In this article, we consider the PRA's latest proposals to enable UK insurers to exit the market in an orderly manner and share our insights on the specific requirements firms may expect to face.

In early January 2024, the UK's Prudential Regulation Authority (PRA) published a letter setting out its insurance supervision priorities for 2024, identifying ease of exit as a focus area. The PRA are looking to increase confidence in insurers' ability to exit the market in an orderly manner. If firms are able to enter and exit the insurance market with ease, this is likely to enable effective market operation whilst promoting competition.

Ease of exit is not new. It is a topic that has been on the PRA's agenda for a number of years with Sam Wood's "Brave New World" and "Prudentist" speeches in 2021, as well as being reflected in the PRA's 2020 business plan and priorities. The 2024 insurance supervision priorities letter highlighted that the PRA would soon be consulting on ease of exit, suggesting that the regulator's views and expectations on the topic are now well developed. What is new, just weeks after publication of the letter, is the PRA's release of its consultation paper CP2/24 - Solvent exit planning for insurers. The consultation paper is accompanied by a draft supervisory statement setting out further detail on expectations and proposed additions to the PRA rulebook to allow for solvent exit planning.

This article provides an overview of the PRA's expectations on solvent exit planning, dives into some of the specific requirements for firms and provides our views and insights on what this CP may mean for insurers in the UK.

Making waves with solvent exit planning

The consultation paper refers to "Solvent Exit" as the process through which a firm ceases its insurance business while remaining solvent. This is typically done via:

  • A solvent run-off which would involve ceasing to effect insurance contracts and extinguishing insurance liabilities (through paying claims and commuting or transferring liabilities); or
  • Alternatives to a solvent run-off, such as sale or partial sale, transfer of all or part of the business through a Part VII, a solvent scheme of arrangement or restructuring plan.

It is recognised by the PRA that recovery will often be preferred to a solvent exit, with firms having developed detailed plans for recovery. Where this is the case, the expectations of supervisory statement SS4/18 – Financial management and planning by insurers will still apply and firms are expected to have trigger points for management actions according to their risk appetite statement.

The PRA considers that preparation for solvent exit can improve the outcome for policyholders and policyholder protection which directly relates to the PRA's primary objective to promote the safety and soundness of firms, and secure an appropriate degree of policyholder protection. A lack of preparedness can increase the risk of an initially solvent exit becoming disorderly with risks to policyholders, creditors and stakeholders, while also posing a risk to financial stability and the wider market. Therefore, preparation for solvent exit could also be considered to advance the PRA's secondary objective of competitiveness through reducing market disruption.

Under the proposals, firms must prepare for a solvent exit as part of Business As Usual (BAU) and document this in a Solvent Exit Analysis (SEA). If solvent exit became a reasonable prospect, firms should prepare a detailed Solvent Exit Execution Plan (SEEP) as well as monitor and manage a solvent exit.

The consultation closes on 26 April 2024 and the PRA is planning to publish its policy statement in H2 2024 with an implementation date of Q4 2025 for the resulting changes.

We explore some of the specific requirements for producing a SEA, a SEEP and executing a solvent exit in the next two sections.

Running a tight solvent exit ship

As set out above, firms will be expected to prepare for a solvent exit as part of BAU and document and maintain details of these preparations in a SEA. The SEA should be updated when a material change takes place and at least every three years. The level of detail in the SEA should be proportionate to the nature, scale and complexity of a firm. It is worth noting from a pragmatic perspective and to ensure link up, the SEA can be a discrete section of a firm's recovery plan if this is deemed appropriate.

The PRA sets out examples of plausible circumstances that could lead to the need for a solvent exit. Firms may also draw upon and adapt scenarios developed under SS4/18. Examples include:

  • Financial issues such as underwriting losses, deterioration in technical provisions, risk mitigation arrangements not performing as expected and asset losses;
  • Non-financial issues such as major governance failure or loss of critical IT infrastructure;
  • Business models becoming unsustainable, such as difficulty in securing investment or reinsurance arrangements;
  • Shift in strategy away from insurance or reinsurance; and
  • Parent or other group companies facing financial or non-financial issues.

Regardless of the reason for a solvent exit, firms may need to execute a solvent exit in both stressed and non-stressed circumstances, and this should be reflected in their preparations.

The table below summarises the minimum areas to be covered in a SEA and expectations for each of these areas as described in the draft supervisory statement:

Areas to be covered in a SEA

Area to be covered in SEA Summary of expectations
Solvent exit actions
  • Actions needed cease PRA-regulated activities while actions needed to solvent;
  • Details of how a firm would carry out a solvent run-off of its liabilities;
  • Prudent views on the ability to sell or transfer liabilities and alternative options such as Part VII; and
  • Timeline for execution of actions including dependencies.
Solvent exit indicators
  • Forward-looking indicators of whether a solvent exit is needed, and likely success should be identified and monitored based on a defined set of triggers;
  • Indicators should cover financial and non-financial metrics in quantitative and qualitative terms;
  • Projected and actual levels, trends and ongoing appropriateness of indicators should be monitored; and
  • Analysis performed to meet expectations of SS4/18 may be leveraged.
Potential barriers and risks
  • View of market-wide (e.g. change in market conditions) and firm specific (e.g. loss of key staff) barriers and risks to execution of a solvent exit;
  • Potential impact on outcome and effectiveness of the firm's solvent exit actions should be assessed with steps being taken in BAU to identify and remove any material barriers or risks;
  • Analysis performed to meet expectations of SS4/18 may be leveraged to describe dependencies; and
  • Anticipated impacts of a decision to execute a solvent exit, including wider market reaction, should be considered.
Resources and costs
  • Financial resources including capital, reinsurance, funding and liquidity needed to execute a solvent exit;
  • Non-financial resources such as key staff, operational and outsourcing arrangements, premises amongst others;
  • Additional costs incurred as a result of solvent exit;
  • Identification of absolute minimum level of financial resources to execute a solvent exit; and
  • Details of how access to resources could be maintained throughout execution.
Communications
  • Internal and external stakeholders that may be impacted by a solvent exit;
  • Internal communication plan developed to meet expectations of SS4/18 may be leveraged;
  • Details of how and when communication to stakeholders would be carried out before and during the execution of a solvent exit; and
  • Assessment of potential reactions and negative impacts arising from communication.
Governance and decision-making
  • Senior Manager accountable for solvent exit BAU preparations, escalation and decision-making;
  • Governance arrangements should be established to ensure timely decision making; and
  • Capabilities should exist to produce adequate and appropriate information within a reasonable time frame to inform decisions regarding a solvent exit.
Assurance
  • Assurance activity to be undertaken either internally or externally;
  • SEA should be approved in accordance with the firm's governance arrangements; and
  • Senior Manager should confirm that expectations of the supervisory statement on solvent exit planning are met, and the SEA should be available to the PRA on request.


The table above summarises the minimum areas to be covered in a SEA and expectations for each of these areas

When in SEEP water

A firm is required to produce a SEEP within a one-month timeframe when there is a reasonable prospect of the need to execute a solvent exit or when requested by the PRA. The SEEP should be sufficiently detailed to inform both a firm and the PRA how it will complete the cessation of PRA-regulated activities and should be appropriate for a firm's business model, structure, operations, risk strategy and circumstances.

Within the previous section, we set out the minimum areas to be covered by a SEA. While the SEA should be the starting point for a SEEP, the PRA has set out a non-exhaustive list of what should be contained within the SEEP which goes beyond the expectations for the SEA, such as detailed action plans for execution of the solvent exit and organizational structure, operating model and internal processes. The Board is expected to provide challenge, review and ultimately approve the SEEP.

Following the decision to initiate a solvent exit, firms should make the PRA aware of this decision and keep both the regulator and relevant stakeholders informed of progress throughout execution. Throughout the execution phase of a solvent exit, firms are expected to continually assess the likely success, feasibility and appropriateness of solvent exit actions to inform whether further actions are required. Firms are also expected to monitor projected and actual levels, as well as trends of solvent exit indicators and the implementation of the SEEP.

What might rock the boat?

Within this section we set out our views and insights on what the consultation may mean for UK insurers. While the expectations set out in the consultation are proposals at this stage, we anticipate the final policy and supervisory statement being largely aligned to these proposals.

The level of work required to produce a SEA will vary from firm to firm, noting the PRA's intention for the SEA to be proportionate to individual firms. While larger firms may have a head start due to existing Recovery and Resolution plans, additional analysis and thinking is likely to be required to ensure that associated complexities are appropriately considered.

We would expect firms to perform a gap analysis as an initial step to understand how existing capital management plans or recovery plans (if these are in place) can be used, either partially or fully, to meet the requirements of planning for a solvent exit. The outcome of this exercise can then inform subsequent work to be carried out to meet the requirements.

It is likely that firms may begin to engage with third parties to explore exit options which can be included in the SEA. However, where these third parties are themselves PRA-regulated insurers, the implications of any arrangements may also need to be considered within their own SEA depending on what is driving a solvent exit. Therefore, such dependencies will need to be considered as part of producing a SEA.

The work carried out on barriers and risks to solvent exit as part of the SEA may lead to firms deciding to make changes to their business and operations, or even disposing of some elements of their business to mitigate or remove these risks.

While changes resulting from this consultation paper would not be implemented until Q4 2025, firms may want to think soon about the effort associated with meeting the expectations for preparing for a solvent exit as part of BAU. In particular, aspects such as setting up internal governance, preparing an initial SEA and getting assurance over the SEA are likely to be time consuming and require input from a variety of stakeholders.

Wash up

Based on the discussion set out above, our three key takeaways about CP2/24 are as follows:

  1. Firms will be expected to produce a SEA which documents their plans for a solvent exit as part of BAU. The SEA should be updated when a material change takes place and at least every three years.
  2. Solvent exit plans should be proportionate to the nature, scale and complexity of a firm. The proposals also anticipate leverage of existing capital management or recovery plans which may reduce the work required to meet the proposed expectations.
  3. Firms may wish to commence steps such as a gap analysis to provide a better understanding of areas where they currently fall short of the proposed expectations to help plan activity to feed into the SEA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.