
from Confed’s U.S. branch.
Confed’s U.S. branch wrote approximately (U.S.) $6.173 billion of life insurance, including
policies sensitive to competition from other carriers and annuities that funded pensions. For
example, Michigan’s civil service’s retirement programs had acquired a $100 million annuity
contract from the U.S. branch. The U.S. branch was in total about twice the size of theestate in Canada.
To be licensed as an insurer, Confed had to deposit assets in trust in Michigan, its U.S. portof entry, to support its insurance liabilities. Prior to its liquidation, CTSL had removed cashfrom the Michigan trust account, replacing it with CTSL promissory notes. In August 1994,
when the liquidation orders were made, about (U.S.) $640 million of notes were in the trust,which CTSL could not repay, and about (Cdn.) $350 million of mortgages and private
placements located in Canada were pledged to the trust, but were effectively under thecontrol of the Liquidator because of the winding-up. Although the Canadian estate faced anapparent shortfall to policyholders, it was clear from the outset that the shortfall to U.S.
policyholders would be significantly greater. There was a high risk of extremely complex andcostly litigation, with ensuing uncertainty and delay to the administration of both estates thatwould seriously prejudice an orderly wind-up in both jurisdictions.
In order to assess the best interests of the estate, efforts were made to determine the likely
range of results under various scenarios involving unitary proceedings or separate
proceedings. Estimating the ultimate realization from Confed’s assets required the exerciseof judgment in quantifying the expected results of future events. These estimates were, bynecessity, influenced by many factors that made precision virtually impossible.
The Liquidator and Rehabilitator negotiated an interim arrangement while different avenues
for dealing with the two estates were being explored, pursuant to which they would consult
on all material transactions, given the possibility of combining the U.S. and Canadian
proceedings, and given that as a result each was the major stakeholder in the other’s
estate. Further, at the request of the Rehabilitator, the Liquidator spoke at many U.S.
stakeholder meetings, acknowledging the Liquidator’s obligation to all policyholders ofConfed wherever situate, providing the same level of disclosure as to Canadianstakeholders, and building credibility for a negotiated solution.
In June 1996, a settlement was reached that was approved by both supervising courts
without opposition. The major provisions of the U.S. Settlement Agreement included:a) a full and complete release from the Rehabilitator on its own behalf and on
behalf of all U.S. claimants in favour of Confed, the Liquidator and theCanadian estate;b) payment by the Liquidator to the Rehabilitator of $225 million;c) a “true-up" mechanism” under which, if the claims of Canadian policyholders
were paid in full, any remaining residue would be paid to the Rehabilitator
until U.S. policyholder claims were paid in full, and if U.S. policyholders’claims were paid in full, any remaining residue would be transferred or paid tothe Liquidator; andd) agreement that, if the claims of U.S. policyholders and Canadianpolicyholders were paid in full, any remaining assets would be placed under
the control of the Liquidator and applied to the payment of claims of creditors
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The Liquidator initially paid $225 million to the Rehabilitator, and $309.2 million was returnedto the Liquidator, under the true-up mechanism.
U.K.
Confed had extensive operations in the U.K. Prior to the liquidation, it had been in
negotiations with Sun Life for the sale of the U.K. business. A number of the terms
negotiated previously were not appropriate in liquidation. Given the substantial liquidity
provided by the completion of the transaction, which in turn helped to complete otherreinsurance transactions, the Liquidator completed the negotiations with Sun Life, including
escrow arrangements, during the weekend of August 12, 1994. The escrowed funds
secured and limited Confed’s liability for representations, warranties and taxes, andultimately saved the estate hundreds of millions of pounds sterling as pension mis-selling
became a major issue in England.
BermudaConfed was licensed under Bermuda law to conduct most types of life insurance and annuity
business in non–Bermuda currency and with non-Bermuda entities, on both a direct andreinsurance basis. Confed’s Bermuda branch targeted an international market of high net
worth individuals. The Bermuda branch business had approximately 170 outstanding
policies with a face amount of approximately $170 million (plus various term certain
annuities), policyholder liabilities of approximately $7 million, and annual premium income of
approximately $3.1 million.
By order of the Supreme Court of Bermuda in August 1994, a Bermudian liquidator was
appointed for the Bermuda branch. In March 1995, responsibility for administration of the
Bermuda branch was transferred, by that Court’s further order, to the Liquidator.
Following this, the Liquidator set up an escrow arrangement whereby premiums for the
Bermuda branch policies would continue to be received and held, pending completion of anassumption reinsurance transaction which was completed in July, 1995, with the approval of
the Bermuda and Ontario courts.
Cuba
Confed operated a branch in Cuba. The Cuban government had prevented the assets of the
Cuban branch from being removed from Cuba and had passed a decree ordering insurancecompanies not to pay any policyholder who left Cuba permanently in the 1950s. The
liabilities of the Cuban branch were primarily payable in Cuban pesos, which were notreadily negotiable outside of Cuba. The books and records remained at the Cuban branch,access to which required a visa, and remained in the control of the Cuban government. The
Liquidator’s best estimate of the liability in respect of policies issued through the Cuban
branch to policyholders who had left Cuba permanently was in the range of (U.S.) $2 million
to (U.S.) $4 million. The Liquidator, with the assistance of the Canadian government,
negotiated an agreement with the Cuban government that ensured all policyholders of the
Cuban branch, whether resident in Cuba or not, would be paid. In addition, the Cuban
government caused periodic payments totalling (U.S.) $9 million to be paid to the Liquidator.
The effect of the agreement was to ensure all policyholders of the Cuban branch werecovered, to allow the Liquidator to realize a recovery in respect of the Cuban branch assets
in a liquid form, notwithstanding that they were denominated in Cuban pesos and had been
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seized by the Cuban government, as well as ensuring that the Liquidator had access to thebooks and records of the Cuban branch to allow it to deal with policyholders resident outsideof Cuba.
Some lessons learned:a) Confed US had authority to restructure policies, which gave it far greater
flexibility in selling blocks of business. Canada now has adopted legislation
permitting limited restructuring of policies. Take away – authority torestructure policies can create value.
b) There were significant issues between Confed US and CLIAC. Take away –do not think of cross border issues as being just between countries but also
as being between entities within the same country. Issues within a country
can be as intractable as those between them.
c) Governance and information sharing issues arose as between the National
Organization of Life and Health Guaranty Associations (NOLGHA) and the
Rehabilitator in the US and between Assuris and the Liquidator in Canada
and with respect to the handling of strategic issues between the jurisdictions. .
Take away – the consumer protection organizations are part of the process
and need access to information on not only about their own jurisdiction but
also the rest of the conglomerate, at least to the extent it might impact them.
d) CTSL, the treasury subsidiary, managed Confed’s derivative book and also
acted as a market maker in its own right maintaining what was supposed to
be a matched book of business and transferring funds among entities that
required liquidity. Take away –you cannot consider the consolidated assets
and liabilities in resolving a multi-national financial institution insolvency. Each
entity and jurisdiction will need to be considered on its own, even if there is
the potential for some of the jurisdictions to accept a universalist approach. In
addition, when there are allegations of fraud, all participants have a tendency
to go into a shell to protect themselves and their position, which can becounterproductive, so it is important to be careful in making such allegations.
e) Confed’s head office in Canada provided processing and other services forthe entire group, without which parts of it could not function or would at least
have had difficulty. Agreements to provide access to services helped
establish a co-operative relationship between jurisdictions and there weresome services that were sold. Take away –do not do something that upsetsthe business operations and structure in the process of winding up a multinational entity that may destroy value. Recovery plans can help this kind of
situation.
f)

The UNCITRAL Model Law not been developed in 1994. While intended
mainly for commercial enterprises, it does have a number of attributes whichshould apply to financial institutions. Further, the UNCITRAL Cross Border
Guide on Insolvency (approved by the General Assembly in 2009) has anumber of very useful and important comments on cross border issues. Take
away –the UNCITRAL provisions, including a recovery plan with a protocol on
how to deal with assets could add to the timely development of a working
relationship among the restructuring jurisdictions and add value.

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CASE STUDY 2: Lumbermens Mutual Group, USA
Background
Lumbermens Mutual Group (the Group), fka-Kemper Insurance Group, a large international
property/casualty insurance group with multiple affiliated insurers, wrote workers’
compensation, environmental, professional, excess casualty, bond and surety, disability, andloss control insurance products. The Group voluntarily stopped issuing new and renewal
insurance contracts early in 2003 and was placed into supervised run-off status by the
Illinois Department of Insurance in mid 2004 after operating under a series of corrective
orders that began in 2003. These measures were taken to prevent the insolvency of a Group
with direct loss and LAE liabilities of over $11 billion.
Causes of Trouble
The Group reported deterioration in capital due to uncertainties with respect to its asbestos
and environmental exposure and challenges with respect to the restructuring of its pooled
operations. During 2002, Lumbermens surplus notes, which accounted for nearly all of
surplus on an un-stacked basis, were lowered to junk status. In January 2003, various rating
agencies downgraded the Group following news that it would repurchase a $125 million
investment by Berkshire Hathaway, Inc. and that its president and chief operating officer had
retired, leading to questions about the competence level of the Group’s management. In
2002, the Group reported $450 million in adverse loss reserve development, resulting in a
directive by the Board of Directors to cease underwriting of insurance business. The loss of
surplus lowered Lumbermens statutory risk based capital to the Authorized Control Level.
Corrective Actions by Supervisor
The Group had attempted during 2003 to sell its middle-market lines of business to an
investment consortium, but negotiations were called off after a definitive agreement could
not be reached. Recognizing the Group’s inability to resolve its mounting issues, in 2004 theIL Insurance Department developed a supervised run-off plan in an effort to protect
policyholder’s interests. Additionally, regulators began on-site supervision to closely monitor
the firm's liquidity as it attempted to meet policyholder claims. Without the run-off plan,
regulators indicated that the Group was projected to run out of cash by early 2005. With theplan in place, the Group has been able to successfully execute transactions with large
policyholders in order to reduce gross liabilities and preserve statutory surplus. This was
accomplished through the use of buy-backs, novations, trust agreement transactions, andreinsurance-based transactions. The Group also utilized employee layoffs and other costsaving measures to downsize its expense structure. For example, as of August 2010 directloss and LAE liabilities had been reduced down to $1.7 billion from the initial $11 billion.
Company officials contended that a supervised commercial run-off plan would be more
beneficial to the Group’s policyholders and less disruptive to the market than a receivership.
The Group’s plan included buying back coverage obligations to large commercial
policyholders and commuting reinsurance agreements to the extent those actions wereconsistent with the Group’s need to maintain positive surplus and ensure sufficient liquidity
to pay claims and general expenses.

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