Insurance intermediaries have been required to maintain an up-to-date wind-down plan (WDP) for some time. But when the Financial Conduct Authority (FCA) completed its multi-firm review on a sample of general insurance brokers in 2022, it had material concerns and identified several areas of poor practice, outlined in 'Assessing liquidity for orderly wind-down: good and poor practices from general insurance brokers'. Having reviewed and advised on a number of WDPs across the sector, these conclusions resonate with our findings.
We expect the FCA to continue to review the WDPs of insurance intermediaries in 2023 and beyond. With work still to do, how can firms ensure their WDP meets expectations?
Interpreting FCA guidance on wind-down planning
You can find FCA guidance on wind-down planning in these FCA publications:
- FG20/1: Our framework: assessing adequate financial resources
- TR22/1: Observations on wind-down planning: liquidity, triggers & intragroup dependencies
- PRIN 2.1 The Principles – FCA Handbook
- Wind-Down Planning Guide (WDPG)
- Section TC2.4 of the FCA Handbook – Threshold condition 4: adequate resources
It can be helpful to study the FCA's objectives and translate them into your own words:
“An effective wind-down plan aims to enable a firm to cease its regulated activities and achieve cancellation of its permission with minimal adverse impact on its clients, counterparties or the wider markets. This includes scenarios where the firm undertakes a strategic exit as well as unexpected crisis or insolvency that makes the firm unviable.” – FCA Handbook, WDPG, Para 1.1
From an insurance intermediary’s perspective, you may choose to translate these words into ‘mitigate policyholder detriment, as well as the impact and cost to counterparties, preserve our reputation and return the surplus to shareholders’.
Key workstreams to include in a wind-down plan
The FCA has challenged firms to consider the following points when preparing a wind-down plan:
Risk management framework
Wind-down planning should be grounded in a robust and rigorous analysis of what the risks facing the business are, and what the trigger of a wind-down may be. This should include stress testing and reverse stress testing.
How will the company make the decision to wind down and how will it oversee the wind-down plan? This should be discussed and agreed by the board, and documented in the WDP. By identifying and stress testing scenarios, and having a disciplined approach to providing and monitoring management information, a firm will be in a good position to identify early warning signs. They're then better placed to mitigate that risk or reduce the impact of any wind-down.
Management needs to identify each part of the business that is necessary to execute an orderly wind-down and ensure all critical items are considered. This should include asset sales, people, IT systems, infrastructure, data and so on. It should also identify interdependencies across functions, departments and group entities. Once this analysis is complete, shared services – such as IT, procurement, finance and HR – can then be assessed for their minimum requirements in a wind-down scenario, to ensure adequacy and financial resource allocation.
Management also needs to analyse and document assumptions about the resources required to deliver an orderly wind-down. FCA guidance says that firms should have adequate capital to incur losses and remain solvent, or to fail in an orderly way. These resource estimates should include assessments of extra closure costs and potential litigation costs.
Documenting key decisions
The FCA’s review highlighted the need for firms to document key decisions made in any wind-down plan including:
- testing how the firm’s risk management framework, stress testing and reverse stress testing align with the scenarios and triggers contemplated in the WDP – and whether this is plausible
- reviewing how credible and operable a WDP is in the context of consolidated or group wind-down plans
- analysing how the firm has modelled the liquidity required for an orderly wind-down (including documenting all assumptions) and how this translates into funds held in ring-fenced accounts.
It's important to identify stakeholders and document the impact a wind-down may have on them. This can be used to understand what actions stakeholders could take that may impact your wind-down plan – in terms of both practical plans and resources needed.
A wind-down plan should include a tightly documented and defined communication plan. If the implementation of a WDP is imminent, it's expected that key documents – such as statements for the website, press releases, bespoke instructions to policyholders and counterparts – will be drafted and ready to go.
Include both solvent and insolvent scenarios
A thorough financial resources analysis will enable management to consider whether a solvent wind-down is practical or not. If not practical, it's essential to think about the implications of an insolvency on your wind-down and ensure it is considered in your wind-down plan. This should include the impact on policyholders and counterparts, and what the firm could do to mitigate those.
What's the appropriate level of granularity?
Each stage of a wind-down plan requires management to exercise and document their judgement on the appropriate level of granularity to include, as well as their readiness to implement each part of the plan. This means asking at each stage:
- What still needs to be done?
- How long will it take?
- What resources are required?
We expect the FCA to be proactive in reviewing wind-down plans in the sector. Firms should ask themselves whether they are ready to receive the FCA’s call.
For more information and advice, contact Bradley Chadwick.