Key actions for insurers ahead of new PRA Solvent Exit Planning requirements: Broadstone - Reinsurance News

Broadstone, an independent financial services consultancy, has outlined four essential steps for insurers preparing for the Prudential Regulation Authority (PRA)’s new guidelines on Solvent Exit Planning.

On January 23, 2024, the PRA released a consultation (CP2/24) setting out its updated expectations for insurers’ solvent exit planning.

This guidance is designed to improve insurers’ readiness to execute a solvent exit by ensuring timely identification of the need for exit, addressing potential barriers beforehand, and strengthening governance, oversight, and communication throughout the process.

The new requirements will mean that insurers must carry out a Solvent Exit Analysis (SEA), document it, and consistently update it as they go forward.

This aims to ensure that insurers can exit the market with minimal disruption, in a managed manner, and without having to rely on insolvency or emergency resolution measures.

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The consultation period concluded in April 2024, with the PRA’s final policy expected soon and full implementation planned for Q4 2025. This timeline gives insurers under 15 months to prepare, including acting on “no regrets” steps to meet anticipated requirements.

In preparation, Broadstone recommends that insurers review the effectiveness of their current risk frameworks and recovery requirements.

This may involve assessing whether existing management action triggers are suitable for indicating when a solvent exit might be necessary, or whether further indicators should be included. Implementing the SEA will require considerable team involvement, even as they balance other daily responsibilities.

Broadstone also advises firms to engage a wider range of stakeholders to align on the understanding of solvent exit plans and agree on ongoing governance arrangements.

For the SEA to be effective, it is important that a firm has clear governance structures, with a designated Senior Manager accountable for preparing, reviewing, and approving the SEA. Governance structures should include clearly defined escalation and decision-making protocols related to a solvent exit.

Equally important is educating and informing stakeholders about the role of solvent exit planning, the relevance of solvent exit indicators, and the need for continuous monitoring. Governance arrangements should also support the creation and execution of a Solvent Exit Execution Plan (SEEP), if required.

In considering both financial and non-financial impacts, firms should focus on resource allocation needed to execute a solvent exit. This includes a communication strategy for customers, employees, and other stakeholders, as well as assessing operational impacts on third-party suppliers. Key financial indicators such as solvency and liquidity positions will also need to be closely monitored.

The PRA expects firms to undertake robust assurance over the SEA, either through internal audit or external reviews. A Senior Manager should be responsible for the SEA’s preparation, review, and approval, as well as for ongoing monitoring and execution of a solvent exit if it becomes necessary.

To ensure thorough evaluation, the SEA should be scrutinised and approved within the firm’s governance structure, including at the Board level.

Ewen Tweedie, Actuarial Director at Broadstone, commented: “With the implementation of proposed changes to solvent exit planning due to take effect during Q4 2025, and final guidance still outstanding, it leaves firms less than 15 months to prepare.

“There is a lot to do, including reviewing their existing suite of recovery and resolution plans and producing a suitable Solvent Exit Analysis to satisfy internal governance processes, any additional assurance required, and ultimately the regulator.

“In the meantime, there are ‘no regrets’ actions firms can take now, such as performing a gap analysis, or reviewing governance arrangements, which may put firms ahead of the curve. Investing time now as well as understanding potential mitigation and recovery options could unlock sources of value going forwards.”