Preparing for a solvent exit
Planning to wind-down the business in a solvent way is unlikely to be high on an insurer’s board agenda.? But this position is about to change as the Prudential Regulation Authority (PRA) has just released its final rules requiring UK insurers to prepare for an orderly solvent exit and to be able to execute this if needed.
Boards should seek to leverage the benefits in such an exercise and be asking management to drive value from the obligatory contingency planning, rather than develop a “tick box” plan that will otherwise sit on a shelf (or in the cloud) and gather dust.
The new rules attempt to fill an (arguably limited) policy gap in the regulatory framework between recovery (where management seeks to restore solvency) and resolution (a resolution authority takes actions to minimise disruption arising from the actual failure of a firm).
In a nutshell
Briefly, the new rules will stipulate that a firm will need to document in its solvent exit analysis (SEA):
The rules create new obligations on firms to produce a solvent exit execution plan (SEEP) when a solvent exit becomes a reasonable prospect, or when requested by the PRA.? The rules also introduce new requirements on a firm throughout the execution of a solvent exit.?
The rules are applicable to all UK Solvency II firms, non-directive firms, mutuals and friendly societies, the Society of Lloyd’s and run-off acquirers.? Lloyd’s managing agents, firms in passive run-off and UK branches of overseas insurers are out of scope.
Drawing on practical insights and experience
Many insurers will be able to adapt existing work in relation to their own risk and solvency assessment (ORSA) and capital management plans to comply with the new requirements. Some insurers have previously produced recovery and resolution plans and will be able to draw upon this work, but it is likely that additional work will need to be performed in some areas such as the solvent exit indicators.
We expect that this part to be challenging for firms given the potential sources of distress for a business and how to calibrate forward-looking indicators.? There will be some degree of iteration in this exercise as the business considers the costs of executing a solvent exit in various scenarios.
Understandably, few boards and management teams will have personal experience of such circumstances to draw upon.? Therefore, boards will want comfort that the analysis is sufficiently robust and the plan is actionable enough to satisfy themselves that it will pass muster of the firm’s supervisory team.?
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Teneo’s Financial Advisory team has worked on some of the largest and most complex insolvencies and restructurings (including advising on what regulators refer to “near misses”) in the insurance sector and has significant recent experience of advising and managing (re)insurance businesses that have become exposed to financial distress.
Challenges that arise at times of distress
Some of the challenges we see at the early stages of an insolvency situation is the absence of a clear plan that is acceptable by an insurance group’s key financial lenders and regulators.? This takes time to formulate as management have rightfully invested all their efforts and time into saving the company.? Time is of the essence when looking to preserve and maximise value.
Knowing that the firm has performed adequate analysis around the potential break up options is a reassuring starting point for the board to be able to take informed decisions in an otherwise highly pressurised environment.
Boards of performing businesses might usefully consider this exercise to meet the regulator’s requirements as an opportunity to deliver better value for its shareholders.? The run-off market provides solutions to ‘live’ players to make more efficient use of capital, reduce expenses, manage undesirable exposures and free up management time to focus on core business.
While the regulation might only ask the board to consider when it would be appropriate to execute a solvent exit of the legal entity, boards might wish to ask management to consider creating a framework for assessing when to dispose of an underperforming portion of its portfolio.
Identifying key staff required to complete a solvent exit and assessing the costs of redundancies and retention is highly sensitive.? Management will likely need some objective challenge around its judgements in this area.? There will inevitably be difficult conversations with creditors and suppliers and how to retain those critical suppliers necessary for keeping the lights on when they have unpaid invoices.
Following management’s analysis, boards should have a better view of where material barriers exist and seek to minimise the impact of these where it is appropriate to do so.? Addressing these barriers might also lead to other efficiencies and greater resilience through the negotiation of better agreements, reduction in the complexity of the group’s operations and structure and considering the right balance between sharing staff and infrastructure across the group.
The rules come into effect from 30 June 2026.? The exercise will draw on the experience and knowledge of teams across the business, including finance, company secretariat, legal, HR, operations, investments, risk & actuarial, M&A and commercial propositions teams.? However, some firms may also need input from experienced restructuring professionals to provide specialist input and advice on dealing with “real life” insurance distress and insolvency.? Boards need to be confident that management has produced clear implementation plan to achieving the deadline and seeking appropriate assurance.
If you would like to have a chat around any aspect of developing a solvent exit analysis, please do reach out to myself or one of my colleagues.
Teneo is the global CEO advisory firm. We partner with our clients globally to do great things for a?better future. Drawing upon our global team and expansive network of senior advisors, we provide advisory services across our five business segments on a?stand-alone or fully integrated basis to help our clients solve complex business challenges. Our clients include a?significant number of the Fortune 100 and FTSE 100, as well as other corporations, financial institutions and organizations.