The PRA has released a consultation (CP2/24) (CP) on proposals for solvent exit planning for PRA-regulated insurers. The proposals were trailed in the PRA’s business plan for 2022/23 and follow similar proposals consulted on last year in respect of non-systemic banks and building societies.
The proposals aim to build confidence in the ability of UK insurance firms to exit the market in an orderly fashion, without the need for an insolvency or resolution process. The CP is of very broad application (affecting all PRA-regulated insurers other than those already in “passive run-off” (see below) and UK branches of overseas insurers) and if the proposals are adopted, will require management focus and investment by firms in order to comply with the new planning and governance requirements imposed.
This proposal comes in the context of recent amendments to the insolvency regime for insurers, with enhanced write-down powers introduced by the Financial Services and Markets Act 2023. HM Treasury has also recently consulted on a proposed Insurer Resolution Regime (IRR), which will give the Bank of England power to manage the failure of systemically important insurers. The IRR will involve certain insurers in additional resolution and recovery planning. The PRA will consider the need for any amendments to its solvent exit planning rules as and when the IRR is enacted.
What is meant by a solvent exit?
A “solvent exit” is defined by the PRA as the process by which a firm ceases its insurance business (the regulated activities of effecting and carrying out contracts of insurance) in an orderly manner while remaining solvent throughout. A solvent exit may take different forms, ranging from a solvent run-off of insurance contracts by paying claims as they fall due, through to a full or partial sale, a transfer of all or part of the business under Part VII of FSMA 2000, or a solvent scheme of arrangement or restructuring plan.
Which firms do the proposed rules apply to?
The scope of the proposals is very wide. It is proposed that they will apply to all PRA-regulated insurers other than firms already in “passive run-off” (defined in the draft rules to mean a firm no longer writing new insurance contracts and which does not acquire run-off business), and UK branches of overseas insurers. The following entities will therefore all be within scope:
- UK Solvency II firms
- Non-Directive firms (a UK insurance firm to which UK Solvency II does not apply)
- The Society of Lloyd’s and Managing Agents
- Mutuals and friendly societies, and
- Run-off acquirers (defined in the draft rules to mean a firm which acquires and carries out contracts of insurance in run-off).
What are the proposed solvent exit planning requirements?
All in scope firms will be required to produce a solvent exit analysis (SEA) as part of their business-as-usual activities, which must be updated at least every three years. While every firm is required to produce and update an SEA, those for which solvent exit becomes a reasonable prospect will then be required to produce a detailed solvent exit execution plan (SEEP).
The SEA must include:
- Details of how the firm would carry out a solvent run-off, including whether options such as a full or partial sale, Part VII transfer or solvent scheme of arrangement/restructuring plan would be appropriate.
- Identification of the “trigger point” at which (should its permission to effect contracts of insurance be removed) it would be able to achieve a solvent run-off of its liabilities to existing policyholders (and other liabilities, as applicable) in full and as they fall due. A firm should monitor indicators, including financial and non-financial metrics, to provide sufficient warning to enable the firm to move to solvent exit while it still has the financial and non-financial resources to do so.
- Identification of barriers and risk to the successful execution of a solvent exit, and how these might be mitigated or removed. Barriers may be market-wide or firm-specific, for instance, a complex legal or corporate structure, loss of key staff, existence of unknown or untraceable policyholders, or the lack of alternative cover in the market for policyholders.
- Details of the financial and non-financial resources required to execute a solvent exit.
- A communication plan identifying stakeholders which may be impacted, and how and when the firm would communicate with them.
- Governance arrangements – the firm must appoint a Senior Manager, approved under the Senior Managers and Certification Regime, who is accountable for solvent exit preparations, decision making and execution, including the SEA, and the decision as to whether a SEEP should be produced.
When there is a reasonable prospect of a firm needing to execute a solvent exit, or when requested by the PRA, a firm will be required within one month to produce a SEEP. This is intended to be an in-depth document which will need to include a detailed action plan and timeline for the execution of the solvent exit, assessment of required resources to complete the exit, and a communication plan for stakeholders.
Why is the PRA making these proposals?
The PRA considers that the proposals will increase the likelihood that firms can initiate solvent exits at an appropriate time (before it becomes too late), with a higher chance of successful completion. This will reduce exit costs, benefit policyholders, reduce the risk to the wider market of disorderly exits, and reduce the need for FSCS compensation payments caused by insurer failure.
What action should insurers take?
The consultation closes on 26 April 2024, and insurers may submit responses to the PRA up to this date. The PRA expects the proposals to be implemented in Q4 2025. Assuming the proposals are implemented in their current form, there will be significant work involved for insurers, including the need to set up internal governance arrangements, and conduct the analysis necessary to prepare their first SEA. To discuss CP2/24 or for more information, please contact Heidi Sawtell or Helen Martin.
Heidi Sawtell
Helen Martin