Navigating the PRA’s Proposed Solvent Exit Planning: Key Insights for Insurers

The Prudential Regulation Authority (PRA) has recently released a consultation paper outlining extensive proposals for PRA-regulated insurers to enhance their readiness for an orderly ‘solvent exit.’ The proposed rules, if implemented, introduce complex requirements that would necessitate significant investment of effort from insurers. This article provides an overview of the key aspects of the proposed rules and their potential implications.

Implementation Timeline and Overview

The PRA’s consultation on solvent exit planning for insurers is open for comments until 26 April 2024. The PRA anticipates publishing a final Policy Statement in the second half of 2024. They intend to work collaboratively with stakeholders to develop consistent liquidity reporting requirements by Q4 2025. While this may seem distant, insurers must not underestimate the time and investment required to comply with the proposed rules.

New Rules and Compliance Requirements: the proposed rules are broad-reaching, applying to all UK-authorised insurers except UK branches of foreign insurers and firms already in passive runoff. The PRA expects insurers, except those excluded, to produce and maintain a Solvent Exit Analysis (SEA), which must be updated every three years. Insurers for whom a solvent exit is a reasonable prospect must prepare a detailed Solvent Exit Execution Plan (SEEP).

Key Responsibilities and Accountability

Insurers are required to appoint a Senior Manager under the Senior Managers and Certification Regime (SMCR) to oversee various aspects, including BAU preparations, SEA review and approval, escalation and decision-making related to a solvent exit, and monitoring the execution of the exit.

Understanding Solvent Exit

The PRA defines “solvent exit” as the orderly cessation of effecting and carrying out contracts of insurance while remaining solvent throughout the run-off. Various options, including solvent run-off, business sale, Part VII transfer, solvent scheme of arrangement, or restructuring plan, are available to insurers.

Proposed New Rules and Expectations

The PRA’s supervisory statement outlines expectations for both the preparatory phase and execution of solvent exit. This includes the production of a Solvent Exit Analysis (SEA) as part of business-as-usual activities, setting exit triggers, and actions to take when thresholds are crossed. Insurers may need to prepare a more detailed Solvent Exit Execution Plan (SEEP) upon request or when SEA indicators suggest a reasonable prospect of a solvent exit.

SEA and SEEP Requirement

Under SEA, the PRA requires the insurer to identify the circumstances which can lead to solvent exit. The details included in the SEA are forward-looking indicators and solvent exit actions. This addresses barriers and risks which helps outline financial resources needed and communication plans Additionally, a Senior Manager accountable for BAU preparations and the SEA’s review and approval must be appointed. Internal or external assurance activities for solvent exit preparations are essential, and the PRA may seek its own assurance through a skilled person report. When a solvent exit becomes a reasonable prospect, insurers must submit a SEEP within a month. This plan needs board approval and should include a detailed timeline, financial projections, realistic valuation of assets and liabilities, and an enhanced communication plan. The SEEP complements the SEA, providing further information to support the execution of the exit plan.

Implications for Insurers

The proposed rules are extensive and apply to a vast majority of insurers, including many small- to medium-sized firms unfamiliar with such detailed solvent exit planning. Insurers are encouraged to engage with the proposed requirements, familiarize themselves with the new rules, and respond to the consultation. Those with existing exit plans should revisit them, and new entrants should proactively plan for compliance

Conclusion

The PRA’s proposed rules present a significant challenge for insurers, especially those new to solvent exit planning. 4most, with its specialized expertise, stands ready to assist both life and general insurance companies in navigating this complex landscape. By offering tailored solutions and proactive support, 4most enables insurers to meet regulatory requirements and optimize their risk management strategies with confidence.

If you would like to learn more about how 4most can support your organisation, reach out to us – info@4-most.co.uk.