The PRA primary objectives include promoting the safety and soundness of firms and securing an appropriate degree of policyholder protection. Limiting the likelihood and impact of future insolvency of an insurer meets these objectives – ultimately, a solvent exit is likely to be more efficient, cost-effective and less disruptive to policyholders.
On 23 January 2024, the PRA issued a consultation (CP2/24) setting out their new expectations for insurers on solvent exit planning. The purpose of the proposals is to increase the likelihood of insurers being able to successfully execute a solvent exit, by identifying earlier when an exit may be required, pre-emptively identifying potential barriers to exit, and ensuring clearer governance, monitoring and communication during a solvent exit. This should increase confidence that firms can exit the market with minimal disruption, in an orderly way, and without having to rely on the backstop of an insolvency or resolution process.
Their proposals apply to all insurers, including mutuals and friendly societies, however not insurers already in passive run-off. All insurers will be required to produce a Solvent Exit Analysis (SEA), and an additional Solvent Exit Execution Plan (SEEP) is required for any insurers where solvent exit has become a reasonable prospect.
The consultation closed in April 2024, and the PRA planned to publish a Policy Statement in H2 2024, with the implementation of changes scheduled to take effect during Q4 2025. Whilst the Policy Statement is expected imminently, there is an opportunity for insurers to turn their attention to ‘no regrets’ activities such as gap analysis, or identification of key MI to meet the anticipated requirements.
What is a Solvent Exit Analysis (SEA)?
All insurers will be required to produce a SEA as part of their BAU activities. The SEA will need to be updated at least every three years, or when a material change to the business takes place. The SEA should be robust, and sufficiently far reaching to describe how insurers would perform a solvent exit. This should include:
- solvent exit actions
- solvent exit indicators
- potential barriers and risks
- resources and costs
- communications
- governance and decision-making
- assurance
Solvent exit actions should include how the firm would transfer or repay their insurance liabilities, setting out alternative approaches such as sale, transfer or restructuring as necessary. The SEA should include a reasonable timeline over which solvent exit actions could be executed, taking account any internal or external factors impacting the timing of events.
Solvent Exit Indicators should consider both financial and non-financial metrics, examples including solvency coverage, liquidity analysis, lapse rates, operational difficulties or staff turnover. Indicators should be monitored with appropriate, meaningful trigger levels identified.
The level of detail within the SEA should be proportionate to the nature, scale and complexity of the firm. This is of particular importance to mutuals and friendly societies who may have more complicated governance arrangements, fewer capital raising options, and broader responsibilities to policyholders to consider.
There is an expectation that some of this information should currently exist within a firm’s risk management framework, and the emphasis is on utilising what is already available, and enhancing with further analysis as required.
What is a Solvent Exit Execution Plan (SEEP)?
Firms are required to produce a SEEP within one month of identifying a solvent exit has become a reasonable prospect. This could be through identification from monitoring solvent exit indicators, or if the PRA requires the firm to do so.
A SEEP needs to contain sufficient, detailed information to inform the firm and the PRA how it will complete a solvent exit. This should include how the firm will monitor progress through the exit process, and identifying emerging barriers and risks to executing the solvent exit.
The SEEP should also include details of financial and non-financial resources needed, and a clear and detailed communication plan for stakeholders impacted by the SEEP.
What Do Firms Need to Do?
- Review existing risk frameworks, and recovery and resolution requirements
The PRA accept that recovery is often preferred to a solvent exit. Capital management plans set out trigger points for management actions according to their risk appetite statement. The SEA should be a consistent and complementary addition to the existing work in these other areas, meaning insurers may wish to conduct a gap analysis against current policies.
Firms should consider how effective existing frameworks are. For example, are the trigger points for management actions suitable for determining whether or not a solvent exit has become a reasonable prospect, or should further indicators be considered.
It goes without saying there will be a resourcing impact on requiring teams to input to the SEA whilst balancing other BAU activities.
- Engage wider stakeholders within the business to align understanding of solvent exit plans and agree ongoing governance arrangements
For the SEA to be effective, a firm must have clear governance arrangements with a Senior Manager accountable for the preparation, review and approval of the SEA, and clear escalation and decision making points regarding a solvent exit. The Senior Manager should also be responsible for the ongoing execution of the SEA.
Critical to achieving that aim is educating and informing stakeholders of the importance of solvent exit planning, and the importance of solvent exit indicators and monitoring. Governance arrangements will also need to effectively support the potential creation and execution of a SEEP.
- Consider both financial and non- financial resources required to execute a solvent exit
The SEA needs to consider non-financial impacts and resources required for a solvent exit. For example, firms should consider communication strategy for customers, staff and wider stakeholders, or operational strains and impacts on third party suppliers.
This is in addition to monitoring key financial metrics such as solvency coverage, or liquidity position.
- Seek assurance of the SEA
There is a clear expectation from the PRA that firms undertake adequate assurance over the SEA, either by review by internal audit or through seeking external assurance. A Senior Manager needs to have responsibility for the preparation, review and approval of the SEA, and for ongoing monitoring and execution of a solvent exit should it be required.
The SEA also needs to be suitably challenged and approved through the firm’s governance arrangements, including approval at Board level.
What is Next?
The PRA plan to publish a Policy Statement imminently, in H2 2024, with the implementation of changes to take effect during Q4 2025.
This leaves less than 15 months for firms to review their existing suite of recovery and resolution plans, and produce a suitable Solvent Exit Analysis to satisfy internal governance processes, any additional assurance required, and ultimately the regulator.
In the meantime, there are ‘no regrets’ actions firms can take now, such as performing a gap analysis, or reviewing governance arrangements, which may put firms ahead of the curve.
