UK recovery, resolution and solvent exit

 At a glance

• The recovery, resolution and solvent exit rules provide insurers and supervisors with a range of tools to facilitate an insurer’s restructuring or exit from the market – and, depending on the type and size of firm, requirements will differ for each.
• Notably, large and systemically important insurers will be subject to all requirements, including the existing recovery planning and the new solvent exit requirements. They will also be subject to future Resolution Authority-led resolvability assessments and resolution plans.
• Small-to-medium sized insurers will have to comply with the solvent exit planning rules (in addition to recovery planning). This could prove a complex and resource-intensive exercise given they are less familiar with this type of work.
• Although the solvent exit requirements come into force by the end of 2025, and the timeline for the Insurer Resolution Regime (IRR) is uncertain, insurers should not under-estimate the time and resource necessary to comply with the various requirements. The Solvent Exit Analysis (SEA) in particular is likely to require significant effort by many insurers.
• Insurers need to revisit existing recovery and (where relevant) resolution plans to understand where there could be gaps. Insurers could, for example, review some of the work completed for other regulatory initiatives, such as on operational resilience, the Own Risk and Solvency Assessment (ORSA) and financial management and planning, to make full use of work already completed and avoid duplication.

Who this blog is for: Board members and senior executives working for UK insurers, in particular in operations, finance, risk and regulatory affairs teams.

Context
 

There have been several developments recently in relation to insurance recovery, resolution and solvent exit – both in the UK and elsewhere. Last year, HMT proposed the introduction of IRR in the UK, tasking the Bank of England as the Resolution Authority (RA) with carrying out resolution planning and resolvability assessments, while equipping it with a set of resolution powers. The timeline for implementing IRR is uncertain and depends on the parliamentary timetable.

At the beginning of this year, the PRA also consulted on solvent exit planning for insurers (CP2/24 – Solvent exit planning for insurers). The final rules will be published in H2 of this year, with insurers having to comply by the end of Q4 2025.

In parallel, the EU finalised its Insurance Recovery and Resolution Directive (IRRD) earlier this year, likely to be effective from 2026.
Although these various initiatives – recovery, solvent exit, and resolution - are similar in the sense that they are all about the options available towards the end of life for an insurer, they differ in nature, scope, as well as timing. A key challenge for firms will be to piece the various parts of the puzzle together and understand how they interact and overlap.

The purpose of this insight is to explain how solvent exit planning, recovery and resolution all fit together, and what the implications for insurers are. We also outline what insurers should do to prepare for the incoming requirements.
 

What are the current requirements?
 

Currently, UK insurers are expected to determine triggers for recovery management actions in their risk appetite statement (SS4/18) and produce recovery plans within two months of a Solvency Capital Requirement (SCR) breach under the prudential “ladder of intervention”. Fundamental Rule 8 sets general expectations for all insurers to “prepare for resolution”, whilst the FCA’s wind-down planning guide also provides non-binding guidance to FCA solo regulated firms on how to plan a wind-down. At a more advanced stage, firms entering run-off must provide a run-off plan within 28 days of their decision. For Internationally Active Insurance Groups (IAIGs), more granular recovery and resolution standards already apply in those jurisdictions  that have implemented the IAIS’ ComFrame 12.

At the moment, there are no expectations for UK insurers around solvent exit planning or resolution (the exception being large and systemically important insurance groups). The new rules around solvent exit and IRR will therefore present a significant step change in requirements for UK firms, although some insurers will be able to re-purpose and leverage some of the work they have already done on other initiatives.
 

What are the solvent exit planning and IRR rules, and how do they interact with existing requirements?

The three pillars: recovery, solvent exit and resolution

The new solvent exit planning requirements and the IRR are complementary and apply to relevant insurers in addition to existing recovery planning requirements including the prudential “ladder of intervention”. At a high level, they all aim to facilitate an insurers’ exit from a market if required, although they kick in of various phases during this exit. The diagram below outlines the key elements: recovery, solvent exit and resolution.

Both solvent exit and resolution will be available if recovery actions fail. Under the IRR, only the BoE in its capacity as RA will be able to initiate and lead the resolution process. On the other hand, under the solvent exit planning rules, insurers or the PRA could trigger a solvent exit. This means that firms will need to take an active role in developing their own exit thresholds in line with their risk profile and business model. The PRA does not provide quantitative guidance on those triggers, but mentions that prudential "ladder of Intervention” reference points (such as breach of SCR or Minimum Capital Requirements – MCR) may be used. Insurers may want to explore how they can align breaches in the SCR or MCR thresholds with their solvent exit triggers, although in some cases, firms may have to devise new triggers altogether. The FCA’s thematic review of wind-down planning provides an illustrative example of how to think about triggers over time.

The PRA’s recently published final approach to solvent exit for banks provides some additional insight (see our analysis of the rules here and of their strategic implications here). The PRA clarifies that it does not expect firms to initiate a solvent exit automatically if exit thresholds are met – in fact the thresholds may act as strong incentives for enhanced assessment and discussion (both with supervisors and internally) rather than absolute triggers for exiting the market.

Who is subject to what?

The solvent exit planning rules are broad in scope and apply to the vast majority of UK insurers, including small and non-Directive firms, the Society of Lloyd’s and Lloyd’s Managing Agents. The key requirements include having to produce a SEA and, where solvent exit is a reasonable prospect, a Solvent Exit Execution Plan (SEEP).

While the IRR will cover all Solvency II/UK insurers (but does not apply to the Lloyd’s market), its key elements, including the RA-led resolvability assessments and resolution plans, apply only to the largest, systemically important insurers. The largest insurers therefore have more work to do – although unlike smaller firms, they will not start from scratch, given that some firms which form part of large international groups may have already been required to produce resolution plans and resolvability assessments in line with the IAIS ComFrame.  

What is the overlap?

There is some overlap with the various inputs into recovery planning, solvent exit and resolution. For example, under the current recovery rules, insurers need to include in their risk appetite recovery options available to the insurer, including consideration of when each option may not be available. For the SEA, firms will have to identify risks and barriers to solvent exit (including the loss of critical services and operational failures). They will also have to set out clearly the governance around solvent exit options – including escalation, decision-making, roles and responsibilities. As clarified in the equivalent final rules for banks published recently, the PRA is unlikely to provide SEA templates, since the SEA should be based on firm-specific circumstances. Moreover, resolution plans will require detailed information on systemically important functions, an assessment of material operational processes and a clear outline of crisis management roles and responsibilities, which will inform the RA’s determination of a firm-specific resolution strategy.

The type of analysis required may therefore be similar across recovery, solvent exit and resolution – and related management information, actions and responsibilities will overlap in some areas, although the fundamental objective of each process will differ. For large UK insurers required to comply with both the IRR and the solvent exit rules, understanding these types of synergies will be central to ensure consistency and avoid duplication. Below is a high-level comparison of information requirements for recovery, solvent exit and resolvability assessments for firms that are in scope of all three.

What does this mean for insurers?
 

Large and systemically important insurers: these insurers are familiar with this type of work, having already developed policies, documents and metrics under SS4/18 “Financial management and planning by insurers”. But, they also face more requirements, being subject to both IRR and solvent exit planning rules. For large insurers, a key challenge will be to put together all the pieces of the puzzle and make sure they understand and leverage any potential overlaps between the different inputs required for recovery, solvent exit and resolution.

All insurers except for branches and firms in passive run-off: solvent exit requirements apply to most UK insurers. Smaller firms (which represent more than 82% of all firms in scope) will incur larger compliance costs for the solvent exit requirements in particular as they are unlikely to have the appropriate expertise or processes in place to tackle the new requirements. These insurers might want to consider their resource and investment needs to ensure smooth implementation.Other regulatory initiatives can feed into the work and analysis needed for solvent exit planning. These are relevant to all insurers, and include:

• UK operational resilience framework: this includes identification of important business services, impact tolerances and resilience testing;
• previous and upcoming work around stress testing: the scenarios set out in the PRA’s General Insurance dynamic stress test and Life Insurance Stress test in 2025 could prove helpful;
• ORSA: reverse stress testing and management actions are particularly relevant;
• funded reinsurance: life insurers that make use of funded reinsurance need to anticipate recapture risks under stress scenarios;
• Consumer Duty: including work around providing good customer outcomes in stressed scenarios; and
• financial management and planning as set out in SS4/18: the PRA has highlighted that firms’ risk appetite statement metrics could be relevant starting points for the SEA - i.e., they could be helpful for identifying dependencies related to triggering a solvent exit, or for communication plans.

All insurers will need to revisit the areas above in the coming months, and also (where available) review existing recovery and resolution plans to understand where there are gaps in terms of existing capabilities. Given the solvent exit planning rules should be finalised in H2 2024, now is the time to start planning to avoid duplication and identify relevant material produced for other regulatory initiatives which can be repurposed and reused.

Insurers also need to plan to undertake adequate internal or external assurance activities for their solvent exit preparations. The PRA may seek its own assurance of a firm’s SEA or SEEP (including through a skilled person report under s.166 of FSMA). Ultimately, a named Senior Manager need to be able to confirm that the SEA and SEEP meet the PRA’s regulatory expectations.
 

Conclusion
 

Looking ahead, the UK recovery, solvent exit and resolution landscape will continue to evolve over the next year. However, the direction of travel is already very clear: these topics will move up the regulatory agenda and, for some firms, require a significant implementation effort..  Firms should start planning and budgeting early so as to ensure to give themselves enough time and resources to produce the required outputs.