The Prudential Regulation Authority (PRA) is now consulting on its proposed rules that, if implemented, would require PRA-regulated insurers to prepare for a solvent exit as part of their business-as-usual activities.
“In this consultation, a ‘solvent exit’ means the process through which a firm ceases its insurance business (including both effecting and carrying out contracts of insurance) in an orderly manner while remaining solvent throughout,” the regulator noted.
The move is part of the PRA’s work on increasing confidence that regulated companies can exit the market in an orderly fashion and with minimal disruption. With mandated preparations, the goal is to avoid having to rely on the backstop of an insolvency or resolution process.
“The proposals in this [consultation paper] aim to increase the likelihood that insurers can execute a solvent exit successfully,” the watchdog said. “The PRA considers that solvent exit is likely to be more efficient, more cost-effective, and less disruptive to policyholders compared to insolvency.
“The PRA considers that clear, published policy on how insurers should prepare in advance for a solvent exit should help deliver better and more consistent outcomes.”
It is being proposed that a firm must 1) prepare so that it can effect a solvent exit if necessary; 2) produce a solvent exit analysis (SEA) and update it at least once every three years and whenever a material change has taken place that may affect preparations; 3) where it is a UK Solvency II firm which is part of a group, take into account the implications of, and any risk arising from, being part of the group; and 4) be able to provide to the PRA on request the current version of its SEA.
It was stated that the rules would apply to all companies in scope, regardless of how unlikely a solvent exit may seem.
In an emailed statement, Norton Rose Fulbright partner Matthew Foster commented: “This consultation will be of particular interest to the UK’s run-off and life consolidation markets and may bring opportunities to engage with live-markets earlier in the insurance life-cycle, as such insurers initially develop and then continue to refine their solvent exit execution plans.”
The PRA consultation will close on April 26.
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