Solvent Exit Planning for Insurers – Lessons from the banking sector and the FCA’s Wind-down Planning

Background of PRA's PS20/24

PS20/24 sets out a new requirement for insurers to prepare for a solvent exit as part of their business-as-usual (BAU) activities. Firms are expected to document preparations in a Solvent Exit Analysis (SEA), which should be updated whenever a material change takes place and at least every three years. These requirements apply to all firms in scope, regardless of how unlikely the prospect of a solvent exit is.

If a solvent exit is likely, firms must prepare a detailed Solvent Exit Execution Plan (SEEP) to manage and monitor the process.

Key lessons to learn from the banking sector

The PRA published similar Solvent Exit Planning rules for non-systemic banks and building societies on 12 March 2024. Firms in the banking sector are currently preparing for the Solvent Exit Planning deadline of 1 October 2025.

Below is a summary of the key points from our work in the banking sector that insurers should consider when implementing the new requirements. Firms should:

• Document their approach to evaluate the credibility and viability of the main actions set out for a solvent exit. Firms should consider taking proactive steps to enhance the credibility of the SEA actions including assessing key dependencies that could impact the success and stability of the exit plan, such as critical resources and operational processes.
• Identify and set out clear triggers in the SEA that would prompt the initiation of a solvent exit. Firms may leverage their existing risk appetite and key risk indicators. There should be a formalised approach for selecting the solvent exit indicators and for monitoring and escalating breaches in the SEA.
• Identify potential obstacles or risks to the execution of a solvent exit including those that are firm-specific as well as market-wide to appropriately mitigate these.
• Identify and document realistic costs, timelines and resource requirements for the execution of the solvent exit plan. This should include additional costs for the solvent exit and possible losses, as well as the cost of resources needed to mitigate any barriers or risks.
• Design a communication framework for internal and external stakeholders that may be impacted by a solvent exit. Plans should include details of how and when stakeholders will be updated, before and during the solvent exit process. They should also consider how to mitigate negative responses from stakeholders in relation to the firm’s solvent exit such as the resignation of staff.
• Set up a comprehensive framework for the governance, challenge and approval of the SEA, and the execution of the SEEP. This will need to be established early to allow the relevant individual(s) to oversee the process of implementing the solvent exit planning rules.

Key considerations from the FCA’s Wind-down Planning Guide

The PRA highlighted that firms may find examples of good practice from the FCA’s Wind-down Planning Guide and TR22/1: Observation on wind-down planning: liquidity, triggers & intragroup dependencies.

We have summarised good practices for insurers to consider as part of  Solvent Exit Planning preparations:

• Clear identification of the risks relevant to the firm’s business model and activities
  Having a thorough and regularly updated risk register, which covers all the risks relevant to the firm, is essential to adequately identify, measure, monitor and manage key risks in the business. This can help firms to promptly identify risks outside of tolerance and to take any necessary remedial action. 
• The use of reverse stress testing to identify triggers for wind-down planning
  Knowing when to consider winding down the business is key to credible wind-down arrangements. Firms should consider the results of reverse stress testing to help identify trigger points for when a solvent exit plan may need to be executed.
• Coherence between the risks identified on the firm’s risk register, their stress testing and reverse stress testing and evidence that these risks were considered at the right levels of the management hierarchy
  Stress scenarios which are specific to the firm, and which cover its key risks, can feed into the firm’s risk management and wind-down planning. By using the results of those stresses, firms can set the triggers for key risk and early warning indicators. 
• A rigorous assessment of the potential impact of risks crystalising, rather than relying on previously observed impacts
  Firms should regularly review and update the potential impact of key risks crystalising. The impact of these risks will often change over time. The key risks for firms as well as the potential management actions and mitigants should also be regularly reviewed and updated.

Next steps for solvent exit planning

Firms should review the solvent exit planning rules and conduct a gap analysis against the regulatory requirements. Firms should ensure that they have allocated sufficient time and resources to develop solvent exit capabilities before the compliance deadline.

The focus for firms over the next 18 months should be on ensuring a proportionate and compliant SEA is prepared that captures the firm’s nature and complexity.

Get in touch

We have put together a template on what we would expect to see in a SEA that can be tailored to your firm specifically. If you would like to discuss solvent exit planning, please get in touch with our regulatory experts below.

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