Solvent exit planning is key for insurers ahead of imminent PRA policy statement - IFA Magazine

Broadstone, a leading independent financial services consultancy, has identified four key actions for insurers to take ahead of imminent changes from the Prudential Regulation Authority (PRA) on Solvent Exit Planning.

On 23 January 2024, the PRA issued a consultation (CP2/24) setting out their new expectations for insurers on solvent exit planning. It aimed to increase the likelihood of insurers being able to successfully execute a solvent exit, by identifying earlier when an exit may be required, pre-emptively identifying potential barriers to exit, and ensuring clearer governance, monitoring and communication during a solvent exit.

Firms will be required to conduct a Solvent Exit Analysis (SEA), which will need to be reported and regularly updated going forward.

This should increase confidence that firms can exit the market with minimal disruption, in an orderly way, and without having to rely on the backstop of an insolvency or resolution process.

The consultation closed in April 2024 with a PRA Policy Statement expected imminently during H2 2024, and the implementation of proposals scheduled to take effect during Q4 2025. It leaves insurers less than 15 months to prepare and capitalise on ‘no regrets’ activities to meet the anticipated requirements.

Broadstone lays out four recommendations to help insurers prepare for the changes.

1. Review existing risk frameworks as well as recovery and resolution requirements

Firms should consider how effective existing frameworks are. For example, are the trigger points for management actions suitable for determining whether or not a solvent exit has become a reasonable prospect, or should further indicators be considered.

It goes without saying there will be a resourcing impact on requiring teams to input to the SEA whilst balancing other BAU activities.

2. Engage wider stakeholders within the business to align understanding of solvent exit plans and agree ongoing governance arrangements

For the SEA to be effective, a firm must have clear governance arrangements with a Senior Manager accountable for the preparation, review and approval of the SEA, and clear escalation and decision-making points regarding a solvent exit.

Critical to achieving that aim is educating and informing stakeholders of the importance of solvent exit planning, and the importance of solvent exit indicators and monitoring. Governance arrangements will also need to effectively support the potential creation and execution of a Solvent Exit Execution Plan (SEEP).

3. Consider financial and non-financial resources required to execute a solvent exit

The SEA needs to consider non-financial impacts and resources required for a solvent exit. Firms should consider communication strategy for customers, staff and wider stakeholders, or operational strains and impacts on third party suppliers. This is in addition to monitoring key financial metrics such as solvency coverage, or liquidity position.

4. Seek assurance of the SEA

There is a clear expectation from the PRA that firms undertake adequate assurance over the SEA, either by review by internal audit or through seeking external assurance. A Senior Manager needs to have responsibility for the preparation, review and approval of the SEA and for ongoing monitoring and execution of a solvent exit should it be required. The SEA also needs to be suitably challenged and approved through the firm’s governance arrangements, including approval at Board level.

Ewen Tweedie, Actuarial Director at Broadstone, said: “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.”