Solvent Exit Planning for Insurers- An Unnecessary Evil?

In a nutshell, it will require PRA regulated insurance companies, as part of their “business as usual” activities, to have in place on a continuous basis a Solvent Exit Analysis (SRA).  This will indicate what is the likelihood of it becoming insolvent and, if so, how will they exit the market before that happens.  If it looks likely, they will also then have to put in place a detailed Solvent Exit Execution Plan (SEEP).

Sounds like a reasonable idea but is it necessary for the insurance sector? One of the PRA reasons is that they want to maintain a level playing field between different sectors of financial services. In our view, it would be better to recognise that, when thinking of banks/building societies and insurance companies,  there are two different playing fields and there is no need to “pitch” them both at the same level. It wasn’t the insurance sector that triggered the 2007/8 global financial crisis.

They also think it will reduce disruption to the wider market and reduce the costs of exit being borne by the industry through the Financial Services Compensation Scheme. The FSCS publishes a list of insurance company insolvencies they are currently involved in. This shows that since 1992, of the 48 firms 46 were in the general insurance sector and just 2 were in the life insurance sector. None of them are names the general public are likely to recognise. A reasonable conclusion to draw is that insurance sector insolvencies are not likely to be a material risk to the disruption of the wider market and that the reduction to industry FSCS costs will be similarly modest.  

Our view is that this additional regulatory burden should only apply to the very largest insurance firms and more so to general insurers than life assurers. It is another example of a “one size fits all” approach that places a disproportionate burden on the smallest firms, many of which are in the valued, but already diminishing, UK mutual sector.

A final concern is that the PRA say in their Consultation Paper (CP2/24) that a benefit of Solvent Exit Analysis is that “this feature in the market is intended to attract investment, encourage innovation, enhance resource allocation, and foster policyholder protection, leading to increased competition and choice for consumers”.

Perhaps a lot of existing and potential insurance firms will think it adds to an already complex and costly regulatory burden and pushes them further towards calling it a day or not starting up at all. With both UK regulators now having an objective to help financial services grow and become even more competitive, will they ever accept that less regulation, clearer regulation and tailored regulation would be seen as encouraging incentives to business expansion and ultimately improved consumer choice and value?  

If you’d like to discuss this further or if you need any assistance then please do get in touch.