
PRA’s Final Policy on Solvent Exit Planning for Insurers
On 18 December 2024, the Prudential Regulation Authority (“PRA”) published PS20/24 and SS11/24, its policy statement and final policy on solvent exit planning for insurers, and in this article we summarise the position.
The policy applies to all PRA-regulated insurers (other than those which are in passive run-off and UK branches of overseas insurers) and the Society of Lloyd’s. The PRA also decided to exclude Lloyd’s managing agents from the scope of the solvent exit rules, recognising the unique structure of the Lloyd’s market, and the existing powers of the Council of Lloyd’s, including the power to require managing agents to prepare and submit run-off contingency plans and run-off closure plans.
Preparing for a solvent exit
Firms must prepare for an orderly solvent exit as part of their business-as-usual activities by producing a Solvent Exit Analysis (“SEA“). This applies regardless of the likelihood of a solvent exit. When the execution of a solvent exit becomes a realistic prospect, the firm must produce a Solvent Exit Execution Plan (“SEEP“), as outlined below.
The PRA expects a firm’s SEA to:
- outline solvent exit actions (e.g. Part VII transfer, sale or run-off) that could be undertaken by the firm;
- include appropriate solvent exit indicators to signal when a solvent exit should be initiated, and assess the likelihood of its successful execution;
- address potential barriers and risks (both market-wide and firm specific) to the execution of a solvent exit. Such barriers and risks should be mitigated or removed during the firm’s business-as-usual activities;
- outline the likely resources (both financial and non-financial) required to execute a solvent exit; and
- include a communication plan for internal and external stakeholders
The level of detail should align with the firm’s size, complexity, and business model. The SEA should be updated whenever significant changes occur, and at least every three years.
Firms should also establish clear governance arrangements which include, for example, having a Senior Manager accountable for: (i) BAU solvent exit preparations (including the review and approval of the SEA), (ii) escalation and decision-making regarding solvent exit, and (iii) monitoring the execution of a solvent exit. In addition, firms should undertake adequate assurance activities.
Solvent Exit Execution Plan and the execution of a solvent exit
The PRA expects firms to produce a SEEP when there is a reasonable prospect of executing a solvent exit, or when requested by the PRA. The firm’s directors or senior management should provide appropriate challenge to, review, and approve the SEEP. The PRA will work with firms on a case-by-case basis to set an appropriate timescale to produce the SEEP.
Firms should use their SEA as the foundation for the SEEP, and the PRA has confirmed that it expects the SEEP to contain:
- a strategy for ceasing to perform regulated activities, including appropriate actions and timelines;
- a plan to monitor and respond to emerging barriers and risks;
- a detailed plan for the execution of a solvent exit (addressing, for instance, how the firm will deal with its contractual commitments, the transfer of (re)insurance liabilities, and the sale of transfer of all or part of its business, assets and liabilities);
- an assessment of required financial and non-financial resources;
- a communication plan for stakeholders;
- appropriate governance arrangements; and
- the firm’s organisational structure, operating model and internal processes.
The PRA expects to be notified by firms when they decide to initiate a solvent exit. From this point, firms should take various steps including (but not limited to) continuously assessing the likelihood of success for their solvent exit actions, as well as monitoring the projected and actual trends of relevant solvent exit indicators. Where there is a risk or a concern regarding the successful execution of a solvent exit, firms should notify their PRA supervisor in a timely manner.
Crucially, firms must continue to comply with all applicable regulatory requirements, including but not limited to the PRA’s Threshold Conditions and other rules in the PRA Rulebook throughout the execution of a solvent exit. The PRA has clarified that, on an ongoing basis, firms should assess proactively whether they may fall short of any legal or regulatory obligations, and immediately alert the PRA if this might be the case.
Policy changes
The finalised guidance differs from the proposals in CP2/24 in the following key respects:
- As stated above, Lloyd’s managing agents are no longer included in the scope of the rules;
- The PRA has clarified that firms can adapt their work under existing regulatory requirements (e.g. in respect of their ORSA, capital management plan or recovery and resolution planning) to comply with the SEA and SEEP requirements. However our expectation is that the SEA process will require a greater range of stakeholders than the ORSA;
- The PRA has clarified that the relevant assurance activities can be performed externally or internally, but has retained the suggestion that the assurance could include obtaining challenge from the Board and in particular the non executive directors; and
- There is no longer an expectation for firms to produce a SEEP in 1 month when a solvent exit becomes a reasonable prospect. Instead, the PRA will set a timescale for the firm to prepare and submit its SEEP.
Conclusion
The rules come into force on 30 June 2026. Firms should ensure that they have the relevant procedures and processes in place to meet the expectations in SS11/24 and have completed their assurance activities in good time before this date.
However, the PRA may need to consider whether the rules will need to be amended should Parliament legislate on the Insurer Resolution Regime1
Footnotes
- See our previous article here