Recovery planning for commercial insurers

The new Section 6G of the Insurance Act 1978, as amended, came into effect on May 30 last year, allowing the BMA to require certain insurers, Classes 3A, 3B, 4, C, D, E, and insurance groups to prepare a recovery plan in accordance with certain rules.

In April, the BMA released the Insurance (Prudential Standards) (Recovery Plan) Rules 2024, which becomes operative May 2025 and set out detailed requirements for applicable insurers in relation to their recovery plans.

The introduction of these new recovery rules represents a significant step in fortifying the resilience of commercial insurers against potential financial distress.

These measures are designed to protect policyholders, promote market stability and bolster the overall health of the insurance industry.

The BMA’s previous consultation paper on recovery planning emphasised the importance of integrating a recovery plan within an insurer’s broader enterprise risk management framework, acting as a pre-emptive tool complementing existing measures such as the Commercial Insurer Solvency Self-Assessment.

Insurers who are mandated to prepare a recovery plan must also provide relevant documents and information to the BMA, as required. Additionally, these insurers are expected to maintain both electronic and printed copies of their most recent recovery plans at their head office for record-keeping and regulatory purposes.

The BMA will consider the following factors in determining whether an insurer should prepare a recovery plan under Section 6G:

• Whether the insurer conducts domestic business
• If the insurer’s three-year rolling average of total assets equals or exceeds $10 billion
• If the insurer’s three-year rolling average of total gross written premiums equals or exceeds $5 billion
• Whether the insurer is subject to enhanced supervisory monitoring by the BMA or another relevant supervisory authority

The BMA’s decision to impose this requirement will also consider factors relating to the insurer’s nature, scale, complexity and risk profile.

The BMA will tailor the scope and requirements of a recovery plan based on the insurer’s specific characteristics, including its class of registration; size or market share; its external and internal interconnectedness; the complexity, business model and risk profile of the insurer; the substitutability of the insurer; and any cross-border activities of the insurer.

According to the rules, each recovery plan must be thorough and include the following components:

An executive summary: an overview of how the recovery plan will ensure the insurer’s ability to recover from severe stress scenarios

Description of the insurer: this includes the insurer’s legal structure, business operations, key financial arrangements, and the nature of its insurance business

Criteria for implementation: a detailed description of the triggers that will require the implementation of the recovery plan

Governance: an outline of the insurer’s governance policies and processes for recovery planning and implementation

Recovery methods: the proposed methods that will help the insurer recover from severe stress scenarios

Stress scenarios: stress tests and scenarios that will assess the feasibility of the recovery plan, including when these scenarios will be performed

Communication strategy: the strategy the insurer will use to communicate with all relevant stakeholders before, during, and after the recovery plan’s implementation

Applicable insurers must also review and update their recovery plans at least once every three years or whenever a significant change occurs in their financial position, business strategy or risk profile. Any updates must be filed with the BMA within 30 days of the change being made.

The BMA also has the authority to notify such insurers of any deficiencies in their recovery plans and require them to address those deficiencies within a specified time frame.

First Published in The Royal Gazette, Legally Speaking column, October 2024