Planning for Solvent Exit – SS 11/24

On 18 December 2024, the Prudential Regulation Authority (PRA) published its seasonal gift to the insurance industry - its policy on solvent exit planning for insurers, which is largely unchanged from the 2024 consultation paper and covered in our previous blogs: Time to get ready 29/01/2024 and An evolving landscape for insurers 12/04/2024. This blog explores some of the more practical issues that the policy statement and supervisory statement may raise, as well as some of the initial steps that firms can take now.

A major difference compared to the draft is that the PRA has excluded Lloyd’s managing agents; and also has extended the timeline by which compliance needs to be achieved to take into account the complexity of preparing the solvent exit analysis.

The Role of Solvent Exit

Within the realm of recovery and resolution planning for insurers, solvent exit sits in between the recovery phase and the imminent or actual failure of the firm, when insolvency is initiated. There is the expectation that it can be used when recovery of a viable business is no longer a realistic prospect, but when there are still sufficient resources available to avoid insolvency. As such, it shares characteristics in its purpose with both recovery planning (i.e. actions to avoid insolvency) and resolution. Solvent exit could also be used to support a strategic withdrawal from the insurance market when the firm is not under any stress – it is still important to demonstrate that this can be done without an adverse impact on the PRA’s statutory objectives.

Experience suggests that where insurers have pursued a solvent exit strategy i.e. ceased underwriting and undertaken a solvent run-off, there has been minimal adverse impact, whereas insolvency is more likely to lead to adverse prudential and consumer outcomes.

Solvent exit is, therefore, entirely consistent with the PRA’s statutory objectives, but is also consistent with the FCA’s objectives of achieving good outcomes for customers.

The Solvent Exit Analysis (SEA) and Solvent Exit Execution Plan (SEEP)

SS 11/24 requires a firm to set out its preparations for an orderly solvent exit in the SEA, which must be updated at least every three years, or at the point of a material change in strategy or operations. The SEEP by contrast, only needs to be prepared if solvent exit becomes a “reasonable prospect”. The supervisory statement provides guidance on the minimum detail to be included in these documents, “proportionate” to the circumstances of each firm, especially for the SEA which must be prepared by 30 June 2026.

A firm’s size, business and operating model will all be factors to take into account when considering the level of analysis required. However, there are useful lessons to be learned from existing wind-down planning requirements set out in the Wind Down Planning Guide in the FCA Handbook and Run-off Operations PRA Rulebook and the weaknesses commonly identified in them. A particular theme is that these plans are not actionable. Unsurprisingly, preparation is key – and this is the purpose of the SEA.

It is important to remember that it is likely that a SEEP will need to be produced very quickly in response to a stress event; while the expectation that the SEEP must be produced in a one-month timeframe has been removed, it is clear that it should be produced quickly. This will also be at a time when the firm is pre-occupied with executing the recovery plan and dealing with concerned stakeholders and, therefore, it may have limited time and resources available for producing the SEEP. It is also possible that the request to prepare the SEEP will come directly from the PRA.

Given the short timeframe for completion of the SEEP, it is unlikely that the firm could develop a lot of new material. However, the SEEP will need to include the specific actions to be undertaken in response to the prevailing circumstances, to update the financial and non-financial resources required to execute the plan, and to undergo governance reviews and approvals.

Therefore, the more that these elements of the SEEP are developed in the SEA, the better, so that they can be rapidly configured for the prevailing scenario, reducing the likelihood of a failed solvent exit and disorderly failure. It could be helpful to prepare a skeleton SEEP as part of the SEA, with a clear idea of what contents would need to be produced, by whom and how quickly. This could be supplemented by a SEEP production ‘playbook’. The insurer should also demonstrate that it has the capabilities to prepare and execute the SEEP.

Areas of focus

There are a wide range of areas that need to be covered listed in SS 11/24, some of which firms can leverage from existing work done on the ORSA and stress testing, recovery planning and run-off planning. Below we provide some thoughts on a few of the factors that firms will need to consider.

Trigger framework

The identification and calibration of a trigger framework for decision-making can be a challenging area for firms, even where there are a wide range of metrics in place in the risk monitoring framework. The requirements stress the importance of implementing solvent exit indicators, suitably calibrated to allow sufficient time to prepare the SEEP and then subsequently execute it, if necessary. The trigger for developing the SEEP should, therefore, be separate from, and much earlier than, the point at which a decision on commencing solvent exit becomes necessary. It will also vary from firm-to-firm – a motor insurance firm will differ in its sensitivities from a life insurer.

The existing risk monitoring framework should form the foundation, but there are some points that it would be sensible to consider:

• Appropriate calibration of existing indicators, beyond the point of simply indicating entry into recovery, and to the point at which orderly solvent exit would be triggered. For solvency metrics, these should be calibrated with reference to SCR and MCR;
• Entry into recovery could be a trigger to commence preparation of the SEEP. Even if this is not a trigger in the firm’s own framework, it may be a trigger for the authorities to formally request it;
• Forward-looking indicators to provide an idea of when solvent exit might become necessary and, therefore, the time and financial resources available to execute the SEEP; and
• Non-financial and qualitative indicators, such as adverse press and reputational damage.

Customer outcomes

The PRA is the prudential regulator and so solvent exit is not directly a FCA priority. However, it is important that in preparing both the SEA and the SEEP, good customer outcomes are given the appropriate level of focus. The FCA will want to see that the approach does not lead to the poor treatment of policyholders or a breach of its statutory / regulatory objectives. This may cover factors such as claims handling speeds and providing a poor service and communication during exit.

Third-party purchasers

The scope of solvent exit involves the cessation of all insurance-related regulated activities of the firm and it is likely that assets or even whole business lines will be sold to third parties during solvent exit via Part VII transfers. In which case, it is expected that firms can leverage their approach to restructuring, transfer and disposal options in recovery plans and related documents, for example by including the steps and timelines to execution and identification of potential purchasers. Part VII transfer and disposals during a stressed exit will likely achieve realisations at the lower end of the range of pricing expectations, and firms should also consider that it might not be possible to transfer or sell certain assets and they would need to be held for significantly longer.

Modelling

To support the SEA, and meeting the resources and costs requirement, it is likely a financial forecast of the solvent exit will be required, showing cash flows as well as an evolution of the P&L, balance sheet, solvency and liquidity levels over the entire duration of the solvent exit process, up to when regulatory permissions are withdrawn.

The expected duration of the solvent exit process is a key factor, given the potential longevity of certain insurance exposures which cannot be transferred or settled. The reliability of financial models becomes progressively more open to challenge the further out results are forecast; firms with tail risks over 10 years may need to demonstrate in other ways that such exposures will be covered with a high level of confidence. 

Forecasts should be appropriately detailed and flexible enough to be updated in response to changes in the proposed solvent exit approach, timings and levels of stress. 

While firms will be able to leverage stress testing and existing forecasting models, they should factor in additional costs that are likely to be incurred, such as redundancies, contractual termination costs, use of external advisors and other support, as well as the solvency impact of disposals. Firms should also consider how the expense base changes and how this affects per policy expenses in run off. Most importantly, financial forecasts should be able to demonstrate both to the Board and regulators that the firm has sufficient capital and liquidity to manage a solvent exit from the point that it triggers solvent exit until regulatory permissions are removed. The cost of solvent exit vs available assets will be a critical factor in deciding the timing of the decision to formally enter solvent exit.

Group issues

For international insurance groups which have UK insurance subsidiaries, interconnectivity issues will need to be understood and resolved during the exit process. Examples may include:

• Financial interdependencies
• Operational interdependencies
• Governance structure
• Shared reinsurance protections

Next steps

There are a wide range of factors that insurers in scope for SS 11/24 need to take into account, which will involve both leveraging existing processes but also developing new approaches. Whilst the regulatory deadline of 30 June 2026 is some way off, experience suggests that preparation of such plans can be time-consuming and it is wise for firms to consider how they will tackle this regulation.

Prior to commencing preparation of the SEA, there are activities that firms can consider now as part of their planning process: