Published: 4 November 2025
Introduction
Having come into force on 1 January 2016, Solvency II provided a harmonised and robust framework for Insurance companies in the EU to ensure protection of beneficiaries and EU policyholders across three key pillars:
The key objectives of Solvency II centred around consumer protection, allowing for enhanced protection across the EU as well as increased supervision powers, harmonisation of EU regimes and provision of technical standards on risk management.
Following the introduction of Solvency II, the EU insurance industry has become more resilient with risk mitigation techniques in place. However, to ensure that this regime remains fit for purpose, the European Commission adopted a review package (the “amending proposal”) of Solvency II rules in 2021. The amending proposal has been twofold:
The purpose of this paper is to provide an overview of the new IRRD rules and an assessment of the impacts and obligations imposed on in-scope parties.
The Insurance Recovery and Resolution Directive – the Background
Distress within the insurance market can have many repercussions throughout not only the insurance industry but also the financial sector and economy as a whole. Due to the connection between insurance companies, reinsurance companies and the wider financial markets, any distress or failure should be addressed in a timely and coordinated manner. Following the 2008 financial crisis, taxpayer money was used to restore a number of financial undertakings throughout Europe, and whilst Solvency II has done plenty to mitigate and protect the insurance industry, it falls short of providing protection from failures both at a national and cross border level within the insurance and reinsurance sector. Insurance and reinsurance undertakings are active financial markets players for the purposes of managing portfolio investments and risk and it is inevitable that a failure by an insurance undertaking could lead to instability in the financial markets.
With many insurance and reinsurance undertakings operating cross border, it is necessary to have coordination between member states and third countries to allow for continuation of critical functions of an impacted insurance or reinsurance undertaking while minimising the impacts on the broader financial system. A key objective of IRRD is to mitigate unnecessary losses, minimise the effects on the wider financial markets and also the cost for taxpayers.
The Financial Stability Board has developed key attributes of effective resolution regimes in 2014 (and further undated in 2016 with publication of guidance) [3] which cover Insurance companies determined as systemically significant – these are broad in scope. In addition, Solvency II has been implemented and governed under national laws, which has led to some differences in how the directive has been implemented. Solvency II is a complex piece of legislation, with implementation across member states differing. The principle of proportionality [4] introduced by Solvency requiring supervisory activities by member state authorities to “identify undertakings (and groups) as small and non-complex (SNCUs) in relation to the nature, scale and complexity of their risks” is lacking in clarity and difficult to apply to small insurers. Furthermore, Solvency II does not fully address application of supervisory powers with respect to cross border insurance groups, and it has been said that policyholders are not well protected in all member states in the event of an insurer failure. [5] The absence of a standard set of rules across member states in reality means that cooperation between member states in the event of a failing cross border insurance group is unlikely to succeed. With differing approaches in national laws and without the introduction of pre-emptive recovery and resolution plans, there could be disproportion and a lack of consistency in application of mechanisms to deal with failing undertakings.
The European Insurance and Occupational Pension Authority (“EIOPA”) provided guidance on the need for reform and review of the Solvency II Directive by publication of two opinions. [6] [7] Following the work of EIOPA, the European Commission published an impact assessment and proposal for IRRD aimed at creating a framework for the harmonisation of recovery and resolution tools as well as collaboration between national authorities with respect to insurance and reinsurance undertakings in financial distress.[8] With the introduction of IRRD, national legislators will be required to update and align existing legal frameworks with IRRD requirements.
[3] Key Attributes of Effective Resolution Regimes for Financial Institutions - Financial Stability Board
[4] Technical advice on the implementation of the new proportionality framework under Solvency II - EIOPA
[5] EUR-Lex - 52021SC0260 - EN - EUR-Lex
[6] EIOPA-BoS-17-148_Opinion_on_recovery_and_resolution_for_(re)insurers.pdf
[7] Opinion on the 2020 review of Solvency II - EIOPA
[8] EUR-Lex - 52021PC0582 - EN - EUR-Lex
When Will IRRD Come Into Force?
IRRD came into force on 8 January 2025. Member states must transpose the directive into National law by 29 January 2027, with in-scope entities covered by the regime from 30 January 2027. Ahead of implementation, EIOPA will develop technical standards and guidelines. EIOPA will consult with the insurance on certain key topics as outlined below.
Please note that whilst the directive comes into effect on 29 January in member States, certain guidelines and regulatory technical standards will be published after this date. It is understood that Insurance Europe have raised concerns over this timing given that preparation of pre-emptive recovery plans may be an uncertain task for many insurance undertakings. Questions have been raised as to whether all necessary information, processes and resources will be available to ensure compliance by the implementation date.[9] EIOPA will establish a committee to ensure consistency and coordination of recovery and resolution tasks.
Figure 1
[9] Important considerations ahead of IRRD Level 2 and 3 consultations
Scope of the New IRRD Regime?
IRRD will apply to the following in-scope parties:
Certain parts of IRRD (such as the implementation of recovery plans) will apply to certain subsets of insurance and reinsurance undertakings. For example, small and non-complex undertakings should not be obliged to draw up separate pre-emptive recovery plans, nor should they be subject to resolution planning, except where such an undertaking represents a particular risk at national or regional level.[10]
Main Elements:
Pre-Emptive Recovery Plans
A key element of IRRD is preventative planning. Whilst this is not a new concept with many member states already having established pre-emptive recovery planning in place (e.g. Ireland, the Netherlands and Luxembourg), the aim of enhanced and harmonised pre-emptive recovery planning is to make clear the scenarios which could weaken an insurance or reinsurance undertakings financial position at a union level. Qualitative and quantitative indicators must be identified that would trigger remedial actions. Such indicators must be all encompassing in the areas of liquidity, capital, assets, operational monitoring and remedial actions to be taken. Pre-emptive recovery plans are drawn up by the insurance and reinsurance entities and submitted to supervisory authorities for review. Plans must be updated every two years and after certain events such as a legal restructure or a material change to financial condition.
Not all insurance and reinsurance entities will be subject to pre-emptive recovery planning requirements (except where a supervisory authority considers that such an undertaking represents a particular risk at national or regional level).
In determining whether an entity is subject to recovery planning, supervisory authorities must determine that an insurance or reinsurance undertakings are in scope by reviewing the following:
Figure 2
Under IRRD, supervisory authorities will review the pre-emptive resolution plans within 9 months of submission and must decide whether the plan is reasonably likely to maintain or restore the viability and financial position of the relevant insurance of reinsurance entity; whether the plan is likely to be implemented quickly and effectively and whether the plan will create any adverse effect on the financial system.
In terms of groups, given the interaction and to allow for maximum preparation, pre-emptive recovery and resolution planning should apply to all group entities subject to the group supervision. All relevant resolution authorities and supervisory authorities within resolution colleges must cooperate throughout the recovery planning process. If there are any disagreements on decisions impacting the whole group EIOPA can act as a mediator to resolve.
Whilst EIOPA will prepare regulatory technical standards on pre-emptive recovery planning, IRRD Article 5 makes clear that preparation and maintenance of pre-emptive recovery plans will be considered as part of the overall governance system outlined under Solvency II Article 41.
Resolution Plans
IRRD requires that member states draw up resolution plans. For individual insurance and reinsurance entities, resolution plans are necessary where it is seen to be in the public interest that such entity is subject to resolution action. This is determined based on the same criteria as per pre-emptive plan requirements (see Figure 2). Resolution authorities must ensure that at least 40% of the member state's insurance and reinsurance market and 40% of non-life insurance and reinsurance market is subject to resolution plans (based on gross technical provisions and gross written premiums respectively).
If an insurance or reinsurance entity carries out a significant portion of cross border activities, the resolution authorities in the home jurisdiction will be in charge of providing the resolution plan to host resolution and supervisory authorities. However, any host supervisory or resolution authority may examine this to ensure no adverse impact in their member state and make recommendations where necessary. Again, EIOPA may mediate if any issues arise in decision making between authorities.
Resolution plans must be reviewed and, if necessary, updated every 2 years. They must take into account a number of scenarios and should set out details on areas such as the key elements of the plan, including an assessment on resolvability, financing arrangements, resolution strategies, critical dependencies and a description of essential operations.
With regard to groups, in addition to the above requirements, group plans must ensure a coordinated approach across member states. Where a thirst country is involved, arrangements for cooperation must be identified with any implications for resolution within the EU noted. IRRD enforces that decisions regarding groups across all requirements remain joint with methods for addressing disputes outlined.
Key Players in the IRRD Framework
The implementation of IRRD will require collaboration across member states and outlines the key roles to ensure that the directive is rolled out in a standardised way:
Resolution Objectives and Tools
IRRD stipulates that in the exercise of resolution powers, resolution authorities should have regard to the following objectives:
Figure 3: Source: Article 18, IRRD
The overarching principle is that resolution tools should only be instigated if a normal insolvency proceeding cannot be commenced without negatively impacting policy holders, beneficiaries and claimants, and there is no reasonable approach for alternative action.
The following resolution tools have been made available under IRRD, however, resolution authorities should initially follow the measures outlined in resolution plans. If resolution authorities determine that, having taken into account resolution objectives, an alternative approach is needed, resolution tools should be implemented. Article 19 of IRRD provides the conditions for resolution tools to be implemented and makes clear the ways in which an insurance or reinsurance undertaking is considered “failing or likely to fail.”
Impact on Trading Master Agreements
Under IRRD, on entry into a resolution, resolution authorities must close out any derivative contract ahead of exercising write down or conversion powers. Under Article 40 of IRRD, where a netting arrangement is in place, resolution authorities must determine valuation of liabilities on a net basis pursuant to the terms of the netting agreement. Resolution authorities have a number of powers which impact trading master agreements, including override of default and termination provisions, suspension of certain obligations, and restriction of enforcement of security interests
Similar to BRRD, IRRD includes a recognition of bail in requirement on member state in-scope entities. This means that insurance and reinsurance undertakings, as well as group entities (and subsidiaries), must include a contractual provision requiring their counterparties acknowledgement and acceptance that they are subject to IRRD bail in powers. In-scope contracts will be those governed by the laws of a third country. In addition, in-scope entities will be required to included resolution stay provisions. This will apply to any financial contract which provides for termination rights or rights to enforce security interest. This requirement will apply to any new contract entered after the IRRD implementation date and contracts where there has been a material amendment to an existing obligation after the implementation date.
It remains to be seen if parties will introduce contractual changes through bilateral amendments or via industry protocols (such as those made available for BRRD). IRRD includes that draft Regulatory Technical Standards will be issued by 29 July 2027 to specify contents of contractual terms.
Note that IRRD specifies that “financial contracts” are as defined under Directive 2014/59/EU and therefore will include derivatives, repo, securities lending and commodities contracts.
Next Steps
IRRD introduces a harmonised framework for the protection of policy holders, investors and consumer across EU member states. By building on existing Solvency II principles as well as BRRD elements,[12] IRRD provides set rules and procedures for the recovery planning and resolution of insurance and reinsurance undertakings. Member states will need to align existing frameworks with IRRD requirements ahead of transposition into national laws on the 29 January 2027, which will require careful consideration of IRRD as well as new Regulatory Technical Standards and guidelines (yet to be published). Contract remediation and impact across financial contracts will require timely preparation for in-scope entities. Whilst IRRD implementation has been in discussion for some time, with the official publication on the 8 January 2025, the European insurance market has set out its views on this new directive. A key concern raised is ensuring that IRRD provides a proportionate and workable solution. Insurance Europe has called for clarity across areas such as implementation timings, financial arrangements, as well as definitions and other areas of concern.[13]
[12] A COMPARISON OF RECOVERY AND RESOLUTION FRAMEWORKS IN BANKING AND INSURANCE
Please note, this paper provides a general overview of IRRD and has been provided for general information purposes only.
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