May 23, 2024

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by: kiran

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Tags: "Regulation"

Solvent Exit Planning: A New Requirement for Insurers from PRA

Key Messages:

The PRA has published a consultation paper setting out proposals for insurers to prepare for an orderly ‘solvent exit’ as part of Business as Usual (BAU) activities and to be able to execute a solvent exit if needed, the consultation introduces a new draft Supervisory Statement (SS) – Solvent exit planning for insurers.

A solvent exit means the process through which a firm ceases its insurance business (including both effecting and carrying out contracts of insurance) in an orderly manner while remaining solvent throughout.

The proposals in this CP would add a new “Preparations for Solvent Exit” section to the PRA Rulebook and include:

  • New rules and expectations that firms must prepare for a solvent exit as part of their BAU activities and that firms must document those preparations in a Solvent Exit Analysis (SEA); and
  • New expectations, which would apply only if solvent exit became a reasonable prospect for a firm, on how it should:

a) Prepare a detailed Solvent Exit Execution Plan (SEEP), and

b) Monitor and manage a solvent exit.

SEA

Chapter 2 of the proposed Supervisory Statement talks about the SEA. The aim of the SEA is to document firms’ preparations for a solvent exit, so that, if needed, they could cease PRA-regulated activities in a timely and orderly manner. These expectations apply regardless of how likely or distant a prospect solvent exit may seem.
The level of detail in the SEA should be proportionate to the nature, scale and complexity of each firm and would need to be updated whenever a material change takes place and at least every 3 years and must be available to the PRA upon request. The SEA should include at a minimum:

  •  Solvent exit actions – the actions that would be needed to cease regulated activities while remaining solvent
  • Solvent exit indicators –this should be forward looking to provide sufficient warning for when a SEEP may need to be produced to facilitate a solvent exit
  • Potential barriers and risks – including those that are market-wide and firm-specific, such as complex legal and corporate structures or untraceable/uncontactable policyholders.
  • Resources and costs – both financial and non-financial resources.
  • Communications – the internal and external stakeholders that may be impacted and how and when the firm would communicate with such.
  • Governance and decision-making –a senior manager would be responsible for the firms BAU preparations for a solvent exit.
  • Assurance – adequate assurance activities would be required.

 

SEEP

Chapter 3 of the SS moves onto the expectations that apply when a SEEP is needed. The PRA would expect a SEEP to be produced within one month when there is a reasonable prospect that the firm may need to execute a solvent exit. A non-exhaustive list of contents the PRA would expect in a SEEP are:

  • Actions and timelines for the solvent exit – from the point of initiation to the removal of the firm’s Part 4A PRA permissions.
  • Identification and mitigation (or removal) of barriers and risks to the solvent exit.
  • Communication plan for stakeholders impacted by the solvent exit.
  • Detailed action plan for the execution of the solvent exit, such as the identification, and transfer or payment, of insurance and/or reinsurance liabilities.
  • Assessment of the financial and non-financial resources needed to complete the execution of the solvent exit.
  • Governance arrangements, including roles and responsibilities in making the formal decision to initiate the solvent exit, as well as in managing and monitoring the execution.

What Firms need to consider:

Further details are provided in the CP and in the draft Supervisory Statement. Firms should fully consider the contents of the CP and the draft SS, ensuring that discussions occur with appropriate parties. As is usual with CP’s, this is your chance to influence PRA rulemaking and so you should ensure that the contents of this paper are discussed at the highest level necessary with feedback provided to the PRA as required.

All PRA-regulated insurers except for firms in passive run-off and UK branches of overseas insurers are in scope of the proposals. Insurers should start considering the framework being suggested by the PRA.

To get ahead of the curve, Insurers should be asking themselves how prepared they are for a solvent exit and how they would help to maximise policyholder protection if such an exit is required. They should start to analyse what potential barriers to exit may exist and consider what action is required to overcome such barriers. The more assurance you can provide to the PRA about your ability to achieve a solvent exit, the less involvement they will need during any such exit!

The consultation closed on Friday 26th April 2024 and the proposed implementation date for the changes resulting from this CP would be Q4 2025. Any comments or enquiries can be sent to CP2_24@bankofengland.co.uk.