EUROPEAN COMMISSION Brussels, 22.9.2021 COM(2021) 582 final 2021/0296(COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012 (Text with EEA relevance) {SWD(2021) 260}

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EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL •Reasons for and objectives of the proposal Insurance policies form an integral part of the daily life of European citizens. For many social and economic activities, holding an insurance policy is necessary to protect against potential risks. An insurance policy can also be a savings product, which will determine the long-term welfare of the holders while insurers channel these savings via financial markets into the real economy. The disorderly failure of insurers can therefore have a significant impact on policy holders, beneficiaries, injured parties or affected businesses, especially where critical insurance services cannot be substituted in a reasonable amount of time and at a reasonable cost. The management of a near-failure or the failure of certain insurers, particularly large cross-border groups, or the simultaneous failure of multiple insurers can also lead to or amplify financial instability. The Solvency II Directive reduced the likelihood of failures and improved the resilience of the EU insurance industry, and will be reinforced by the review adopted together with this proposal. Nevertheless, despite a sound and robust prudential framework, situations of financial distress cannot be completely excluded. Yet, there are currently no harmonised procedures at European level for resolving insurers. This results in considerable substantive and procedural differences between the laws, regulations and administrative provisions that govern the failure of insurers in the Member States. In addition, corporate insolvency procedures may not be appropriate for insurance, as they may not always ensure an adequate continuation of critical functions. A regime is therefore needed to provide authorities with a credible set of resolution tools to intervene sufficiently early and quickly if insurers are failing or likely to fail to ensure a better outcome for policy holders, while minimising the impact on the economy, the financial system and any recourse to taxpayers’ money. At international level, in October 2014 the Financial Stability Board (FSB) developed Key Attributes (KA) on effective resolution regimes for the insurance sector targeting any insurer that could be systemically significant or critical if it fails. The FSB released complementary guidance on developing effective resolution strategies and plans in June 2016 and in its KA Assessment Methodology in August 2020. In parallel, in November 2019 the International Association of Insurance Supervisors (IAIS) adopted Insurance Core Principles for all insurance and reinsurance undertakings as well as a Common Framework for Internationally Active Insurance Groups (IAIG) detailing standards for pre-emptive recovery planning for IAIG and powers that authorities are expected to have available to manage an orderly exit from the market. Resolution planning for individual insurance groups is expected as necessary. This proposal reflects these developments and implements these international standards into European legislation. It is based on the preparatory work developed by EIOPA, in particular its July 2017 Opinion, and on EIOPA’s technical advice on the review of the Solvency II Directive. It also follows reports prepared by the ESRB in 2017 and 2018 which argue in favour of a harmonised recovery and resolution framework in insurance. •Consistency with existing policy provisions in the policy area This proposal has been developed in full consistency with the Solvency II framework, particularly, its intervention ladder for undertakings in the event of deteriorating financial conditions and the recovery measures already available for breaches of capital requirements. While it adds certain elements of crisis preparedness, the new preventive powers are consistent with the intervention ladder and the supervisory powers already provided for in the Solvency II framework; they do not lead to a new pre-defined intervention trigger other than the level of the Solvency Capital Requirement. The proposal is also consistent with the corresponding policies in the field of recovery and resolution for credit institutions and investment firms and central counterparties. •Consistency with other Union policies By stabilising the critical functions of distressed insurers, this proposal helps to ensure a better protection of savers and investors, maintain insurers’ essential functions for the real economy and reinforce financial stability. It supports the essential conditions for facilitating efficient and sustainable flows of capital to where they are needed. Overall, this proposal helps to reinforce the role of insurers as long-term investors and actors in the economic recovery following the COVID-19 crisis, in line with the political objectives of the Capital Markets Union and the European Green Deal. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY •Legal basis The legal basis for the proposal is Article 114 of the TFEU. This allows the adoption of measures for the approximation of national provisions which have as their object the establishment and functioning of the internal market. The proposal harmonises national laws on recovery and resolution of insurers, or introduces such a framework if there is none yet, to the extent necessary to ensure that Member States have the same tools and procedures to address failures. By establishing minimum harmonised requirements in the internal market, the proposal would establish a level playing field across the Member States. The harmonised framework would also safeguard the interests of policy holders and preserve the real economy. It would contribute to financial stability and trust in the internal market for insurance and reinsurance by ensuring a minimum capacity for resolution of insurers in all Member States and by facilitating cooperation between national authorities when dealing with the failure of cross-border groups. Therefore, the proposal has as its object the establishment and functioning of the internal market and Article 114 of the TFEU is the appropriate legal base. •Subsidiarity (for non-exclusive competence) Currently, insurance recovery and resolution systems are national and only in place in a handful of Member States. Many national legal systems therefore do not confer the powers necessary for authorities to deal adequately with failing insurers. These divergent national legislations are also insufficient in cases of cross-border failure, particularly for cross-border groups where uncoordinated actions could quickly lead to suboptimal outcomes. Establishing adequate resolution arrangements at Union level requires significant harmonisation of national practices and procedures, which justifies the Union proposing the necessary legislation.

The objective of this proposal, namely the harmonisation of the rules and processes for the recovery and resolution of insurers, cannot be sufficiently achieved by the Member States; instead, due to the effects of a failure of any undertaking in the Union, it can be better achieved at Union level. Therefore, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. •Proportionality This proposal implements international standards and follows the advice of EIOPA. To ensure the suitability and effectiveness of the recovery and resolution framework, and to limit excessive administrative burdens and costs on insurers and authorities, the proposal contains proportionate requirements that take into consideration the nature, scale and complexity of the organisation, activities and services of an insurer. This applies to the scope of undertakings that would be subject to pre-emptive recovery planning and resolution planning; authorities can also allow insurers to be subject to a simplified set of obligations when developing and maintaining their plans. National insolvency procedures would remain a possible exit from the market for a failed insurer and supervisory intervention would remain judgement-based. The provisions of the proposal are, therefore, proportionate to what is necessary to achieve its objectives. •Choice of the instrument Prudential supervision is based on the Solvency II Directive, and resolution is closely linked to non harmonised areas of national law, such as insolvency and property law. Therefore, a directive is the appropriate legal instrument since transposition is necessary to ensure the framework is implemented in a way that achieves the intended effect, within the specificities of relevant national law. 3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS •Ex-post evaluations/fitness checks of existing legislation This proposal shares its Impact Assessment (IA) with the proposal on the review of the Solvency II framework. Annex 10 of the IA evaluates the current Solvency II framework and concludes that it has been broadly effective in achieving progress towards its overarching objectives of facilitating the development of the single market in insurance services while adequately protecting policy holders. However, since its entry into application in 2016, the Solvency II prudential framework has been implemented in a variety of ways by the national supervisory authorities (NSAs). This has been the case, for instance, for the intervention ladder which aims to restore the financial situation of insurers after a deterioration has been observed, or, more broadly, for measures related to recovery and resolution. In addition, in light of the growing cross-border activities and the new challenges posed by the prevailing economic and financial conditions, the Solvency II framework has not yet provided a regime that could ensure the coordinated resolution of insurers. A majority of Member States do not have an effective recovery and resolution framework in place, and when they do, there are substantial differences between them. These differences include the powers and tools available to authorities, the conditions under which these powers can be exercised and the objectives pursued when addressing the failure of insurers. In addition, as evidenced by the few cases of failure and near-failure recorded by EIOPA, the lack of sufficient preparedness of both insurers and public authorities, the lack of adequate tools and powers or the lack of cross-border coordination may have impeded a prompt and successful recovery or resolution of failing insurers in the EU. Consequently, the level of protection for policy holders and beneficiaries may have been suboptimal. •Stakeholder consultations In July 2017, EIOPA published an Opinion on the harmonisation of recovery and resolution frameworks for insurers across the Member States; EIOPA published a second Opinion in December 2020 following the Commission’s “Call for Advice” of February 2019. In both cases, EIOPA conducted a public consultation. In addition, the Commission organised a conference in January 2020, including one session focused on recovery and resolution. On 19 February 2020, the Commission consulted Member States through the Expert Group on Banking, Payments and Insurance. Member States were invited to comment on the Commission’s consultation strategy and on EIOPA’s impact assessment of its proposals. A specific exchange of views took place on a possible approach to recovery and resolution, notably through a targeted survey. In July 2020, an Inception Impact Assessment (IIA) provided a detailed analysis of different policy options; feedback from stakeholders on the IIA was collected until August 2020. From July to October 2020, a public consultation on the review of the Solvency II framework gathered 73 responses from a variety of stakeholders, mostly from the European Economic Area. A “summary report” on the feedback to this consultation was published on 1 February 2021. These consultations showed that while public authorities and civil society broadly supported better alignment of recovery and resolution elements, the insurance industry found such a harmonisation largely unnecessary and pointed to the likely high compliance costs. Some participants stressed the need to have a proportionate application of the rules. All stakeholders, however, stressed the need for better coordination and information exchange between supervisors in a cross-border context. On 10 November 2020, the Commission consulted Member States through the Expert Group on Banking, Payments and Insurance on additional elements related to insurance recovery and resolution. Overall, Member State experts agreed with the policy orientations suggested in EIOPA’s 2020 Opinion. •Collection and use of expertise To support its work on the review of the Solvency II framework, the Commission sent a comprehensive “Call for Advice” to the EIOPA, including on recovery and resolution. The final report from EIOPA was published on 17 December 2020. In addition to consulting stakeholders, the Commission participated in the discussions and exchange of views informing the work of EIOPA, the IAIS and the FSB on the recovery and resolution of insurers. In this regard, the legislative proposal is fully in line with the latest FSB and IAIS policy orientations. •Impact assessment

The IA for this proposal was developed as part of the broader Solvency II review and received a positive opinion from the Regulatory Scrutiny Board (RSB) on 23 April 2021. Costs and benefits associated with this proposal were thoroughly assessed and consulted upon on two occasions by EIOPA; the main insights from EIOPA’s analysis are reflected in the IA and summarised below. The RSB made a number of recommendations for improvements, which led to the IA being further refined. In particular, the assessment of options and the overall costs and benefits of the Solvency II review, together with the recovery and resolution proposal were further substantiated. The IA found that the implementation of a pre-emptive recovery and resolution framework would effectively address the observed lack of preparedness, possibly delayed interventions, the incomplete toolbox and uncoordinated management of cross-border cases of (near-) failure. However, the IA concluded that, in line with international guidance and standards, it is necessary to introduce specific conditions for entry into resolution to address situations where an insurer would have a systemic impact if it fails. In particular, the policy options developed in the proposal would provide a credible framework to address the distress of insurers whose failure could negatively affect policy holders. A harmonised set of powers to prevent and address failures with consistent design, implementation and enforcement features would foster cross-border cooperation and coordination during crises and help to avoid any unnecessary economic costs stemming from uncoordinated decision-making between different public authorities and courts. It would also contribute to the level playing-field and avoid regulatory arbitrage. In terms of costs, the IA demonstrated that they would stem mostly from the planning and resolvability assessment requirements. EIOPA’s impact assessment provides an overview of the range of costs estimated by the NSAs for drafting and maintaining resolution plans and resolvability assessments, and for the supervision of pre-emptive recovery plans. Insurers would face costs from drafting pre-emptive recovery plans, from making information available for resolution planning or from possible changes to address impediments to resolvability. No assessment of these costs was available for the IA; however, as pre-emptive recovery plans would be integrated in the ongoing risk management of insurers, ORSA reports and contingency planning could serve as a source of input. The IA also confirmed EIOPA’s assessment that it would not be proportionate to require the financing of a resolution fund by the insurance industry or the building-up of liabilities by individual insurers that could be bailed-in to absorb losses and recapitalise failing insurers. The IA assessed that these measures would inflate the balance sheet of insurers to create a loss-absorbing capacity in proportion to their technical provisions; this would entail higher costs for the industry and impose additional servicing risks on the companies that would not be justified by materially increased benefits. •Regulatory fitness and simplification As explained under section 2, no additional intervention ladder is created in Solvency II and the new planning requirements are subject to adequate proportionality. The introduction of these proportionality elements should help to reduce regulatory and administrative burdens associated with implementing the proposal and to achieve an appropriate balance with its expected benefits. By fostering awareness and preparedness, the proposal contributes to better-informed and timely remedial actions when needed by insurers. It would also enhance the level playing-field in the measures taken by authorities to restore their financial conditions or resolve them, and thereby contribute to fairer competitive conditions. •Fundamental rights This proposal complies with fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union (the Charter), notably the rights to property, the freedom to conduct a business, the right to an effective remedy and to a fair trial and the right of defence, and has to be applied in accordance with those rights and principles. Any interference with rights of shareholders and creditors which results from resolution action should be compatible with the Charter. In particular, where creditors within the same class are treated differently under resolution action, such distinctions should be justified in the public interest and proportionate to the risks being addressed. Affected creditors, including policy holders, should not incur greater losses than those which they would have incurred if the insurer had been wound up under normal insolvency proceedings at the time that the resolution decision is taken. 4.BUDGETARY IMPLICATIONS The proposal has no implications for the Union budget. The proposal would require EIOPA to: (i) develop ten technical standards and six guidelines; (ii) establish one annual report on the use of simplified obligations; (iii) maintain a database on administrative sanctions reported by national authorities; and (iv) take part in resolution colleges, make decisions in case of disagreement between supervisory and resolution authorities and exercise binding mediation. The newly established resolution committee would also prepare the tasks for EIOPA in the areas covered by the proposal. In this context, relevant competent authorities shall be invited to participate, as members, in to these developments, thereby maximising use of existing resources. The delivery of the technical standards is due 18 months after the entry into force of the Directive. This deadline should provide sufficient time for EIOPA to develop them considering its current resources. The only recurrent deliverable relates to the report on the use of simplified obligations. The workload associated with creating and maintaining the database on sanctions will likely depend on the flow of events reported by national authorities. Occurrences should be limited and would be spread over time, allowing EIOPA to manage its existing resources as necessary. Considering past and current work on crisis management at EIOPA, it is considered that the proposed tasks for EIOPA will not require the establishment of additional positions and can be carried out with current resources. 5.OTHER ELEMENTS •Implementation plans and monitoring, evaluation and reporting arrangements

The proposal requires Member States to transpose the recovery and resolution rules in their national laws within 18 months from the entry into force of this proposal. As mentioned in section 5, national authorities should report to EIOPA on the application of simplified obligations on an annual basis, which EIOPA should in turn disclose. •Detailed explanation of the specific provisions of the proposal Title I – Scope, definitions and authorities Subject matter and scope of application (Article 1) This proposal addresses crisis management (preventive powers, pre-emptive recovery planning and resolution) in relation to all insurance and reinsurance undertakings established in the EU that are subject to the Solvency II framework. In addition, as the failure of an entity affiliated to a group can impact the solvency and the operations of the whole group, pre-emptive recovery and resolution planning needs to identify and encompass the all material entities of groups of which an insurer may form part and authorities should possess effective means of action with respect to those entities to impose remedial actions that takes into account the financial soundness of the group, address impediments to resolvability in a group context and produce a consistent resolution scheme for the group as a whole, in particular in a cross-border context. Set-up of resolution authorities (Article 3) This proposal requires Member States to set up insurance resolution authorities, equipped with a minimum harmonised set of powers to undertake all the relevant preparatory and resolution actions. The proposal does not specify the particular authority that should be appointed and can therefore be for example national central banks, competent ministries, public administrative authorities or other authorities entrusted with public administrative powers. In case the powers are assigned to an existing authority, adequate structural arrangements should be in place to avoid conflicts of interest between supervisory and resolution functions and operational independence, in particular with regard to supervisory authorities. Title II – Preparation Simplified obligations (Article 4) In order to comply with the principle of proportionality and to avoid excessive administrative burden, authorities should, where appropriate, apply different or reduced pre-emptive recovery and resolution planning and information requirements on an undertaking-specific basis, and at a lower frequency of updates, taking into account a number of factors related to the undertaking. On an annual basis, authorities should report to EIOPA on the application of simplified obligations. Pre-emptive recovery planning (Articles 5 to 8) Groups should draw up and submit to the group supervisor group pre-emptive recovery plans. Also insurers, which are not part of a group subject to such planning requirements are required to prepare and regularly update pre-emptive recovery plans that set out actions to be taken by those undertakings for the restoration of their financial position where this has significantly deteriorated. Supervisors should identify the insurers that are obliged to draw up pre-emptive recovery plans based on a number of factors. Overall, at least 80% of a Member States’ market should be subject to such requirements and low risk undertaking would be excluded on an individual basis. These plans will improve the insurer’s understanding of its vulnerabilities and its realistic options in stress scenarios should be an integral part of an undertaking’s system of governance and existing tools may serve as input when preparing pre-emptive recovery plans. Pre-emptive recovery plans are to be assessed by the supervisory authorities to check whether the plans are comprehensive and could feasibly restore an undertaking’s viability in a timely manner. Resolution planning and resolvability assessments (Articles 9 to 16) Resolution authorities are required to prepare resolution plans setting out the resolution actions which the authority envisages in the event the conditions for resolution are met. Overall, 70% of undertakings per Member State should be subject to resolution planning and low risk undertaking would be excluded on an individual basis. The relevant insurers should be identified based on a number of proportionality criteria, including the expected impact of their failure. Neither pre-emptive recovery nor resolution plans should rely on any extraordinary public financial assistance or expose taxpayers to the risk of loss. As part of resolution planning, resolution authorities should also assess the overall resolvability of the insurer and address any impediments thereto. The authorities’ discretion should be limited to what is necessary in order to simplify the structure and operations of the insurance or reinsurance undertaking solely to improve its resolvability. Joint decisions (Article 17)

Group supervisors, supervisory authorities, group resolution authorities and resolution authorities, as applicable, should endeavour to reach joint decisions, following the procedure set out in this Article. Title III – Resolution Resolution conditions (Article 19) The proposal establishes common parameter for triggering the application of resolution tools. An insurance or reinsurance undertaking should be placed in resolution when it is failing or likely to fail and there is no prospect that private sector alternatives or supervisory measures can avert failure. At the same time, it is necessary to ensure that intrusive measures are triggered only when interference with the rights of stakeholders is justified and resolution action would be in the public interest. Resolution tools and powers (Articles 26 to 52) When the conditions for resolution are satisfied, resolution authorities will have the power to apply the following resolution tools: (a)write-down or conversion of capital instruments, debt instruments and other eligible liabilities in particular to facilitate the exercise of other resolution tools such as the solvent run-off or the transfer tools. A specific hierarchy is created that complements and were necessary supersedes the one established in each national insolvency law. In principle, shareholders claims should be exhausted before those of subordinated creditors. It is only when those claims are exhausted that the resolution authorities can impose losses on more senior claims. In certain circumstances, conversion will take place to dilute seriously the remaining shareholders’ claims; (b)solvent run-off: the authorisation of an undertaking under resolution to conclude new insurance or reinsurance contracts is withdrawn in order to limit its activity to the exclusive administration of its existing portfolio, thereby maximising the coverage of insurance claims by existing assets; (c)sale of business: all or part of an undertaking’s business can be sold on commercial terms, without complying with procedural requirements that would otherwise apply. (d)bridge undertaking: all or part of an undertaking’s business can be transferred to a publicly controlled entity. The bridge undertaking must be authorised in accordance with the Solvency II Directive. Its operations are temporary in nature, the aim being to sell the business to a private purchaser when market conditions are appropriate. (e)asset and liability separation: impaired or problem assets and/or liabilities can be transferred to a management vehicle to allow them to be managed and worked out over time. In order to minimise competitive distortions and risks of moral hazard, this tool should only be used in conjunction with another resolution tool. Where available, insurance guarantee schemes could contribute to funding the resolution process by absorbing losses to the extent of the net losses that those schemes would have had to suffer after protecting policy holders in normal insolvency proceedings. In those cases, the application of the write-down or conversion tool would ensure that eligible policy holders are protected up to at least the coverage level which is the main reason why such insurance guarantee schemes have been established under national law. In order to apply those tools, resolution authorities will have powers to take control of an institution that has failed or is about to fail, take over the role of shareholders and managers, transfer assets and liabilities and enforce contracts. Where applicable, resolution actions will need to be consistent with the Union State aid framework. National authorities will be able to provide for, in addition to the minimum harmonised toolkit, specific national tools and powers if they are compatible with the principles and objectives of the Union resolution framework. In particular, national authorities may consider the use of the write-down or conversion tool to recapitalise a failing insurer as long as insurance claims are not affected and that appropriate reorganisation and restructuring measures are taken. Ancillary provisions concerning resolution, including valuation, safeguards, procedural obligations and rights of appeal and exclusion of other actions (Articles 23 to 25 and 53 to 66) In order to ensure that resolution decisions are taken in accordance with key principles regarding property rights and compliance with relevant securities and company law, the Directive includes the necessary provisions and steps which resolution authorities would have to comply with before and upon taking resolution decisions. For example, these include ensuring an accurate valuation of the insurer’s balance sheet, safeguards for affected shareholders and creditors, including policy holders, to receive compensation if they end up worse than if the insurance or reinsurance undertaking been wound up under national insolvency proceedings, the procedural steps by way of which authorities should notify the insurer and other authorities concerned of resolution decisions and a right of appeal against crisis prevention or crisis management measures. To facilitate resolution and the objective of safeguarding financial stability, the framework also includes a temporary moratorium on the payment of claims and stays in the redemption rights of policy holders in relation to life insurance contracts. Title IV - Cross-border group resolution (Articles 67 to 71) To take account of the cross border nature of some insurance groups and create a comprehensive and integrated framework for recovery and resolution actions in the Union, resolution colleges will be established under the leadership of the group resolution authority and with the participation of EIOPA. The EIOPA will facilitate cooperation of authorities, contribute to consistency and mediate if necessary. The objective of the colleges is to coordinate preparatory and resolution measures among national authorities to ensure optimal solutions at Union level. Title V – Relations with third countries (Articles 72 to 77) Insurers in the Union are active in third countries and vice versa, and therefore an effective framework for resolution needs to provide for cooperation with third country authorities. The proposal provides Union authorities with the necessary powers to support foreign resolution actions of a failed foreign insurer by giving effect to transfers of its assets and liabilities that are located in or governed by the law of their jurisdiction, under certain conditions. Union resolution authorities should also have the power to apply resolution tools to national branches of third country undertakings where separate resolution is necessary for reasons of public interest or the protection of local policy holders.

The proposal provides that cooperation agreements with foreign resolution authorities could be concluded to facilitate the support for foreign resolution actions. EIOPA could enter into framework administrative arrangements with authorities of third countries in accordance with Article 33 of Regulation No 1094/2010 and national authorities could conclude bilateral arrangements in line with the EIOPA framework arrangements. Title VI – Penalties (Articles 78 to 82) In order to ensure compliance by insurers, those who effectively control their business and their administrative, management or supervisory body with the obligations deriving from this proposal, Member States should provide for administrative sanctions and other administrative measures which are effective, proportionate and dissuasive. EIOPA should maintain a central database of all administrative sanctions. Title VII - Changes to the Solvency II Directive, Company Law Directives and the EIOPA Regulation Changes to the Solvency II Directive, including on preventive measures (Article 83) Without affecting the existing ladder of intervention, this proposal clarifies supervisory authorities’ powers to impose preventive measures to insurers in cases of deteriorating financial positions or breaches of regulatory requirements, to avoid the escalation of the problems at a sufficiently early stage of deterioration. In order to achieve an effective resolution, the provisions on reorganisation and winding-up are amended to extend their application in the event of use of the resolution tools both when those instruments are applied to insurers and entities covered by the resolution regime. Changes to the Company Law Directives and the EIOPA Regulation (Articles 83 to 88) The Union Company Law Directives contain rules for the protection of shareholders and creditors. Some of these rules may hinder rapid action by resolution authorities. It is therefore proposed to amend these. In order to ensure that resolution authorities are represented in the European System of Financial Supervision and to ensure that EIOPA has the necessary expertise, Regulation (EU) No 1094/2010 would be amended in order to include resolution authorities in the concept of competent authorities. 2021/0296 (COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012 (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof, Having regard to the proposal from the European Commission, After transmission of the draft legislative act to the national parliaments, Having regard to the opinion of the European Central Bank,

Having regard to the opinion of the European Economic and Social Committee, Acting in accordance with the ordinary legislative procedure, Whereas: (1)Distress of insurance undertakings can have substantial repercussions on the economy and social welfare in Member States should such distress lead to a disruption of the protection provided to policy holders, beneficiaries or injured parties. The role of reinsurance undertakings in the economy, their interconnectedness with primary insurance undertakings and financial markets more broadly, as well as the relatively concentrated reinsurance market require an appropriate framework to deal with their distress or failure in an orderly fashion. The recovery and resolution of both primary insurance undertakings and reinsurance undertakings should therefore be addressed, taking into account their respective specificities. (2)The global financial crisis of 2008 exposed the vulnerabilities of the financial sector and its interconnectedness. Causes of distress and failure appeared to be linked, amongst others, to the evolution of financial markets and to the intrinsic nature of insurance or reinsurance activities. In that regard, underwriting risks, that is under-provisioned claims, mispricing, that is underestimated premiums, asset-liability mismanagement and investment losses are often referred to as main sources of concern for insurance and reinsurance undertakings. In that context, taxpayer money has been used to restore the deteriorated financial conditions of several insurance undertakings. Although Directive 2009/138/EC of the European Parliament and of the Council aimed at strengthening the financial system in the Union and the resilience of insurance and reinsurance undertakings, it did not completely eliminate the possibility of failures of such insurance and reinsurance undertakings. High market volatilities and prolonged low levels of interest rates could be particularly harmful for the profitability and solvency position of insurance and reinsurance undertakings. The sensitivity of insurance and reinsurance undertakings to market and economic developments therefore calls for particular caution and an adequate framework to manage, including in a pre-emptive manner, potential deteriorations of the financial positions of such undertakings. Some recent failures and near-failures, in particular of a cross-border nature, illustrated weaknesses of the current framework that need to be addressed to organise adequately the orderly exit from the market of insurance or reinsurance undertakings. (3)Activities, services or operations performed by insurance or reinsurance undertakings that cannot be substituted easily within a reasonable timeframe, or at a reasonable cost for policy holders, beneficiaries or injured parties, need to be seen as critical functions that need to be continued. Such activities, services or operations can be critical at Union, national or regional level. The continuity of insurance or reinsurance protection is often preferable to the winding down of a failing undertaking as such continuity delivers the most favourable outcome for policy holders, beneficiaries or injured parties. It is therefore crucial that adequate tools are available to prevent failures and, where failures occur, to minimise negative repercussions by preserving the continuity of those critical functions. (4)Ensuring effective resolution of failing insurance and reinsurance undertakings within the Union is an essential element in the completion of the internal market. The failure of such undertakings has an impact not only on policy holders and possibly the real economy and financial stability of the markets on which those insurance and reinsurance undertakings operate directly, but also on the trust in the internal market for insurance. The completion of the internal market in financial services has reinforced the interplay between the different national financial systems. Insurance and reinsurance undertakings are active on financial markets to manage their investment portfolio and the risks related to their activities. They are interrelated through their derivative operations with the interbank and other financial markets that are, in essence, pan-European. In that context, the inability of Member States to address the failure of an insurance or reinsurance undertaking and resolve it in a way that is predictable and harmonised and would effectively prevent broader systemic damage, can undermine the stability of financial markets and, consequently, the internal market in the field of financial services. (5)The global financial crisis of 2008 highlighted the need to develop an appropriate recovery and resolution framework for insurance and reinsurance undertakings. At international level, the Financial Stability Board (‘FSB’) developed, in October 2014, Key Attributes on effective resolution regimes for any insurance undertaking that could be systemically significant or critical if it fails. In June 2016, the FSB released complementary guidance on developing effective resolution strategies and plans for systemically important insurers. In parallel, the International Association of Insurance Supervisors (‘IAIS’) adopted in November 2019 Insurance Core Principles for all insurance and reinsurance undertakings, a Common Framework for Internationally Active Insurance Groups detailing standards for pre-emptive recovery planning, and actions that authorities are expected to take towards an insurance or reinsurance undertaking that would exit the market and enter into resolution. Those developments should be taken into account when laying down a framework for the recovery and resolution of failing insurance and reinsurance undertakings. (6)Many insurance and reinsurance undertakings are operating beyond national borders. A lack of coordination and cooperation between public authorities to prepare and manage the distress or failure of an insurance or reinsurance undertaking operating across borders would undermine Member States’ mutual trust, result in a suboptimal outcome for policy holders, beneficiaries and injured parties and affect the credibility of the internal market for insurance. (7)There is currently no harmonisation of the procedures at European Union level for resolving insurance or reinsurance undertakings in a coordinated manner. Instead, considerable substantive and procedural differences between national laws, regulations and administrative provisions that govern the failure of insurance and reinsurance undertakings are observed across Member States. In addition, corporate insolvency procedures may not always be appropriate for insurance or reinsurance undertakings, as those procedures may not always ensure an adequate continuation of the critical functions for policy holders, beneficiaries and injured parties, the real economy or the financial stability as a whole. (8)It is necessary to ensure the continuity of the critical functions of failing insurance or reinsurance undertakings, or of insurance or reinsurance undertakings that are likely to fail, while minimising the impact of such an undertaking’s failure on the economy and financial system. It is therefore necessary to lay down a framework to provide authorities with a credible set of tools to intervene sufficiently early and quickly in insurance or reinsurance undertakings that are failing or likely to fail. Such framework should ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than they would have incurred if the insurance or reinsurance undertaking had been wound up under normal insolvency proceedings in accordance with the no creditor worse off principle. (9)The framework to be laid down should enable authorities to ensure the continuity of insurance protection for policy holders, beneficiaries and injured parties, transfer viable activities and portfolios of the insurance or reinsurance undertaking where appropriate, and apportion losses in a manner that is fair and predictable. Those objectives should help avoid unnecessary losses or social hardship falling on policy holders, beneficiaries and injured parties, mitigate negative impacts on the real economy, minimise negative effects on financial markets and minimise the costs for taxpayers. (10)The review of Directive 2009/138/EC, and in particular the introduction of more risk-sensitive capital requirements, strengthened supervision, enhanced liquidity monitoring and better tools for macro-prudential policies, should further reduce the likelihood of failures of insurance or reinsurance undertakings and enhance the resilience of those undertakings to economic stress, whether caused by systemic disturbances or by events specific to the individual undertaking. Nevertheless, despite a sound and robust prudential framework, situations of financial distress cannot be completely excluded. Member States should therefore be prepared and have adequate recovery and resolution tools in place to handle situations involving both systemic crises and failures of individual undertakings. Such tools should include mechanisms that enable authorities to deal effectively with undertakings that are failing or likely to fail. The use of such tools and the exercise of such powers should take into account the circumstances in which the failure occurs. (11)Some Member States have already introduced pre-emptive recovery planning requirements, and mechanisms to resolve failing insurance or reinsurance undertakings. However, the absence of common conditions, powers and processes for the recovery and resolution of insurance or reinsurance undertakings across the Union is likely to constitute barriers to the smooth operation of the internal market and hinder cooperation between national authorities when dealing with distressed or failing cross-border groups of undertakings. That is particularly true where different approaches mean that national authorities do not have the same level of control or the same ability to resolve insurance or reinsurance undertakings. Those differences in recovery and resolution regimes may affect the level playing field and potentially create competitive distortions between undertakings. Those barriers should be eliminated and rules should be adopted to ensure that the internal market is not undermined. To that end, rules governing the pre-emptive recovery and resolution of insurance or reinsurance undertakings should be made subject to common minimum harmonisation rules. In order to ensure consistency with existing Union legislation in the area of insurance services, the pre-emptive recovery and resolution regime should apply to insurance or reinsurance undertakings that are subject to the prudential requirements laid down in Directive 2009/138/EC. (12)The failure of an entity affiliated to a group can rapidly impact the solvency and the operations of the whole group. It is therefore necessary to have in place group pre-emptive recovery and resolution planning requirements. In addition, authorities should possess effective means of action with respect to those entities to impose remedial actions that take into account the financial soundness of all group entities, address impediments to resolvability in a group context and produce a consistent resolution scheme for the group as a whole, in particular in a cross-border context. The pre-emptive recovery and resolution planning and resolvability requirements and the resolution regime should therefore also apply to parent undertakings, holding companies and other group entities, including branches of insurance and reinsurance undertakings that are established outside the Union. (13)It is necessary to ensure the suitability and effectiveness of the recovery and resolution framework while avoiding unnecessary administrative burdens and costs on undertakings and authorities. The implementation of such recovery and resolution framework should therefore be proportionate to the nature, scale and complexity of the undertaking concerned, and of its activities and services. Regarding the scope of the recovery and resolution planning requirements, authorities should determine, on the basis of a harmonised set of risk-based criteria, which undertakings are subject to the planning requirements. To foster trust in the insurance and reinsurance single market and to foster a level playing field, a minimum degree of preparedness should be achieved through laying down a minimum market coverage level. That minimum market coverage level should however take into account the differences between recovery on the one hand and resolution on the other, and the existence or absence of a public interest for taking resolution action. (14)For the same reason, authorities should, where appropriate, apply different or reduced pre-emptive recovery and resolution planning and information requirements on an undertaking-specific basis, and at a lower frequency of updates. Authorities should, when applying such simplified obligations, take into account the nature, size, complexity and substitutability of an undertaking’s business, its shareholding structure and legal form, its risk profile, its degree of interconnectedness to other regulated undertakings or to the financial system in general. Authorities should also take into account whether the failure and subsequent winding up of the insurance or reinsurance undertaking under normal insolvency proceedings would be likely to have a significant negative effect on policy holders, financial markets, other undertakings, or the wider economy. Authorities should report to EIOPA on the application of such simplified obligations on an annual basis. (15)For an orderly resolution process, and to avoid conflicts of interest, Member States should appoint public administrative authorities or authorities entrusted with public administrative powers to perform the functions and tasks in relation to the recovery and resolution framework. Member States should ensure that adequate resources are allocated to those resolution authorities. Where a Member State designates a resolution authority that has other functions, adequate structural arrangements should be put in place to separate those functions from the functions related to resolution and to ensure operational independence. Such separation should not prevent the resolution function from having access to any information it requires for the exercise of its duties under the recovery and resolution framework, or for cooperation between different authorities involved in the application of the recovery and resolution framework. (16)In light of the consequences that the failure of an insurance or reinsurance undertaking may have on policy holders, the financial system and the economy of a Member State, and in light of the possible need to use public funds to deal with such failure, the Ministries of Finance or other relevant ministries in the Member States should be closely involved, at an early stage, in the process of crisis management and resolution. (17)It is necessary to deal in an efficient manner with deteriorating financial positions of insurance and reinsurance undertakings, or breaches of regulatory requirements by those undertakings, and to prevent the escalation of problems. Supervisory authorities should therefore have the power to impose preventive measures. Such preventive powers should, however, be consistent with the ladder of intervention and the supervisory powers already provided for in Directive 2009/138/EC for similar circumstances, including supervisory powers provided for in the Supervisory Review Process laid down in Article 36 of Directive 2009/138/EC. Such preventive powers should neither lead to a new pre-defined intervention trigger ahead of the Solvency Capital Requirement, laid down in Title I, Chapter VI, Section 4 of that Directive. Supervisory authorities should assess each situation individually and decide upon the need for preventive measures based on the circumstances, the situation of the undertaking and their supervisory judgment.

(18)It is essential that groups, or where applicable, individual undertakings, prepare and regularly update pre-emptive recovery plans that set out actions to be taken by those groups or undertakings to restore their financial position following a significant deterioration of that position that could pose a risk to their viability. Insurance and reinsurance undertakings should therefore identify a set of quantitative and qualitative indicators that would trigger the activation of remedial actions envisaged in such pre-emptive recovery plans. Such indicators should help insurance and reinsurance undertakings to take remedial actions in the best interest of their policy holders and should not lay down new regulatory prudential requirements. Pre-emptive recovery plans covering all material legal entities within the group should be detailed and should be based on realistic assumptions that are applicable in a range of robust and severe scenarios. Those pre-emptive recovery plans should be an integral part of an undertaking’s system of governance. Existing tools may serve as an input when preparing such pre-emptive recovery plans, including the own risk and solvency assessment, contingency plans or liquidity risk management plans. The requirement to prepare a pre-emptive recovery plan should, however, be applied proportionately and should be without prejudice to the development and submission of a realistic recovery plan as required by Article 138(2) of Directive 2009/138/EC. Where relevant, the elements of the pre-emptive recovery plan could inform or serve as a basis to develop the recovery plan required by Article 138(2) of Directive 2009/138/EC. (19)It is necessary to ensure an adequate degree of preparedness for crisis situations. Ultimate parent undertakings or individual insurance or reinsurance undertakings should therefore be required to submit their pre-emptive recovery plans to supervisory authorities for a complete assessment, including the assessment of whether those plans are comprehensive and could feasibly restore an undertaking or group’s viability in a timely manner, even in periods of severe financial stress. Where an undertaking presents a pre-emptive recovery plan that is not adequate, supervisory authorities should be empowered to require that undertaking to take measures necessary to redress the material deficiencies of the plan. (20)Resolution planning is an essential component of effective resolution. Resolution authorities should therefore have all the information necessary to identify critical functions and ensure their continuation. Insurance and reinsurance undertakings have privileged knowledge of their own functioning and any problems arising from it, and resolution authorities should therefore draw up resolution plans on the basis of, inter alia, the information provided by the undertakings concerned. In order to avoid unnecessary administrative burdens, resolution authorities should primarily retrieve the necessary information from the supervisory authorities. (21)Low risk profile undertakings should, due to their low risk profile, not be obliged to draw up separate pre-emptive recovery plans, nor should they be subject to resolution planning. (22)In order to anticipate the possible interaction of remedial and resolution measures and to enhance the crisis preparedness and the resolvability of groups, any group treatment for pre-emptive recovery and resolution planning should apply to all group entities subject to group supervision. The pre-emptive recovery and resolution plans should take into account the financial, technical and business structure of the group concerned and its degree of internal interconnectedness. (23)Group pre-emptive recovery and resolution plans should be prepared for the group as a whole and should identify measures in relation to both an ultimate parent undertaking and individual subsidiaries that are part of that group. The extent to which subsidiaries are considered in the group pre-emptive recovery and resolution plans should, however, be proportionate to their relevance to the group and to policy holders, the real economy and the financial system in the Member States where those subsidiaries operate. The resolution authorities of the Member States where a group has subsidiaries should be involved in the drawing up of any resolution plans. The authorities concerned, acting within the supervisory or resolution colleges, should make every effort to reach a joint decision on the assessment and adoption of those plans. However, adequate crisis preparedness should not be affected by an absence of a joint decision within the supervisory or resolution colleges. In such cases, each supervisory authority responsible for a subsidiary should have the possibility to require a pre-emptive recovery plan for the subsidiaries under its jurisdiction and make its own assessment of the pre-emptive recovery plan. For the same reasons, each resolution authority responsible for a subsidiary should, for the subsidiaries under its jurisdiction, draw up and keep updated a resolution plan. The drawing up of individual pre-emptive recovery and resolution plans for undertakings that are a part of a group should remain exceptional, duly justified and apply the same standards that are applied to comparable undertakings in the Member State concerned. Where individual pre-emptive recovery and resolution plans for undertakings that are a part of a group are prepared, the authorities concerned should aim to achieve, to the extent possible, consistency with pre-emptive recovery and resolution plans for the rest of the group. (24)In order to keep all authorities concerned fully and permanently informed, supervisory authorities should transmit any pre-emptive recovery plans and any changes thereto to the resolution authorities concerned and resolution authorities should transmit any resolution plans and any changes thereto to the supervisory authorities concerned. (25)Based on an assessment of the resolvability of insurance or reinsurance undertakings, resolution authorities should have the power to require, either directly or indirectly through the supervisory authority, that insurance or reinsurance undertakings change their structure and organisation. Resolution authorities should also be able to take necessary but proportionate measures to reduce or remove any material impediments to the application of resolution tools and to ensure the resolvability of the entities concerned. Resolution authorities should assess the resolvability of insurance or reinsurance undertakings at the level of those undertakings where it is expected that, in accordance with the group resolution plan, resolution actions would be taken. The resolution authorities’ ability to request changes to the structure and organisation of an insurance or reinsurance undertaking, or to take measures to reduce or remove any material impediments to the application of resolution tools and to ensure the resolvability of the undertakings concerned, should not go beyond what is necessary to simplify the structure and operations of the insurance or reinsurance undertaking concerned in order to improve that undertaking’s resolvability. (26)The implementation of actions outlined in a pre-emptive recovery plan or a resolution plan may have effects on staff of insurance or reinsurance undertakings. Those plans should therefore contain procedures for informing and consulting employee representatives throughout the recovery and resolution processes where appropriate. Those procedures should take into account collective agreements, other arrangements provided for by social partners, and national and Union law on the involvement of trade unions and workers’ representatives in company restructuring processes. (27)Effective recovery and resolution of insurance and reinsurance undertakings or group entities operating across the Union requires cooperation among supervisory authorities and resolution authorities within supervisory and resolution colleges at all stages of the process, from the preparation of pre-emptive recovery and resolution plans to the actual resolution of an undertaking. Where authorities disagree on decisions to be taken with regard to groups and undertakings, the European Supervisory Authority (European Insurance and Occupational Pensions Authority) (‘EIOPA’), established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council should, as a last resort, play a mediation role. (28)During the recovery and preventive phases, shareholders should retain full responsibility and control of the insurance or reinsurance undertaking. They should no longer retain such a responsibility once the undertaking has been put under resolution. The resolution framework should therefore provide for a timely entry into resolution, that is before an insurance or reinsurance undertaking is balance sheet or cash flow insolvent, before all equity has been fully wiped out, or before the insurance or reinsurance undertaking is unable to comply with its payment obligations as they come due. Resolution should be initiated where a supervisory authority, after having consulted a resolution authority, or after having been consulted by a resolution authority, determines that an insurance or reinsurance undertaking is failing or likely to fail and alternative measures would not prevent such a failure within a reasonable timeframe. An insurance or reinsurance undertaking should be considered to be failing or likely to fail in any of the following circumstances: (i) where the undertaking breaches or is likely to be in breach of the Minimum Capital Requirement (‘MCR’) laid down in Title I, Chapter VI, Section 4, of Directive 2009/138/EC and where there is no reasonable prospect of compliance being restored; (ii) where the undertaking no longer fulfils the conditions for authorisation or where the undertaking fails seriously to comply with its legal obligations under the laws and regulations to which it is subject or is likely to seriously fail to comply with its legal obligations under the laws and regulations to which it is subject in the near future in a way that would justify the withdrawal of the authorisation; (iii) where the insurance or reinsurance undertaking is or is likely to be unable to pay its debts or other liabilities in the near future, including payments to policy holders or beneficiaries as they fall due; or (iv) where the insurance or reinsurance undertaking requires extraordinary public financial support. (29)The use of resolution tools and powers may disrupt the rights of shareholders and creditors of insurance and reinsurance undertakings. In particular, the power of the resolution authorities to transfer the shares or all or part of the assets of an insurance or reinsurance undertaking to a private purchaser without the consent of shareholders affects the property rights of shareholders. In addition, the power to decide which liabilities to transfer out of a failing undertaking to ensure the continuity of services and to avoid adverse effects on policy holders, beneficiaries and injured parties, the real economy or financial stability as a whole, may affect the equal treatment of creditors. Any resolution tool should therefore be applied only to those insurance or reinsurance undertakings that are failing or likely to fail, and only where it is necessary to pursue the resolution objectives in the general interest. In particular, resolution tools should be applied only where the insurance or reinsurance undertaking cannot be wound up under normal insolvency proceedings without unduly affecting the protection of policy holders, beneficiaries and claimants or destabilising the financial system. In addition, resolution measures should be necessary to ensure the rapid transfer and continuation of critical functions and there should be no reasonable prospect for any alternative private solution, including any increase of capital by the existing shareholders or by any third party sufficient to restore the full viability of the entity without having effect on insurance claims. Any interference with the rights of shareholders and creditors that results from resolution action should be compatible with the Charter of Fundamental Rights of the European Union (the Charter). In particular, where creditors within the same class are treated differently in the context of resolution action, such distinctions should be justified in the public interest and be proportionate to the risks being addressed and should be neither directly nor indirectly discriminatory on the grounds of nationality. (30)When applying resolutions tools and exercising resolution powers, resolution authorities should take all appropriate measures to ensure that resolution action is taken in accordance with the principle that insurance claims are affected after shareholders and that other creditors have borne their share of the losses. In addition, resolution authorities should ensure that the costs of the resolution of insurance or reinsurance undertakings are minimised and that creditors of the same class are treated in an equitable manner. (31)The write-down or conversion of capital instruments, debt instruments and other eligible liabilities should provide for an internal loss absorption mechanism. That mechanism, combined with transfer tools that aim at maintaining continuity of insurance coverage for the benefit of policy holders, beneficiaries and injured parties, should allow for the achievement of the resolution objectives and should limit to a great extent the impact of a failure of an insurance or reinsurance undertaking on policy holders. There may be extreme cases, however, where the resolution of an insurance or reinsurance undertaking may require the intervention of specific national schemes, in particular an insurance guarantee scheme or a resolution fund, to provide for complementary loss absorbing and restructuring resources or, as a last resort, extraordinary public financing. The necessary safeguards that aim to protect creditors should also reflect the existence of such specific national schemes, which in turn have to comply with the Union State aid framework. The write-down or conversion tool should be applied before the use of any extraordinary public financial support. (32)Interference with property rights should not be disproportionate. Affected shareholders and creditors of insurance and reinsurance undertakings, including policy holders should therefore not incur greater losses than they would have incurred if the insurance or reinsurance undertaking had been wound up at the time that the resolution decision was taken. In the event of a partial transfer of assets and liabilities of an insurance or reinsurance undertaking under resolution to a private purchaser or to a bridge undertaking, the residual part of the undertaking under resolution should be wound up under normal insolvency proceedings. Shareholders and creditors who are left in the winding up proceedings of an insurance or reinsurance undertaking should be entitled to receive in payment of, or compensation for, their claims in the winding up proceedings not less than what they would have recovered if the whole insurance or reinsurance undertaking had been wound up under normal insolvency proceedings. (33)To protect the rights of shareholders and creditors, it is necessary to lay down clear obligations concerning the valuation of the assets and liabilities of the undertaking under resolution and concerning the valuation of the treatment that shareholders and creditors would have received if the undertaking had been wound up under normal insolvency proceedings. It is therefore necessary to lay down that, before any resolution action is taken, a fair and realistic valuation of the assets and liabilities of the insurance or reinsurance undertaking is carried out. Such a valuation should be subject to a right of appeal. However, due to the nature of resolution action and its close link with the valuation, such appeal should only be possible where it is simultaneously directed against the resolution decision. In addition, it is necessary to lay down that, after resolution tools have been applied, a comparison is made between the treatment that shareholders and creditors have actually received and the treatment they would have received under normal insolvency proceedings. That ex-post comparison should be challengeable apart from the resolution decision. Shareholders and creditors that have received less than the amount that they would have received under normal insolvency proceedings should be entitled to the payment of the difference. (34)It is important that losses are recognised upon failure of the insurance or reinsurance undertaking. The valuation of assets and liabilities of failing insurance or reinsurance undertakings should be based on fair, prudent and realistic assumptions at the moment that the resolution tools are applied. The value of liabilities should, however, not be affected in the valuation by the insurance or reinsurance undertaking’s financial state. It should be possible, in exceptional cases of urgency, that resolution authorities make a rapid valuation of the assets or the liabilities of a failing insurance or reinsurance undertaking. That valuation should be provisional and should apply until an independent valuation is carried out. EIOPA should establish a framework of principles to be used in conducting such valuations and should allow for different specific methodologies to be applied by resolution authorities and independent valuers, as appropriate. (35)When taking resolution actions, resolution authorities should take into account and follow the measures provided for in the resolution plans unless resolution authorities assess, taking into account circumstances of the case, that resolution objectives will be achieved more effectively by taking actions that are not provided for in the resolution plans. (36)Resolution tools should be designed and suitable to counter a broad set of largely unpredictable scenarios, taking into account that there could be a difference between a single insurance or reinsurance undertaking in crisis and a broader systemic crisis. Resolution tools should therefore cover each of those scenarios, including the solvent run-off of the undertaking under resolution until its termination, the sale of the business or shares of the undertaking under resolution, the setting up of a bridge undertaking, the separation of assets and liabilities from the impaired or under-performing portfolios of the failing undertaking, and the write-down or conversion of capital instruments and other eligible liabilities of the failing insurance or reinsurance undertaking. (37)Where resolution tools have been used to transfer insurance portfolios to a sound entity, which could be a private sector purchaser or a bridge undertaking, the residual part of the undertaking should be liquidated within an appropriate time frame. The length of that time frame should be based on the need for the failing insurance or reinsurance undertaking to provide services or support to enable the private sector purchaser or bridge undertaking to carry out the activities or services acquired by virtue of that transfer.

(38)The sale of business tool should enable resolution authorities to effect a sale of the insurance or reinsurance undertaking or parts of its business to one or more purchasers without the consent of shareholders. When applying the sale of business tool, authorities should make arrangements for the marketing of that insurance or reinsurance undertaking or part of its business in an open, transparent and non-discriminatory process, while maximising the sale price as much as possible. Where, for reasons of urgency, such a process is impossible, authorities should take steps to redress detrimental effects on competition and on the internal market. (39)Any net proceeds from the transfer of assets or liabilities of the undertaking under resolution when applying the sale of business tool should benefit the undertaking left in the winding up proceedings. Any net proceeds from the transfer of shares or other instruments of ownership issued by the undertaking under resolution when applying the sale of business tool should benefit the owners of those shares or other instruments of ownership. Proceeds should be calculated net of the costs arisen from the failure of the insurance or reinsurance undertaking and from the resolution process. (40)Information concerning the marketing of a failing insurance or reinsurance undertaking and negotiations with potential acquirers prior to the application of the sale of business tool are likely to be sensitive and may pose risks for the trust in the insurance market. It is therefore important to ensure that the disclosure to the public of such information, which is required by Regulation (EU) No 596/2014 of the European Parliament and of the Council, can be delayed for the time necessary to plan and structure the resolution of the insurance or reinsurance undertaking. (41)A bridge undertaking is an insurance or reinsurance undertaking that is wholly or partially owned by one or more public authorities or controlled by the resolution authority. The main purpose of a bridge undertaking is to ensure that critical functions continue to be provided to the policy holders of the failing insurance or reinsurance undertaking. A bridge undertaking should therefore be operated as a viable going concern and should be put back on the market as soon as conditions are appropriate, or be wound up in case the bridge undertaking is not viable. (42)The asset and liability separation tool should enable authorities to transfer assets, rights or liabilities of an undertaking under resolution to a separate vehicle in order to remove, manage and wind down such assets, rights or liabilities. To prevent an undue competitive advantage for the failing insurance or reinsurance undertaking, the asset and liability tool should be used only in conjunction with other tools. (43)An effective resolution regime should ensure that insurance or reinsurance undertakings can be resolved in a way that minimises the negative impact of a failure on policy holders, taxpayers, the real economy and financial stability. The write-down or conversion should ensure that, before insurance claims are affected, shareholders and creditors of a failing insurance or reinsurance undertaking suffer losses first and bear an appropriate part of the costs arising from the failure of the insurance or reinsurance undertaking as soon as a resolution power is used. The write-down or conversion tool should thus give shareholders and creditors of insurance or reinsurance undertakings and, to a certain extent, policy holders, a stronger incentive to monitor the health of an insurance or reinsurance undertaking during normal circumstances. (44)It is necessary to ensure that resolution authorities have the necessary flexibility, in a range of circumstances, to place the undertaking in resolution in a solvent run-off, to transfer its assets, rights and liabilities in the best conditions for policy holders, or to allocate remaining losses. It is therefore appropriate to lay down that resolution authorities should be able to apply the write-down or conversion tool both where the objective is to resolve the failing insurance or reinsurance undertaking as an undertaking in solvent run-off, and where critical insurance services are transferred while the residual part of the insurance or reinsurance undertaking ceases to operate and is wound up. In that context, the restructuring of insurance liabilities may be warranted to ensure the continuation of a material portion of the insurance coverage and where that is deemed in the best interest of the policy holders. (45)Where there is a realistic prospect that the undertaking’s viability may be restored and policy holders are not suffering any losses in the resolution process, the write-down or conversion tool could be used to restore the undertaking under resolution to a going concern. In such case, the resolution through write-down or conversion should be accompanied by the replacement of the management, except where the retention of the management is appropriate and necessary for the achievement of the resolution objectives. (46)It is not appropriate to apply the write-down or conversion tool to claims as far as they are secured, collateralised or otherwise guaranteed as such write-down or conversion could be ineffective or due to the potential negative impact of such write-down or conversion on financial stability. However, in order to ensure that the write-down or conversion tool is effective and achieves its objectives, it is desirable that it can be applied to as wide a range of the unsecured liabilities of a failing insurance or reinsurance undertaking as possible. Nevertheless, it is appropriate to exclude certain kinds of unsecured liabilities from the scope of application of the write-down or conversion tool. Thus, to ensure the continuity of critical functions, the write-down or conversion tool should not be applied to certain liabilities to employees of the failing insurance or reinsurance undertaking or to commercial claims that relate to goods and services critical to the daily functioning of the insurance or reinsurance undertaking. To honour pension entitlements and pension amounts owed or owing to pension trusts and pension trustees, the write-down or conversion tool should not be applied to a failing insurance or reinsurance undertaking’s liabilities to a pension scheme. To reduce the risk of systemic contagion, the write-down or conversion tool should neither be applied to liabilities arising from a participation in payment systems which have a remaining maturity of less than seven days, or to liabilities to insurance or reinsurance undertakings, credit institutions and investment firms, with the exception of entities that are part of the same group, with an original maturity of less than seven days. (47)The protection of policy holders, beneficiaries or injured parties is one of the main objectives of resolution. Insurance claims should therefore only be subject to the application of the write-down or conversion tool as a last resort measure and resolution authorities should carefully consider the consequences of a potential write-down of insurance claims stemming from insurance contracts held by natural persons and micro, small and medium-sized enterprises. (48)Resolution authorities should be able to exclude or partially exclude liabilities in a number of circumstances where it is not possible to write-down or convert such liabilities within a reasonable timeframe, where the exclusion is strictly necessary and proportionate to achieve the resolution objectives, or where the application of the write-down or conversion tool would cause a destruction in value such that losses borne by other creditors would be higher than if those liabilities were not excluded. Where those exclusions are applied, the level of write-down or conversion of other eligible liabilities may be increased to take account of such exclusions, subject to the ‘no creditor worse off than under normal insolvency proceedings’ principle being respected. At the same time, Member States should not be required to finance resolution from their general budget. (49)As a rule, resolution authorities should apply the write-down or conversion tool in a way that respects the pari passu treatment of creditors and the statutory ranking of claims under applicable insolvency law. Losses should therefore first be absorbed by regulatory capital instruments and should be allocated to shareholders either through the cancellation or transfer of shares or through severe dilution. Where that is not sufficient, subordinated debt should be converted or written down. Senior liabilities should only be converted or written down where the subordinate debt has been converted or written down entirely. (50)Exemptions of liabilities, inter alia for payment and settlement systems, employee or trade creditors, or preferential ranking, should equally apply in third countries and the Union. To ensure that liabilities can be written-down or converted in third countries, it is necessary to lay down that contractual provisions governed by the law of third countries recognise that possibility. Such contractual terms should not be required for liabilities exempted from the application of the write-down or conversion tool, or where the law of the third country or a binding agreement concluded with that third country allow the resolution authority of the Member State concerned to apply the write-down or conversion tool. (51)Shareholders and creditors should contribute, to the extent necessary, to the loss allocation mechanism of a failing undertaking. Therefore, Member States should ensure that Tier 1, Tier 2 and Tier 3 capital instruments fully absorb losses at the point of non-viability of the issuing insurance or reinsurance undertaking. Accordingly, resolution authorities should be required to write-down those instruments in full, or to convert them, where applicable, to Tier 1 instruments, at the point of non-viability and before any resolution action is taken. For that purpose, the point of non-viability should be understood as either the point at which the resolution authority concerned determines that the insurance or reinsurance undertaking meets the conditions for resolution, or the point at which the resolution authority concerned decides that the insurance or reinsurance undertaking would cease to be viable if those capital instruments were not written down or converted. Those requirements should be recognised in the terms governing the instrument, and in any prospectus or offering documents published or provided in connection with the instruments. (52)Resolution authorities should have all the necessary legal powers that, in different combinations, may be exercised when applying the resolution tools in order to ensure effective execution of resolution. Those legal powers should include the power to transfer shares in, or assets, rights or liabilities of, a failing insurance or reinsurance undertaking to another entity, including another undertaking or a bridge undertaking, the power to write-down or cancel shares, or write-down or convert liabilities of a failing insurance or reinsurance undertaking, the power to replace the management and the power to impose a temporary moratorium on the payment of claims. Ancillary powers are needed, including the power to require continuity of essential services from other parts of a group. (53)It is not necessary to prescribe the exact means through which the resolution authorities should intervene in the failing insurance or reinsurance undertaking. Resolution authorities should have the choice between taking control through a direct intervention in the insurance or reinsurance undertaking or through executive order. They should decide according to the circumstances of the case. (54)It is necessary to lay down procedural requirements to ensure that resolution actions are properly notified and made public. Information obtained by resolution authorities and their professional advisers during the resolution process is, however, likely to be sensitive and should therefore be subject to an effective confidentiality regime before the resolution decision is made public. Any information provided in respect of a decision before it is taken, be it on whether the conditions for resolution are satisfied, on the use of a specific tool or of any action during the proceedings, must be presumed to have effects on the public and private interests concerned by the action. It is therefore necessary to ensure that there are appropriate mechanisms for maintaining the confidentiality of such information, including on the content and details of recovery and resolution plans and the result of any assessment carried out in that context. (55)Resolution authorities should have ancillary powers to ensure the effectiveness of the transfer of shares or debt instruments and assets, rights and liabilities to a third party purchaser or a bridge undertaking. In particular, to facilitate a transfer of insurance claims without affecting the overall risk profile of the related portfolio and of the associated technical provisions and capital requirements, the economic benefits provided by reinsurance agreements should be preserved. Resolution authorities should therefore have the ability to transfer insurance claims together with their corresponding reinsurance rights. That ability should also include the power to remove third parties rights from the transferred instruments or assets, the power to enforce contracts and the power to provide for the continuity of arrangements vis-à-vis the recipient of the transferred assets and shares. The right of a party to terminate a contract with an undertaking under resolution, or a group entity thereof, for reasons other than the resolution of the failing insurance or reinsurance undertaking should also remain unaffected. In addition, resolution authorities should have the ancillary power to require the residual insurance or reinsurance undertaking that is being wound up under normal insolvency proceedings to provide services that are necessary to enable the undertaking to which assets or shares have been transferred by virtue of the application of the sale of business tool or the bridge undertaking tool to operate its business. (56)According to Article 47 of the Charter, everyone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal. The decisions taken by resolution authorities should therefore be subject to a right of appeal. (57)Crisis management measures taken by resolution authorities may require complex economic assessments and a large margin of discretion. Resolution authorities are specifically equipped with the expertise needed for making such assessments and for determining the appropriate use of the margin of discretion. It is therefore important to ensure that the complex economic assessments made by resolution authorities in that context are used as a basis by national courts when reviewing the crisis management measures concerned. However, the complex nature of those assessments should not prevent national courts from examining whether the evidence relied on by the resolution authority is factually accurate, reliable and consistent, whether that evidence contains all relevant information which should be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn therefrom.

(58)In order to deal with situations of urgency, it is necessary to provide that the lodging of any appeal does not result in automatic suspension of the effects of the challenged decision and that the decision of the resolution authority is immediately enforceable with a presumption that its suspension would be against the public interest. (59)It is necessary to protect third parties that have acquired assets, rights and liabilities of the institution under resolution in good faith by virtue of the exercise of the resolution powers by the authorities. It is equally necessary to ensure the stability of the financial markets. A right of appeal against a resolution decision should therefore not affect any subsequent administrative act or transaction concluded on the basis of an annulled decision. In such cases, remedies for a wrongful decision should be limited to the award of compensation for the damages suffered by the affected persons. (60)Crisis management measures may be required to be taken urgently due to serious financial stability risks in the Member State concerned and the Union. Any procedure under national law relating to the application for ex-ante judicial approval of a crisis management measure and a court’s consideration of such an application should therefore be swift. Member States should ensure that the authority concerned can take its decision immediately after a court has given its approval. That possibility should be without prejudice to the right of interested parties to make an application to the court to set aside the decision. However, such possibility should only be granted for a limited period after the resolution authority has taken the crisis management measure in order not to unduly delay the application of the resolution decision. (61)Efficient resolution and the need to avoid conflicts of jurisdiction require that no normal insolvency proceedings for a failing insurance or reinsurance undertaking be opened or continued whilst a resolution authority is exercising its resolution powers or applying resolution tools, except at the initiative of, or with the consent of, the resolution authority. It is therefore necessary to lay down that certain contractual obligations can be suspended for a limited period to enable resolution authorities to apply the resolution tools. That possibility should not, however, apply to obligations in relation to systems designated by a Member State as referred to in Directive 98/26/EC of the European Parliament and of the Council, including central counterparties. Directive 98/26/EC reduces the risk associated with participation in payment and securities settlement systems, in particular by reducing disruption in the event of the insolvency of a participant in such a system. It is necessary to ensure that those protections continue to apply in crisis situations and that appropriate certainty for operators of payment and securities systems and other market participants is maintained. A crisis prevention measure or a crisis management measure should therefore not, per se, be deemed to constitute insolvency proceedings within the meaning of Directive 98/26/EC, provided that the substantive obligations under the contract concerned continue to be performed. (62)It is necessary to ensure that resolution authorities, when transferring assets and liabilities to a private sector purchaser or a bridge undertaking, have an adequate period of time to identify contracts that need to be transferred. It should therefore be possible for resolution authorities to restrict counterparties’ rights to close out, accelerate or otherwise terminate financial contracts before the transfer is made. Such restrictions should allow resolution authorities to obtain a true picture of the balance sheet of the failing insurance or reinsurance undertaking without the changes in value and scope that an extensive exercise of termination rights would entail, and should help to avoid creating market instability. Interference with the contractual rights of counterparties should however be restricted to the minimum extent necessary. Any restrictions on termination rights imposed by resolution authorities should therefore only apply in relation to crisis management measures or events directly linked to the application of such measures. Rights to terminate arising from any other default, including failure to pay or deliver margin, should thus remain. (63)It is necessary to preserve legitimate capital market arrangements in the event of a transfer of some, but not all, of the assets, rights and liabilities of a failing insurance or reinsurance undertaking. It is therefore appropriate to lay down safeguards to prevent the splitting of linked liabilities or linked rights and contracts, including contracts with the same counterparty covered by security arrangements, title transfer financial collateral arrangements, set-off arrangements, close out netting agreements, and structured finance arrangements. Where such safeguards apply, resolution authorities should be bound to transfer all linked contracts within a protected arrangement, or leave them all with the residual failing insurance or reinsurance undertaking. Those safeguards should ensure that the regulatory capital treatment of exposures covered by a netting agreement for the purposes of Directive 2009/138/EC is not affected. (64)In order to provide financial stability to the insurance and reinsurance undertaking a moratorium on surrender rights of policy holders should be introduced. Such a moratorium and the ensuing financial stability for the undertaking concerned should provide the resolution authorities with sufficient time to valuate those undertakings and to assess which resolution tools should be applied. Such a moratorium should also ensure equal treatment of policy holders, and thus avoid potential adverse financial impacts on policy holders that would not be among the first ones to surrender their policy. Because one of the objectives of resolution is the continuation of insurance cover, policy holders should continue to make any obligatory payments under the insurance contracts concerned, including in the case of annuities. (65)Ensuring that resolution authorities have the same resolution tools and powers at their disposal will facilitate coordinated action in the event of a failure of a cross-border group. Further action, however, is necessary to promote cooperation and prevent fragmented national responses. To agree to a group resolution scheme when resolving group entities, resolution authorities should therefore be required to consult each other and cooperate in resolution colleges. To provide for a forum for discussion and reaching such agreement, resolution colleges should be established around the core of the existing supervisory colleges through the inclusion of resolution authorities and the involvement of competent ministries, EIOPA and, where appropriate, authorities responsible for the insurance guarantee schemes. Resolution colleges should not be decision-making bodies, but platforms facilitating decision-making by national authorities, while it should be for the national authorities concerned to take the joint decisions. (66)Resolution of cross-border groups should strike a balance between, on the one hand, the need for procedures that take into account the criticality of the situation and allow for efficient, fair and timely solutions for the group as a whole and, on the other hand, the necessity to protect policy holders, the real economy and financial stability in all the Member States where the group operates. The different resolution authorities should therefore share their views in the resolution college and any resolution actions proposed by the group resolution authority should be prepared and discussed amongst different resolution authorities in the context of the group resolution plans. In order to facilitate swift and joint decisions wherever possible, resolution colleges should also take into account the views of the resolution authorities of all the Member States in which the group is active. (67)Resolution actions by the group resolution authority should always take into account their impact on policy holders, the real economy and financial stability in the Member States where the group operates. Resolution authorities of the Member State in which a subsidiary undertaking is established should therefore have the possibility to object, as a last resort and in duly justified cases, to the decisions of the group resolution authority where those resolution authorities are of the opinion that the resolution actions and measures are not appropriate, either because of the need to protect policy holders, the real economy and financial stability in that Member State, or because of obligations that comparable undertakings in that Member States are subject to. (68)Group resolution schemes should facilitate coordinated resolution, which is more likely to deliver the best result for all undertakings of a group. Group resolution authorities should therefore propose group resolution schemes and submit those schemes to the resolution college. Resolution authorities that disagree with a group resolution scheme or decide to take independent resolution action should explain to the group resolution authority and other resolution authorities covered by the group resolution scheme the reasons for their disagreement and notify those reasons, together with details of any independent resolution action they intend to take. Any resolution authority that decides to depart from the group resolution scheme should duly consider the potential impact of such departure on policy holders, the real economy and financial stability in the Member States where the other resolution authorities are located and the potential effects of such departure on other parts of the group. (69)To ensure coordinated action at group level, resolution authorities should be invited to apply, within a group resolution scheme, the same tool to entities belonging to the group that meet the conditions for resolution. Group resolution authorities should thus have the power to apply the bridge undertaking tool at group level to stabilise a group as a whole and to transfer ownership of subsidiaries to the bridge undertaking with a view to the onward sale of such subsidiaries, either as a package or individually, when market conditions are appropriate. In addition, the group-level resolution authority should have the power to apply the write-down or conversion tool at parent level. (70)Effective resolution of internationally active insurance and reinsurance undertakings and groups requires cooperation between Member States and third-country resolution authorities. For that purpose, where it is justified by the situation at hand, EIOPA should be empowered to develop and enter into non-binding framework cooperation arrangements with authorities of third countries in accordance with Article 33 of Regulation (EU) No 1094/2010. For the same reason, national authorities should be permitted to conclude bilateral arrangements with third country authorities in line with EIOPA’s framework cooperation agreements. The development of such bilateral arrangements should ensure effective planning, decision-making and coordination in respect of such internationally active insurance and reinsurance undertakings. In order to create a level playing field, such bilateral arrangements should be reciprocal, with resolution authorities recognising and enforcing each other’s proceedings, unless any exception that allows for rejection of recognition of third country resolution proceedings applies. (71)Cooperation between resolution authorities should take place both with regard to subsidiaries of Union or third-country groups as with regard to branches of Union or third-country insurance and reinsurance undertakings. Subsidiaries of third-country groups are undertakings established in the Union and are therefore fully subject to Union law, including the application of any resolution tools. It is necessary, however, that Member States retain the right to act in relation to branches of insurance and reinsurance undertakings having their head office in third countries, where the recognition and application of third-country resolution proceedings relating to a branch would endanger the real economy or financial stability in the Union, or where Union policy holders would not receive equal treatment with third-country policy holders. In those circumstances, Member States should have the right, after having consulted their resolution authorities, to refuse recognition of third-country resolution proceedings. (72)EIOPA should promote convergence of the practices of resolution authorities through guidelines that are issued in accordance with Article 16 of Regulation (EU) No 1094/2010. More in particular, EIOPA should specify all of the following: (a) the application of simplified obligations for certain undertakings; (b) the methods to be used when determining the market shares and the criteria for the scope of pre-emptive recovery planning; (c) a minimum list of qualitative and quantitative indicators and a range of scenarios for pre-emptive recovery plans; (d) the criteria for the identification of critical functions; (e) the details on the measures to address or remove impediments to resolvability and the circumstances in which each measure may be applied; and (f) how information should be provided in summary or collective form for the purpose of confidentiality requirements. (73)Technical standards in financial services should f