PRA consults on plans to bolster insurers' solvent exit planning

The PRA has opened a consultation (CP2/24) on how insurers prepare to execute solvent exits. All PRA-regulated insurers – other than firms in passive run-off and UK branches of overseas insurers – are in scope of the proposals, which aim to foster an environment where insurers can exit the market in an orderly way – without the “backstop” of an insolvency or resolution process.

If taken forward, the proposals will add a new part – Preparations for Solvent Exit – to the PRA rulebook. A new supervisory statement will also be issued for in-scope insurers. 

The proposals include new:

• rules and expectations that firms must prepare for a solvent exit as part of BAU activities (firms must document their preparations in a ‘solvent exit analysis’ (SEA);
• expectations to apply if solvent exit became a reasonable prospect, on how the firm should (1) prepare a ‘solvent exit execution plan’ (SEEP) and (2) monitor and manage the solvent exit.

The PRA’s general view is that solvent exits are typically more efficient, cost effective and less disruptive to policyholders – in particular compared to insolvency. However, the regulator has found that in practice, potential barriers to solvent exits - across life and general insurers - are often found late in the solvent exit process. 

The PRA has indicated that it will be proportionate in its expectations of firms; the more assurance it has that a solvent exit can be achieved, the more hands-off it will be during an exit. 

Under the proposals for SEAs, insurers - irrespective of how remote a solvent exit may appear - will be required to produce and maintain an SEA setting out the firm’s preparations. The SEA will then need to be updated at least every three years (or sooner where a material change takes place), and be producible to the PRA on request. 

Under the proposals for the SEEP, the plan will be required within one month (where there is a reasonable chance that the firm may need to carry out a solvent exit; or on request from the PRA). The SEEP will need to contain sufficient detail to show whether a solvent exit could be successfully executed.  

The PRA is expected to publish a policy statement in the second half of 2024, with the implementation date for the proposed changes set for Q4 2025.