Series 7 Episode 9: Solvent exit planning – what insurers need to know

Transcript

Pete Thomas: Welcome to this episode of Risk & Regulation Rundown, the podcast where we share perspectives on the latest issues shaping financial services risk and regulation. Today, we're talking about the new PRA requirement for UK insurers to prepare solvent exit analysis, that comes into force at the end of June 2026. Firms are currently implementing and preparing for this, but we're also going to talk more broadly about the evolution of recovery and resolution planning and the regulatory frameworks for the insurance sector and what else is to come. I'm Pete Thomas. I'm part of PwC's Insurance practice and lead on this topic, and I am your guest host for today's episode.

It's a broad topic with some specific to-dos over the next few months and over the course of this episode, we'll discuss some of the challenges and key considerations, including lessons that can be learnt from other parts of financial services and internationally. To do this, I'm delighted to be joined by Sarah Watson, a Director in our Insurance Risk and Regulatory practice and James Cameron, a Director in our Restructuring and Insolvency team, focusing on insurance and financial services. Welcome both. Before we get into that detail, let's start off with some context as to why the PRA's introducing these new rules. Sarah, can you kick us off please?

Sarah Watson: Yes, sure. Thank you, Pete, and it's lovely to be with you today. For the past several years, the UK's regulatory landscape for insurers has been shifting towards a more structured pre-emptive approach to recovery and wind down planning, and that mirrors trends that we've already seen emerge in the banking sector in the UK but also, more broadly in the international space for insurers. The PRA's new solvent exit planning regime is the next major step in that evolution.

Firstly, the UK's been progressively building a fuller recovery and resolution framework for insurers. Back in 2023, we saw the introduction of the Insurer Resolution Regime, giving authorities clearer tools to stabilise or resolve failing insurers, and then we had the Insurers in Financial Difficulties Regime, which modernised the court’s powers to write down liabilities as an alternative to insolvency. Secondly, the PRA's experience has shown that potential barriers to achieving a solvent exit are often only discovered during an exit, when it's already too late to plan properly to deal with these. Up until now, Solvency II and now Solvency UK has only had requirements for insurers around stress scenarios within their ORSA and to submit a recovery plan to the regulator once your solvency capital requirements have been breached. So, i.e. this is a post-breach recovery plan that's been in the requirements and that's different from what's now being talked about, which is more of a pre-emptive recovery planning.

Now firms need to develop a solvent exit analysis as part of their BAU and to consider that period when it's clear that they can't get back to BAU and so need to exit the market. What we're seeing is the PRA really aiming to shift this planning from reactive to genuinely pre-emptive. And then thirdly, the UK's move is strongly aligned with what we're seeing on the global regulatory direction, which I know we're going to discuss a bit more later on. Ultimately, the purpose is clear. It's about minimising disruption to policy holders and the wider market, to avoid unnecessary disorderly failures and to ensure that insurers can exit the market safely, efficiently and with confidence.

Pete: Great. In summary, Solvency II or Solvency UK as it now is, already covers stress, but this takes a slightly different take on recovery. These new requirements then cover that potential gap that exists in regulation between recovery and resolution. That's the why, in terms of why the PRA has brought this out. In terms of the what, Sarah, can you give us a quick overview of what the policy statement 20/24 requires of firms?

Sarah: Sure. The core requirement is that all in-scope PRA-regulated insurers, so that's Solvency UK firms, non-directive firms and the Society of Lloyd’s, they must produce and maintain this solvent exit analysis, or SEA, as part of their BAU activities. The SEA is a forward-looking assessment that sets out how a firm would cease their PRA-regulated insurance activities whilst remaining solvent. The PRA specified what it must include. So that's things like triggers, indicators, barriers, risks and the financial and non-financial resources that a firm would acquire, and the actions and the governance that they would put in place around it. Firms must complete their first SEA by 30 June 2026, which feels like it's rapidly approaching, and then update it at least every three years. If conditions deteriorate such that it looks like solvent exit becomes a reasonable prospect, firms must then produce a much more detailed Solvent Exit Execution Plan, or SEEP, within a timeline that will be specified by the PRA. This SEEP must be evidence-based, operationally realistic and demonstrate that firms can execute on the exit, monitor risks and keep the PRA and other stakeholders informed throughout. And then finally, this policy statement also places strong emphasis on board engagement and oversight. The board must approve both the SEA and the SEEP. They must challenge the assumptions that are in there. They must think about and confirm resource adequacy, review the triggers and think about and ensure how these documents align with the firm's existing recovery resolution or risk management frameworks. In short, the policy statement 20/24 requires firms not only to plan for an orderly solvent exit but also to embed that solvent exit readiness into their existing governance, monitoring and BAU risk management.

Pete: Excellent. Well, we’ll come back and dig into the practical implications of those requirements for insurers in a little bit. But before, I think it'd be helpful to set some context in terms of the rules and requirements that exist internationally. And to do this, I caught up with PwC's Global Insurance Regulatory Leader, Carlos Montalvo. Let's hear what perspectives Carlos had to say.

Carlos, great to speak to you as always. As you know, we're talking about the new solvent exit planning requirements that the PRA has brought out in the UK. Now these sit under the umbrella of recovery and resolution planning more broadly. Can you help put this into context for us and give us an overview as to how recovery and resolution planning for insurers is developing in Europe and internationally?

Carlos Montalvo: With pleasure Pete. As you rightly say, recovery and resolution is by no means a new topic. Not only is it not a new topic, but it's also not a new topic when we are talking about insurance. Allow me to go back for a second and go back, I would say, 25 years ago when we were designing Solvency II. A political, but also technical decision was made. Solvency II must be a non-zero failure system. Why? Long story short, because zero failure would be at the end paid by policyholders. If it is non-zero, that means there are going to be casualties. First point that I think is important for us to be clear about, but the second one has to do with what we saw during the big crisis. What we saw during the big crisis is how, at a given point in time, at a political level, there is a decision that banks must embed pre-emptive recovery and resolution planning. When that happens, banks also put pressure that they are not alone on this pattern and they make sure, through FSB, that particularly the largest insurance companies are subject to similar requirements. So FSB imposes the IAIS, International Association of Insurance Supervisors, to come with a list of systemically important insurers and those insurers would have to develop a pre-emptive recovery plan and be subject to resolution planning. From there, International Association of Insurance Supervisors considers that their study is particularly important and relevant for them to regain their independence and to come with an alternative way to avoid this list of SIFIs and by so doing, they start working also on pre-emptive recovery and resolvability. They do it through the holistic framework and they set up a framework that is extended for internationally active insurance groups, including UK-based ones.

In parallel, in Europe, we have not only Solvency II but also, a review of Solvency II which is used by regulators to open up to new issues including pre-emptive recovery for which a new directive is set up. This new directive by the way is, I would say 85-90% coincident with the banking requirements but, and this is interesting and fresh, from this very same week, EIOPA is already working on guidelines on how to, let's say, approach some of these expectations and requirements to insurance reality. So, this is a little bit of where we come from and where we are. There is a framework at global level. There is equally a newly developed framework at European level and there is also one at the UK level. I would say if you would put the three of them together, they would be 95-98% coincidence. And one of the areas by the way, where there is no coincidence, is solvent exit planning, which is not yet, and I use my words carefully, not yet foreseen for insurance companies.

Pete: Thank you, Carlos, and it seems that UK insurers should take some comfort that they're not being singled out, and this is part of an overall global regulatory direction of travel. Bearing in mind that UK insurers are often part of wider international groups and bearing in mind the context of the evolving regulatory developments that you just mentioned, how would you suggest that international insurers approach this topic with this myriad of evolving regulation?

Carlos: Well, my suggestion here would be quite straightforward. First point, this is here to stay. Second point, if it is here to stay, then try to make the most out of it but also, let's try to minimise the burden. And third point, it's not only that, let's say, they are not alone in pain, it is also that regulators themselves are not going to be alone because they are going to be, for international groups, working together through crisis management groups, through qualities of supervisors and so on. So, it is particularly important, I would say, when it comes to looking at solvent exit planning as part of pre-emptive recovery resolution and resolvability framework or umbrella to make sure that PRA is able and companies are able to explain the benefits of it, so that everybody understands it. Therefore, there is a positive return towards other regulators that are not going to be so familiarised with this and equally, that PRA rather than the companies also, that's a little bit of pedagogical education the regulators in terms of how and why they ended up coming with the idea that planning for solvent exit in good times can help minimise disruption, as we were indicating before in bad times shall they come. So, in the end, it is in everybody's interest.

Pete: Great, and some great topics and threads there that we're going to pick up with Sarah and James in a moment. Carlos, thank you very much.

Carlos: My pleasure.

Pete: Following those perspectives from Carlos, James, I'm wondering if we might just turn to you. This all sounds a little bit like a very theoretical exercise, but I know that you are dealing on a daily basis with insurers that have gone wrong. So, can you give us some real examples of insurer stress and failure to help us think practically about the types of situations that these rules might be looking to address?

James Cameron: Thanks Pete, and thanks for having me as well. First, I think it's important to note that the solvency regulation introduced nearly ten years ago has provided effective protection against insolvency. However, we do not operate in a zero-failure regime and so, I do really think that this is good regulation. But there's a couple of examples I’d draw out. Firstly, the steady emergence of, or deterioration of, liabilities. A common theme I see is the steady development, or adverse development, on long tail lines. But we've seen more recently claims inflation in shorter lines, particularly in motor, where between 2019 and 2023, the cost of motor claims increased by over 30%. Secondly, we've dealt with cases where a re-insurer either failed or coverage has been disputed at scale. These can immediately impact liquidity and capital and can move the firm from stable to stressed very quickly. So, effective solvent exit planning enables insurers to identify those potential scenarios specific to your business.

Pete: Great. Let's get into the detail then of what insurers really need to do here and, Sarah, turning back to you, if we may, these are clearly new regulatory requirements, but the topics and concepts are certainly not alien to the sector. So, where should firms look for parallels and what existing work should insurers look to leverage?

Sarah: Yes, well, there's definitely existing work that firms should look to utilise. It doesn't all need to be started from scratch. So, some examples: one, firms who have been previously identified as globally systemically important institutions or, the G-SIIs, or those who were internationally active insurance groups. They will likely have already created these pre-emptive recovery and resolution plans that they can use. Secondly, insurance brokers will have their existing wind down plans and threshold condition TC2.4 assessments that they could start to leverage from. And then any insurers who are part of a wider group that includes a bank, they could look to see how the wind down planning and the scenarios they've used on the bank could be leveraged or any lessons learned could be used on the insurance side. But then more generally, I think insurers should be thinking about how they use their wider risk management framework and specifically the ORSA with its stress and scenarios, and James referenced some of the scenarios they can think about. So, use those and the management actions that are detailed in there as a starting point. And I imagine the PRA is likely to look to see how a firm's solvent exit analysis and the work they're doing now is consistent with their risk factors, their scenarios, their broader operational resilience and disaster recovery that they've all been working on over the last few years.

Pete: Excellent. I always tell my clients, it's not an exercise just to give to one person and go and sit in a dark room and try and do it. It all needs to get tied together. James, turning back to you, the objective is clearly to allow firms to be more aware and more prepared. Reflecting again on your practical experience, what are the areas that will really help firms if they've given some advanced thought to how they might exit the market in an orderly fashion?

James: One of the things I often see in a stress scenario is boards not being sufficiently prepared or coming for professional advice too late. Having a good plan in place helps to maximise the number of options and protects value. And it also acts as a very good mitigant when it comes to considering directors' duties in those situations. But in terms of some of the areas which will help firms; firstly, insurers should spend time now ensuring they have access to, and a proper understanding of the quality of their data. This includes policyholder data and claims data and should focus on fixing any documentation gaps, as better data dramatically speeds up and enhances decision-making later. Secondly, knowing your potential options is one thing. Whether you will run off your liabilities, whether you undertake a loss portfolio and a subsequent Part VII transfer or the use of a Scheme of Arrangement. Recently, we supported R&Q Re on a contingent Scheme of Arrangement which safeguarded the company's solvency position and was designed to protect creditors from the disruption, delays and significant costs associated with an insolvency process. A Scheme can therefore be a really innovative option to achieve recovery and stability. However, and Sarah mentioned before about operational realism, but having realistic assumptions in your plan is very important. Where books of business are more volatile or where there are potentially question marks on the adequacy of the reserves, then the premium may be required to be paid to a legacy acquirer. Lead times for a Part VII or a Scheme of Arrangement vary and can take between six to 12 months. You should therefore have realistic, indicative timelines in your plan. Finally, it's just worth noting that having a contingency plan in place for areas where there may be a concentrated reliance on, say, a single outsourcer or key person dependencies is also important.

Pete: Thanks James. And Sarah, what are some of the key challenges firms are facing and how are we helping them? What does good look like here?

Sarah: Yes, well, that's a good question, Pete. Firstly, we do get a lot of questions on proportionality. From the conversations we're having, firms do want to do this right, but they also want to do this in a proportionate way. So, how much is too much? Some things we're doing, we're helping firms work out the level of detail that could be required in their SEA, which means that if the solvent exit ever looks likely, then they're able to take that and produce the SEEP in a quick and efficient manner. And we're helping firms manage this alongside their already very busy operational and regulatory workload. The second challenge is the trigger framework. I think firms are finding it difficult to really define forward-looking objective indicators that genuinely distinguish between recovery and the point at which a solvent exit becomes a reasonable prospect. We're helping them think about how to integrate and calibrate these triggers with their existing monitoring frameworks without creating duplicate or parallel systems.

Thirdly, understanding the operational barriers and interdependencies. As you said, it can't be done in silo and managing and mapping those interdependencies across areas like finance, risk, operations, outsourcing, IT, HR, there's a lot of moving factors there and we can help firms assess reliance internally and also reliance on third parties and how this can all tie in to their operational resilience work over the last few years. And the PRA's looking for evidence-based assumptions. Lastly, we see firms struggling to demonstrate sufficient data quality for these assumptions, and integrated testing of the financial and operational readiness. Now, we know that's an area where banks faced significant challenges, and it’s likely insurers are facing similar hurdles there.

Pete: Thank you, Sarah. Some good hints and tips there. One of the questions that clients are asking me, as well as just, 'How do I do a good compliant exercise?', is, 'Well, how do we get value from this exercise?' James, any thoughts, please?

James: Yes, I think this provides a really great opportunity for insurers to gain a much better understanding of their back book liabilities and optimise their capital. Analysing exit scenarios may highlight where claims volatility is concentrated and where reserving uncertainty is most material. This gives boards a clearer picture of which lines of business consume disproportionate capital.

Pete: Brilliant. And what about technology? We should be always looking to see how we can use technology and how technology can help us make things easier, faster, better. What about technology in the context of this exercise, James?

James: Well, firms who model run off early can often identify locked up capital or inefficient legacy structures, leading to earlier decisions to dispose of non-core portfolios, reduce complexity and sometimes release tracked capital from older books to be reinvested in core and more profitable underwriting. We have been using our tech platform with clients which uses their existing company data to evaluate the capital benefit that may be achieved from a runoff transaction. This can be manipulated live to show a variety of outcomes under different scenarios, and enable management to unlock the broader benefits of a runoff transaction such as operational efficiencies.

Pete: And so, Sarah, as insurer boards begin to approve their solvent exit analysis and as we look ahead, what's next? And what is the regulator looking for, now and into the future?

Sarah: Well, tricky as it is to look into my crystal ball, I think firstly, we'll get more of a sense of this in the PRA's annual Dear CEO letter which normally comes out in January, but I would imagine that after 30 June, it's likely the PRA will ask to review a sample of firms’ solvent exit analysis and to understand the governance and the assurance that firms have gone through to get there. And they'll likely look at these and consider how these are integrated into a firm's wider risk management framework, how they're aligned with the firm's ORSA, for example. And then for any global groups, they may also consider how this is aligned with other international requirements. And then if we've learned anything from what the banks have seen over the last few years, it's highly unlikely that this is going to be the end of it for insurers. I can imagine the supervisory expectations and what insurers need to do and document in this area is going to continue to evolve.

Pete: Now as we start to maybe think about bringing this discussion to a close, I'd like to ask you to both leave our listeners with a comment or a key message. What should they really focus on as this June deadline approaches? I wonder if, Sarah, you can kick us off and then James?

Sarah: I think for me, in one word, it would be integration. I would encourage firms, don't see this as a stand-alone regulatory project run by a separate team. This has to be integrated. I would say integrated across functions, whether that's risk, finance, actuarial, legal etc. but also, integrated across your existing risk management framework, the processes you already have, and the documentation you already have in place. And then finally, integrated across the three lines of defence and across your governance processes.

James: I completely agree with that, Sarah. From my perspective, I think it's important to not view solvent exit planning as a failure scenario. It is a fundamental part of good risk management. Firms that prepare early not only reduce the risk of disorderly failure, creating much better outcomes in those situations, but they also create real business value through strengthening operational resilience, better understanding potential options with back book liabilities, and improving decision-making under stress.

Pete: Excellent. James, Sarah, thank you for your contributions. I think for me, there is clearly a need to put together a robust exercise to demonstrate to regulators that you have taken this seriously. To some of the comments, particularly from you, James, around actually how you get the value from this, as firms take the time, I'd like to see firms seek not just a compliant exercise but something that they can get real value from, whether that's from a capital perspective, an operational resilience perspective, there are opportunities here. Thanks also to Carlos for joining us earlier and indeed, thank you to everyone who has tuned in and listened today. This has been the Risk & Regulation Rundown, and if you'd like to hear more, please do get in touch and subscribe to the series to receive future episodes. Thank you.