Resolution in Europe: The Unresolved Questions by Andreas Dombret Patrick S. Kenadjian

Author:Andreas Dombret, Patrick S. Kenadjian
Language: eng
Format: epub
Publisher: Walter de Gruyter
Published: 2019-06-15T00:00:00+00:00

Bail-In

Another potential recovery tool might be a bail-in arrangement, which could enable losses to be quickly allocated to and absorbed by shareholders and creditors. A bail-in entails techniques available to restructure liabilities or raise equity capital. This might be accomplished by restricting or writing off liabilities of debt providers or through the conversion of such liabilities into equity or equity-like instruments.30 The bail-in instrument could therefore help to absorb losses and recapitalize the insurer. A tool of this kind would also ensure the ongoing prevalence of critical functions and might help to avoid systemic risks of the insurance sector.

Recovery instruments can be seen as a protective shell that not only protects policyholders, but may also protect unprofitable and inefficient insurance companies from market withdrawal. Unprofitable insurers could be kept artificially alive by recovery measures, and consumers would ultimately bear the costs of such market frictions, as they would possibly be exposed to more expensive products and inefficient claims handling. However, in the insurance sector, policyholders are to be protected against insolvency risks, especially in personal insurance. For this reason, “creative destruction” through both market entries and exits has to preserve policyholders’ interests. These deliberations lead to the discussion of resolution measures.

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