PRA to require all insurers to prepare solvent exit plans

What does this mean?

The PRA’s proposals aim to increase the likelihood that insurers can successfully execute a solvent exit, that will be more cost effective and less disruptive to policyholders compared to insolvency. The proposals will require insurers to preemptively identify potential barriers to exit; support clearer decision-making and communication before and during a solvent exit; and enable better monitoring as the solvent exit progresses.  

The Solvent Exit Analysis

Insurers will be required to prepare a SEA as part of their business as usual (BAU) activities. The SEA will need to be updated at least every three years. Additionally, the PRA expects the SEA to be updated where a material change takes place. 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. 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 PRA expects the level of detail in the SEA to be proportionate to the nature, scale, and complexity of the insurer. 

The insurer’s solvent exit actions should include how the insurer would carry out a solvent run-off of its liabilities. An insurer should set out appropriate options such as a sale / partial sale, transfer / 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 or 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 are operational difficulties and staff turnover.

The Solvent Exit Execution Plan

The PRA proposes that SEEPs should be produced within one month when there is a reasonable prospect that the insurer may need to execute a solvent exit. PRA supervisors will also have the discretion to direct insurers to prepare a SEEP. 

All SEEPs must be shared with the PRA, and should demonstrate whether the insurer could successfully execute a solvent exit. The SEEP should as a minimum include the following 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.

What do firms need to do?

Insurers will need to consider their wider approach towards resolution and recovery planning. For example, where insurers have a capital management plan or an existing recovery plan in place, they should consider whether the SEA should be inserted into these existing plans. 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 CP2/24.

The themes covered in the PRA’s consultation have some similarities with existing wind-down planning requirements for FCA solo-regulated firms. 

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. 

Insurers should consider their responsibilities in relation to the new Consumer Duty. The PRA is placing a high priority on insurers’ approach to stakeholder management as part of their solvent exit analysis, 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 BAU 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. 

The PRA makes clear that it expects insurers to undertake 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).  

Next steps

The consultation closes on 26 April 2024. The PRA plans to publish a Policy Statement in H2 2024, and proposes implementation of the changes to take effect during Q4 2025.