The Prudential Regulatory Authority (PRA) has begun the journey of implementing one of its objectives from its 2022/23 business plan - to increase confidence that insurers can solvently exit the market with minimal disruption to policyholders and the market. To kick start the execution of this plan the PRA issued a consultation paper (CP, CP/2/24) and a draft Supervisory Statement (SS) on 23 January 2024, outlining its intent to add new rules to the Solvent Exit Part of the PRA Rulebook.
The CP outlines that this level of comfort around exiting the market solvently will be achieved via two new proposals. Firstly, that all in-scope PRA-regulated insurers perform and document a Solvent Exit Analysis (SEA) during business as usual (BAU). A SEA is a blueprint plan on how the insurer will efficiently and solvently exit the market. Secondly, once a solvent exit becomes a reasonable prospect for a firm, it must prepare a detailed Solvent Exit Execution Plan (SEEP).
The PRA defines a solvent exit as when an insurer ceases insurance business, including effecting and carrying out contracts of insurance. This can be achieved by the run-off, payment or transfer of its insurance and policyholder liabilities, a sale of shares or partial sale of the business. All methods result in the removal of a firm's Part 4 PRA permissions in an orderly and solvent manner.
The basis behind the proposed rules is to bridge the gap between when a recovery solution is no longer feasible and the need for insurers to enter insolvency or a resolution process.
The PRA is accepting responses to the CP, which will be assessed and where relevant, will form part of the Policy Statement issued by the regulator. The deadline for responses to the CP is 26 April 2024.
If implemented, the regulator envisages releasing a Policy Statement, detailing the feedback from the consultation period during the second half of 2024, with the implementation of the proposed rules in Q4 2025. Therefore, all in-scope insurers will need to produce a SEA, which achieves the PRA requirements for Q4 2025.
The in-scope entities for the proposal include all PRA-regulated insurers, except for firms in passive run-off and UK branches of overseas insurers. The proposal sets out that a SEA is required for all in-scope PRA-regulated solo firms. Groups are not in-scope in the CP, however, if solos firms wish to submit a group-wide SEA, PRA approval is required to do so.
The proposal states that the SEA needs to be updated when a material change takes place in the business, and at least every three years. A SEA should be available upon the PRA’s request at any time after the implementation date.
The proposal states a SEA is required to be prepared by all in-scope PRA-regulated entities, whereas a SEEP is only required to be produced by firms when there is a reasonable prospect that a solvent exit is required.
The purpose of firms having a live SEA is so that a SEEP can be efficiently produced within one month. The SEA serves as a starting point for the SEEP, ensuring that the solvent exit planning process is streamlined and effective. A SEEP will need to be produced once any number of indicators are breached such as the solvent exit indicators (see the contents of a SEA heading), breaching the minimum capital requirement (MCR) or by request of the PRA.
The analysis documented in a SEA is to be proportionate to the nature, scale and complexity of the firm. The main benefit of producing a SEA during BAU is that it will allow firms to identify and mitigate barriers and risks they will encounter in executing a solvent exit. The minimum required contents of a SEA are outlined in the following section.
The SEEP includes updating and documenting further details to the SEA, which include more implementable actions and updating, monitoring and responding to the risks and barriers which were previously identified in the SEA.
The draft SS outlines the minimum required contents for a SEA in order to meet the PRA objectives:
Scenario – a firm should base its solvent exit on a plausible circumstance, which would result in the need for a solvent exit. The scenario should be based on a stressed circumstance, ie financial or operational constraints such as capital, reinsurance or liquidity, or a non-stressed circumstance such as a change in the strategic direction of the firm.
Solvent exit actions – how firms plan to sell, transfer or repay its insurance liabilities during a solvent exit. Firms should document the means and forecast valuations of removing the liabilities from its books. Firms should outline the actions required to ensure it remains solvent in the run-off of its liabilities such as partial sale, full sale, sale of renewal rights or appropriate reinsurance cover.
Solvent exit indications – firms should identify and monitor forward-looking financial and non-financial metrics, which once breached results in the production of a SEEP. Thresholds should be identified at which a firm’s permissions should be removed and at which point a solvent exit would no longer be feasible.
Potential barriers and risks – a broad range should be considered, including market-wide and firm-specific items that will impact the firm being able to carry out a solvent exit. The PRA expects material barriers and risks to be mitigated in the normal course of business to reduce the likelihood of an unsuccessful solvent exit.
Resources and cost – firms should identify the financial and non-financial resources they require to perform a solvent exit of the market. This should include the minimum level of financial resources required to achieve a successful solvent exit, beyond which a solvent exit would not be possible.
Communication plan – firms should consider both the internal and external stakeholders which will be impacted by the solvent exit and plan the method of communication to them. Firms should assess how they will manage and mitigate negative market reactions to their exit.
Governance and decision-making – a clear governance structure should be formed to oversee: BAU preparation for a solvent exit, review and approval of SEA, decision-making regarding a solvent exit and monitoring the execution of a solvent exit.
Assurance – adequate assurance activities for a solvent exit should be undertaken. Such examples are a review of the SEA by internal audit or external specialists and obtaining sufficient challenge from a firm’s governance body.
If a firm has a capital management plan or recovery plan in place, it may find it helpful to include the SEA as a discrete section in either of its existing plans but may set out the SEA separately if firms find it appropriate to do so. Several sections between these documents are similar and synergies can be found by leveraging the existing documents.
Insurers can also learn a lot from looking at the banking sector or at their insurance intermediary counterparts, where rules on wind-down planning are more developed. The PRA proposal has been drawn up to be consistent with relevant parts of the FCA wind-down planning guide, which should be read in conjunction with the draft supervisory statement.
Management will need to make judgements around the granularity of analysis, the level of support from key stakeholders and the complexity of barriers and risks addressed in its SEA. There is a delicate balance between the level of detail required, as the SEA should be proportionate to a firm’s nature, scale, and complexity, however sufficient analysis needs to be performed to ensure the PRA objectives are achieved, including being able to produce a SEEP within one month.
The proposal outlines that the SEEP should be consistent and appropriate for a firm’s business model, risk strategy and operations. Although the proposal outlines this guidance for the SEEP only, firms should be aware of this requirement to ensure its SEA is in line with these factors, allowing for efficient production of the SEEP if required.
Engage early. With the PRA looking to issue a Policy Statement in the second half of 2024, this only gives firms roughly one year until the proposed rules are implemented in Q4 2025. Our previous experience with the banking industry and insurance intermediaries in relation to the FCA regulations shows that early engagement is key for ensuring a smooth, efficient, and high-quality output.
For more information contact Bradley Chadwick, Will Stagg or Kantilal Pithia.
