PRA finalises solvent exit planning rules for insurers

What does this mean?

The PRA’s expectations apply to all PRA-regulated insurers, except insurers in passive run-off, UK branches of overseas insurers, and Lloyd’s managing agents. The PRA confirms that following CP2/24, managing agents have been excluded from its policy. This is primarily because the Council of Lloyd’s already has the authority to mandate managing agents to prepare run-off contingency and closure plans, appoint substitute managing agents, and issue relevant directions. 

All in-scope insurers will be required to produce a Solvent Exit Analysis (SEA). Whereas insurers only need to produce a Solvent Exit Execution Plan (SEEP) where they consider a solvent exit has become a reasonable prospect, or where the PRA makes a specific request for a SEEP to be prepared. 

Solvent Exit Analysis

Insurers will be required to prepare a SEA as part of their business as usual activities. The SEA will need to be updated at least every three years, as well as when a material change takes place that may affect preparations for a solvent exit. The PRA states insurers should be prepared to provide the SEA to the PRA upon request. 

The SEA should describe when and how insurers would exit from their insurance business while still solvent, with the level of detail in the SEA being proportionate to the nature, scale, and complexity of the firm. The PRA specifies that as a minimum the SEA should include the following:

• solvent exit actions;

• solvent exit indicators;

• potential barriers and risks;

• resources and costs;

• communications;

• governance and decision-making; and

• assurance.

The insurer’s solvent exit actions should include how the insurer would carry out a solvent run-off of its policyholder liabilities while taking account of other liabilities. An insurer should set out its main options for a solvent exit, such as a sale or partial sale, a merger with another insurer, a transfer or partial transfer of its business under Part VII of FSMA, or a solvent scheme of arrangement and / or restructuring plan.

The SEA should also set out management actions on how insurers would cease PRA regulated activities while remaining solvent. These include considerations such as selling assets and renewal rights. 

The insurer’s solvent exit indicators should include financial and non-financial metrics. The PRA provides the following as quantitative examples: solvency coverage, relative loss of capital, profit and loss, underwriting loss, reserves deterioration, asset losses, and relative increase in lapse rate. The qualitative examples given include operational difficulties and staff turnover.

Insurers must undertake assurance activities in relation to their solvent exit preparations. The PRA clarifies that assurance can be performed internally, or externally as considered appropriate by the insurer. 

Solvent Exit Execution Plan

Following feedback to CP2/24, the PRA has removed the timing expectation to produce a SEEP one month from the date when there is a reasonable prospect that the insurer may need to execute a solvent exit. Instead, the PRA will set a timescale for an insurer to provide it with a SEEP.  

A SEEP should demonstrate whether the insurer could successfully execute a solvent exit. The SEEP should as a minimum include the following considerations for a solvent exit:

• actions and timelines;

• identification and mitigation of barriers and risks; 

• communication plan for stakeholders impacted; 

• detailed action plan for the execution of the solvent exit;

• assessment of the financial and non-financial resources needed, and how the firm will monitor and maintain these resources;

• governance arrangements; and 

• organisational structure, operating model, and internal processes.

With regards to the assessment of resources, the PRA expects this to include projections to ultimate of future premiums and claims, cashflows gross and net of reinsurance, and expenses. The assessment of resources should also include projections to ultimate of Solvency Capital Requirements and Minimum Capital Requirements, among other things.

While the PRA does not provide examples of good practice of current solvent exit planning it has seen, it refers to the FCA’s Wind-down Planning Guide and TR22/1: Observations on wind-down planning: liquidity, triggers & intragroup dependencies as containing examples of good practice which may be helpful. Further, the PRA clarifies that when the Insurer Resolution Regime is introduced it may impact its policy on solvent exit planning, at which point it will consider the case for amendments to its policy. 

What do firms need to do?

With 18 months to implement the new expectations, insurers should start now by considering how to proportionately address the new requirements for their business.

Insurers will need to consider their wider approach towards resolution and recovery planning. For instance, they can choose to include the SEA as a discrete section in their ORSA, capital management plan, or recovery and resolution plan, or present it independently if preferred.

Large insurers should ensure the level of detail in their SEA reflects the complexity of their business. While smaller insurers may have less detail in their SEA, they will nonetheless need to ensure that they cover the key areas discussed in the PRA’s final policy. This includes undertaking assurance activities in relation to their SEAs. Such assurance activities may include reviews by internal audit or external specialists, along with obtaining sufficient challenge from the insurer’s governance body (including non-executive directors).  

The themes covered in the PRA’s final policy have some similarities with existing wind-down planning requirements for FCA solo-regulated firms. The PRA specifically suggests that insurers looking for good practice or further guidance should review the FCA documents mentioned above. 

Insurers should consider how their approach to capital and liquidity planning is able to support a potential solvent exit option, as well as the potential impact of planned asset sales on insurers’ solvent exit analysis. Insurers should also ensure that their governance and decision-making arrangements are able to effectively support the potential execution of their solvent exit plan. The PRA expects the insurer’s board to review and approve the SEEP, providing sufficient challenge on its contents. 

Insurers should consider their responsibilities in relation to the FCA’s Consumer Duty. The PRA is placing a high priority on insurers’ approach to stakeholder management as part of their SEA, meaning that insurers should ensure that critical groups such as policyholders and creditors are appropriately engaged as part of their wider communication strategy. 

Insurers will need to consider resourcing and capacity of their teams to complete the SEA while balancing other activities. Insurers will want to conduct a gap analysis against their current policies, and set up internal governance with a Senior Manager responsible for producing and monitoring the execution of the SEA. Discussions and decisions to address any gaps identified should follow appropriate governance processes and be effectively recorded.

Next steps

The PRA’s expectations on SEAs come into force from 30 June 2026. PRA supervisors may request SEAs from the insurers they supervise from this date.