Clifford Chance

On January 23 2024, the Prudential Regulation Authority (PRA) the PRA published consultation paper CP2/24, outlining solvent exit planning proposals for UK insurers ("Solvent Exit"). This aims to increase the likelihood of a smooth and efficient exit for insurers compared to insolvency, ultimately protecting their policyholders.

The consultation is the latest development in insurer recovery and resolution requirements as the UK (alongside other jurisdictions) focus on the topic. It follows the enhancements to the write-down powers for financially troubled insurers under the Financial Services and Markets Act 2023 (FSMA 2023), and the ongoing project by HM Treasury and the PRA to establish a UK Insurer Resolution Regime. For more information on the IRR, please refer to our briefing: UK government’s response to insurer resolution regime consultation.

The proposals apply to both Solvency II firms and non-directive insurance firms in the UK, along with the Society of Lloyd’s and Lloyd’s managing agents. The proposals do not apply to "passive run-off firms" that are no longer permitted to issue insurance contracts nor UK branches of third-country insurers (although we note the IRR requirements do apply to third country insurers).

What is a 'Solvent Exit'?

The PRA defines a Solvent Exit as the process through which a firm ceases its insurance business in an orderly manner while remaining solvent throughout. This includes both the cessation of writing insurance business as well as the de-authorisation of the insurer itself. The firm is expected to continue to comply with Threshold Conditions and other regulatory requirements throughout.

Mechanisms for Solvent Exit

Some of the mechanisms envisaged include:

• solvent run-off i.e., ceasing to write new business, settlement of liabilities by paying claims, commuting liabilities and/or transferring liabilities followed by the de-authorisation of the insurer is the most common exit mechanism for non-life insurers;
• sales or partial sales and Part VII insurance business transfers to transfer liabilities to another insurer; and
• Schemes of arrangement and/or restructuring plans.

Recovery (and Ladder of Intervention), Solvent Exit, or Resolution?

This consultation aligns with the PRA's expression of intention to consult on exit planning outlined in their January 2023 Dear CEO letter and which made clear that Solvent Exit supports a broader initiative to ensure compliance with Fundamental Rule 8, emphasising a firm's obligation to prepare for resolution. This consultation is also part of a comprehensive effort addressing the orderly exit of financial institutions by the PRA, including a June 2023 consultation on Solvent Exit planning for non-systemic banks and building societies.

The consultation paper also describes how the PRA envisages the Solvent Exit proposals for insurers fits within the broader framework of relevant PRA and Bank of England requirements. The PRA sees the Solvent Exit requirements as another tool within their toolkit to address potential insurer distress such that it would be used alongside the Ladder of Intervention powers and requirements on firms under Solvency II and under the proposed Insurer Resolution Regime (IRR). The Solvent Exit proposals kick in BAU times, as insurers need to prepare a Solvent Exit Analysis, and within a month of there being a reasonable prospect of a solvent exit, preparing a Solvent Exit Execution Plan.

Key Proposals

The proposals include:

1.New high-level rules and requirements that insurers must prepare for a Solvent Exit as part of their business-as-usual activities and document their preparations in a Solvent Exit Analysis (SEA). The SEA is expected to include the following as a minimum:

• Solvent exit actions (setting out the actions that are likely to be required, alternative actions that can be taken and a timeline);

• Solvent exit indicators (including the trigger point at which it would need to initiate a solvent exit);
• Potential barriers and risks (requiring an analysis of the firm's legal and corporate structure and light of potential solvent exit actions/ mechanisms, with an expectation that steps are taken to mitigate such barriers and risks);
• Resources and costs;
• Communications;
• Governance and decision-making (including appointing a Senior Manager accountable for the SEA); and
• Assurance (internal or external, and the Senior Manager will need to confirm that the SEA meets the regulatory requirements).

2.The SEA would need to be updated for material changes at least every 3 years, and it could be provided to the PRA upon request.

• New expectations for preparing a detailed Solvent Exit Execution Plan (SEEP) and monitoring and managing a Solvent Exit if it becomes a reasonable prospect. This would involve producing a detailed SEEP within one month of a reasonable prospect (see solvent exit indicators as part of the SEA above) or upon PRA supervisor notification. The plan should demonstrate the firm's ability to successfully execute a Solvent Exit.

If implemented, a new Preparations for Solvent Exit Part would be added to the PRA Rulebook and a new Supervisory Statement titled "Solvent exit planning for insurers" would be introduced.

Firms complying with the PRA's extensive requirements for SEA and SEEP could face significant costs due to the number of key areas that need review. The SEA should address Solvent Exit indicators and potential barriers and risks (details in Box A and B of the supervisory statement) as well as resources and costs, communications, governance and decision-making, and assurance. The SEEP requires a detailed action plan with assessments of financial and non-financial resources, as well as governance arrangements, organisational structure, and operating models (all explained further in the supervisory statement).

Given the level of information required in the SEA under the proposals, the need for a Senior Manager to attest that it meets those requirements, and our experience on banking resolution planning, we expect that unless the rules are clarified, that insurers may be required to produce relatively detailed analysis for Solvent Exits. These plans may in practice need to include an M&A "playbook" to set out an analysis of the insurer's existing business, potential buyers of the business and a commercial and legal structuring considering the mechanisms that can be used to sell the business. This may also helpfully allow insurers to revisit their group and governance structures and implement any internal re-organisations to address any potential barriers and risks before any actual exit is required.

Next steps

Comments on these proposals can be submitted until April 26 2024. The PRA aims to publish a policy statement in the second half of 2024, with the proposed changes anticipated to take effect in Q4 2025.

The PRA believe that a proactive approach to Solvent Exit planning by UK insurers will be more efficient, cost-effective, and less disruptive to policyholders compared to insolvency. Clients should therefore engage with the consultation given the increased PRA expectations and considerations involved in preparing the SEA and the SEEP.