Solvent exit planning: the way is clear

For many, work begins to wind down ahead of the festive period. However, just when you think nothing exciting can come up, the Prudential Regulation Authority (PRA) has stepped in and issued the long-awaited policy statement on solvency exit planning for Insurers - something to sink your teeth into besides turkey.

So, what exactly are we dealing with? The PRA issued the initial consultation for insurers in January 2024 and the requirements remain relatively unchanged for most insurers. 

The new rules require that insurers prepare for a solvent exit as part of their business as usual (BAU) activities, which should be documented in a Solvency Exit Analysis (SEA). Once solvent exit is considered likely to happen, the PRA expects the insurer to produce a solvent Exit Execution Plan (SEEP), detailing the insurer’s plans for implementing the solvent exit.

For most, the SEEP should be nothing other than a distant nightmare and so the real work is focused on developing a SEA that supports good risk management within the business and complies with the regulatory requirements.

The PRA has set out the key information that should be included in the SEA. The text in blue is the summary info of what the PRA has outlined. The text below is our opinions and recommendations.

What are the key challenges with the requirements? 

To answer this question, it’s first easier to highlight what we think will be easy to do. And that is to build a document that ticks all the boxes or, at least appears to tick them. 

The PRA has given a very clear set of requirements, and it will be easy enough for firms to develop a SEA that has the right headings and pays lip-service to the requirements. But while this might pass the initial checklist review, it will come unstuck as soon as the SEA is reviewed in any detail. 

The key challenges are:

1. Delivering something that adds value to the business.
2. Being pragmatic and understanding how much detail to include.  

Let’s take these in turn.

Building a SEA that works for the business

Insurance companies have been managing risk for a long time and there are already a suite of tools, documents and processes that support the business in achieving its goals, including monitoring and managing the solvency position. 

ORSAs, solvency risk appetites, management actions, recovery and resolution plans, are just a few tools which will be great resources in supporting the development of a SEA. 

One of the most important elements to think about first, is how this document will be structured and where does it fit best - will it sit as a separate section in an ORSA, where most of the stress and scenario testing is conducted? Or is it best to be added on as a new section on existing recovery plans? 

For us, as a starting point, the most important links will be with recovery and resolution planning. After all, a firm isn’t going to agree to conduct a solvent exit without trying to recover first. Considering how you might combine these documents together could bring economies of scale, generate consistencies and ensure that the ‘story’ flows with how the business will work in practice. Generating a list of SEA actions that make no allowance for potential recovery actions, which should have been implemented before, is both misguided and undermines the value of the analysis. 

It should also be noted that many firms will not have documented recovery plans. For those, there will be significant economies of scale and value in building out these documents together. Otherwise, a SEA will become an isolated document with no material links to how the business is likely to be run, right up until the point at which this document is required. 

There is also no doubt that firms should be looking to use their 2025 ORSA to do some of the heavy lifting on the analysis necessary to support some of the more quantitative elements of the SEA. Expense run-offs and a range of stresses that bring the company to a point of ‘no return’ should help to set the scene for the type of actions that will be involved in a SEA scenario. This means that work should be done early this year to ensure you line up the right scenarios and build efficiencies where possible. 

Being pragmatic and identifying the right structure and level of detail

We should be under no illusion as to the amount of detail required to make a SEA valuable. As set out above, the PRA is not only asking for the range of actions, but the risks to them, the costs of them and the communications and governance that will sit around them. For any individual action, this could be a full detailed report. So, how do we make this document in a way that works best?

Now more than ever, this type of report could be an opportunity to embrace technology and step away from the traditional ‘paper’ reporting structure, to a more dynamic report that enables the user to navigate through the details as needed, while not drowning the reader in information. 

This could involve a combination of a report-based framework, accompanied by a web-based dashboard detailing a database of scenarios, risks and required actions necessary. Think closer to the traditional governance, risk and compliance platform, but with the detail required for a SEA. 

If this seems a bit over the top and your Board still prefers the touch of A4 to an iPad, there are still ways to build a SEA that enables a top-down view of actions, risks and dependencies, while adding the necessary detail where required. Including the right dashboards, decision graphics and desktop scenario case studies can lift the report and better facilitate the discussions that lead to improved risk management. 

Get in touch

At Barnett Waddingham, we are working closely with clients to build the right SEA solution for their business. If you are interested in discussing this with us, please reach out.