CP2/24 – Solvent exit planning for insurers

Privacy statement

By responding to this consultation, you provide personal data to the Bank of England (the Bank, which includes the Prudential Regulation Authority (PRA)). This may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the response itself.

The response will be assessed to inform our work as a regulator and central bank, both in the public interest and in the exercise of our official authority. We may use your details to contact you to clarify any aspects of your response.

The consultation paper will explain if responses will be shared with other organisations (for example, the Financial Conduct Authority). If this is the case, the other organisation will also review the responses and may also contact you to clarify aspects of your response. We will retain all responses for the period that is relevant to supporting ongoing regulatory policy developments and reviews. However, all personal data will be redacted from the responses within five years of receipt. To find out more about how we deal with your personal data, your rights, or to get in touch please visit Privacy and the Bank of England.

Information provided in response to this consultation, including personal information, may be subject to publication or disclosure to other parties in accordance with access to information regimes including under the Freedom of Information Act 2000 or data protection legislation, or as otherwise required by law or in discharge of the Bank’s functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the Bank receives a request for disclosure of this information, we will take your indication(s) into account but cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on emails will not, of itself, be regarded as binding on the Bank.

Responses are requested by Friday 26 April 2024.

Consent to publication

The PRA publishes a list of respondents to its consultations, where respondents have consented to such publication.

When you respond to this consultation paper, please tell us in your response if you agree to the publication of your name, or the name of the organisation you are responding on behalf of, in the PRA’s feedback response to this consultation.

Please make it clear if you are responding as an individual or on behalf of an organisation.

Where your name comprises ‘personal data’ within the meaning of data protection law, please see the Bank’s Privacy Notice above, about how your personal data will be processed.

Please note that you do not have to give your consent to the publication of your name. If you do not give consent to your name being published in the PRA’s feedback response to this consultation, please make this clear with your response.

If you do not give consent, the PRA may still collect, record, and store it in accordance with the information provided above.

You have the right to withdraw, amend or revoke your consent at any time. If you would like to do this, please contact the PRA using the contact details set out below.

Responses can be sent by email to: CP2_24@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Krish Kistnassamy, Insurance Policy Department
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 This consultation paper (CP) outlines the Prudential Regulation Authority’s (PRA) proposals for PRA-regulated insurers to prepare for an orderly ‘solvent exit’^{footnote [1]} as part of business-as-usual (BAU) activities and to be able to execute a solvent exit if needed. The PRA identified in 2021,^{footnote [2]} and confirmed in its business plan for 2022/23, that it would do more in the coming years to increase confidence that firms can exit the market with minimal disruption, in an orderly way, and without having to rely on the backstop of an insolvency or resolution process. This CP is part of that long-standing programme of work and follows a similar consultation issued for non-systemic banks and building societies in the UK in CP10/23 – Solvent exit planning for non-systemic banks and building societies.

1.2 The proposals in this CP would, if implemented, add a new Preparations for Solvent Exit Part to the PRA Rulebook and introduce a new supervisory statement (SS) (Appendix 2) applicable to those insurers that are in scope of the proposed new rules.

1.3 The proposals in this CP include:

• new rules and expectations that firms must prepare for a solvent exit as part of their BAU activities and that firms must document those preparations in a Solvent Exit Analysis (SEA); and
• new expectations, which would apply only if solvent exit became a reasonable prospect for a firm, on how firms should: (a) prepare a detailed Solvent Exit Execution Plan (SEEP), and (b) monitor and manage a solvent exit.

1.4 The proposals in this CP aim to increase the likelihood that insurers can execute a solvent exit successfully. The PRA considers that solvent exit is likely to be more efficient, more cost effective and less disruptive to policyholders compared to insolvency. The PRA considers that clear, published policy on how insurers should prepare in advance for a solvent exit should help deliver better and more consistent outcomes.

1.5 Greater preparedness by insurers for a solvent exit should support the PRA’s statutory objectives and benefit insurers in scope and the wider market. A successful solvent exit maximises policyholder protection relative to an insolvent exit. Uncertain exits pose a risk to the wider market by increasing the likelihood that an insurer’s exit is disorderly. A lack of preparedness can increase the risk of an initially solvent exit ending in insolvency, with associated costs and risks to policyholders, creditors, and other key stakeholders of the firm. Increasing the ease with which insurers can cease PRA-regulated activities supports a well-functioning and competitive market, where new insurers can enter^{footnote [3]} and unviable insurers can leave more readily, and with a reduced need for PRA intervention.

1.6 At present, the PRA’s experience has been that potential barriers to an insurer’s ability to achieve a solvent exit, for both life and non-life insurers, are often only identified once solvent exit execution is underway. The PRA’s aim in progressing this work is, therefore, to ensure that all insurers in scope have analysis in place that identifies any potential barriers to exit as this could impact PRA objectives.

1.7 The PRA recognises that barriers to a solvent exit for insurers can be complex and multifaceted, depending on the nature of the firm, its operations and its market position. The PRA will be proportionate in its expectations. The greater the assurance the PRA has that an insurer can achieve a solvent exit, the less involved the PRA would need to be during any exit. As an additional benefit, exit planning by insurers in scope can help identify areas of the business that may need improvement or adjustment for continued viability (whether on an open and closed book basis), transferability, or saleability.

1.8 While the proposals in this CP maintain consistency wherever possible with the proposals in CP10/23 for non-systemic banks and building societies, the approach the PRA takes for the expectations on solvent exit planning and execution for insurers differs in some respects where necessary to reflect the differing nature and type of business, how different types of firms exit the market and the different regulatory landscapes. In particular, the policyholder liabilities of insurers are often long-term and cannot easily be transferred or replaced, with different pressures on exit and different impact on policyholders compared to depositors. In addition, whereas CP10/23 expanded on pre-existing PRA requirements on recovery planning for in scope banks and building societies, there are no directly equivalent PRA requirements on recovery planning for insurers, with the exception of the ‘ladder of intervention’ that applies under the Solvency II regime.^{footnote [4]}

1.9 All PRA-regulated insurers except for firms in passive run-off and UK branches of overseas insurers are in scope of the proposals in this CP. This CP is relevant to UK Solvency II firms, non-Directive firms, the Society of Lloyd’s^{footnote [5]} and its managing agents.^{footnote [6]} This CP will refer to all of these collectively as ‘insurers’ or ‘firms’ unless otherwise specified.

1.10 The PRA outlines below the considerations of scoping in different type of firms.

• UK Solvency II and non-Directive firms: The expectations are intended to sit alongside the ladder of intervention and include Solvency II firms. Non-Directive firms can be more at risk of a disorderly exit and they are therefore also included.
• Society of Lloyd’s and Managing Agents: The Society accounts for a significant share of the non-life insurance market and there is a need for exit planning. Both the Society of Lloyd’s and its managing agents are therefore in scope. Consistent with the PRA’s co-operation agreement with the Society of Lloyd’s, the PRA will work with the Society on policy implementation for managing agents to ensure appropriate outcomes.
• Internationally Active Insurance Groups (IAIGs): UK Solvency II firms that are part of an IAIG will largely be able to build on their resolution plans, where these exist, under International Association of Insurance Supervisors (IAIS) ComFrame^{footnote [7]} to meet the proposed new expectations. Work carried out on existing resolution plans should be helpful in developing most areas of an SEA or SEEP but additional work may be needed in some areas such as the indicators to inform decision-making.
• Group and Solo entities: The proposed rules provide that UK Solvency II firms that are member of a Solvency II group should consider the implications and risks from group membership when preparing their SEA. While groups are not within the scope of these proposals, solo firms who wish to submit a group wide (as opposed to solo level) SEA will be able to do so, subject to prior PRA agreement.
• Mutuals and friendly societies: While there are additional considerations for mutuals and friendly societies given their complex governance structures, the PRA proposes to include them since they are also at risk of disorderly exit.
• Run-off acquirers: Run-off acquirers are actively running off contracts of insurance but do not normally intend to exit the market themselves. For this reason, the PRA proposes to include these firms.

1.11 The PRA proposes to exclude the following firms from the scope of the policy proposals:

• Firms in passive run-off (ie firms that have ceased effecting contracts of insurance, or those whose Part 4A permission for effecting contracts of insurance has been removed and those which are not run-off acquirers):^{footnote [8]} It is unlikely that any further useful solvent exit planning can be done for firms already in passive run-off.
• UK branches of overseas insurers: Branch-specific plans require consideration of the entire legal entity since the branch cannot fail unless the legal entity does too. Introducing specific requirements that extend to the legal entity (which is the responsibility of the home supervisor rather than the PRA) would not be proportionate to the risk of branch failure.^{footnote [9]}

1.12 The PRA has assessed the potential costs and benefits of these proposals. While there will be some costs to insurers to implement these proposals, the PRA considers that they would be outweighed by the benefits. Details of the PRA’s analysis of the potential costs and benefits are covered in the cost-benefit analysis section of this CP.

1.13 The PRA has a statutory duty to consult when introducing new rules and changing existing rules (s138J of the Financial Services and Markets Act (FSMA) 2000), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.

1.14 The Insurance Practitioner Panel was consulted on the background, objectives, scope and timing of the proposals in this CP. The panel’s feedback has been taken into account in the design and proposed timing of the policy.

1.15 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Implementation

1.16 The PRA intends to publish a Policy Statement (PS) in the second half of 2024. The PRA proposes that the implementation date for the changes resulting from this CP would be Q4 2025.

Responses and next steps

1.17 This consultation closes on Friday 26 April 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP2_24@bankofengland.co.uk.

1.18 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.19 Please also indicate in your response if you believe any of the proposals in this CP are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.20 References related to the UK’s membership of the EU in the SS covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [10]}

2: The PRA’s proposals

Solvent exit planning for PRA-regulated insurers

2.1 In this consultation, a solvent exit means the process through which a firm ceases its insurance business (including both effecting and carrying out contracts of insurance) in an orderly manner while remaining solvent throughout. A solvent run-off would usually begin with the insurer ceasing to effect contracts of insurance. The insurer would typically extinguish its insurance liabilities by a combination of paying insurance claims as they fall due, commuting liabilities with policyholders and/or transferring some liabilities to another insurer. At a point after the firm has extinguished its obligations to policyholders and has no outstanding insurance liabilities, the solvent exit would end with the removal of the firm’s Part 4A PRA permissions. The PRA recognises that firms might consider options other than a solvent run-off for a solvent exit including sale or partial sale, transfer of all or part of its business under Part VII of the FSMA 2000 and a solvent scheme of arrangement or restructuring plan.^{footnote [11]} During a solvent exit, firms would still be required to comply with the PRA’s statutory Threshold Conditions^{footnote [12]} and other requirements. At the point of exit, the insurer would be solvent in having been able to discharge all of its financial obligations from its own resources.

2.2 A solvent run-off of insurance liabilities is the most frequently used exit mechanism for non-life insurers, while life insurers exiting the market tend to be absorbed by larger organisations.

2.3 The PRA recognises that recovery will often be preferred to a solvent exit and that some firms spend considerable resources in detailing their plans for recovery. In their capital management plans, firms are expected to set out trigger points for management actions according to their risk appetite statement, in line with the expectations set out in Supervisory Statement (SS) 4/18 – Financial management and planning by insurers. The ‘ladder of intervention’^{footnote [13]} that applies under the Solvency II regime (and to some extent under the non- Directive firms’ rules) requires insurers to provide the PRA with a recovery plan on a Solvency Capital Requirement (SCR) breach or expected breach and a finance plan within 3 months of breach or expected breach of the Minimum Capital Requirement (MCR). This ‘ladder of intervention’ is designed to ensure intervention by the PRA is proportionate to the risks that a firm’s financial soundness poses to its policyholders.

2.4 When recovery or a solvent exit is not feasible, the only current alternative is insolvency. HM Treasury has been developing an Insurer Resolution Regime (IRR) ^{footnote [14]} which, if implemented through legislation, would provide the Bank with new powers, including the ability to resolve some insurers including systemic insurers, multiple insurers concurrently, or insurers offering ‘niche’ business lines where replacement or substitute cover cannot easily be obtained. As and when any legislation to introduce an IRR is enacted, the PRA would consider the need for any amendments to its solvent exit planning policy.

2.5 Figure 1 provides an overview of how the proposed solvent exit planning policy would fit with other relevant policies for insurers. The PRA would expect all firms in scope to have an SEA and would expect firms to prepare a SEEP when a solvent exit becomes a reasonable prospect.

Figure 1: How solvent exit planning policy for insurers fits in with other relevant PRA and Bank policies

Planning for a solvent exit as part of BAU activities

2.6 The PRA proposes new rules and expectations for insurers to prepare for solvent exit as part of their BAU activities. These would apply to all firms in scope, regardless of how unlikely or distant a prospect solvent exit may seem. The PRA’s proposals for BAU preparations include new PRA rules in the PRA Rulebook that would require insurers to prepare for a solvent exit and to produce and maintain an SEA, and new expectations on solvent exit planning during BAU (Chapter 2 of draft SS – Solvent exit planning for insurers) to guide firms’ compliance.

2.7 The proposed rules would require insurers to prepare for a solvent exit as part of their BAU activities, so that, if needed, they could cease PRA-regulated activities in a timely and orderly manner. The proposed rules would require insurers to produce and maintain an SEA documenting a firm’s preparations, which should be updated whenever a material change takes place and at least every 3 years, and that could be provided to the PRA upon request.

2.8 Chapter 2 of the draft SS on solvent exit planning provides details on how the PRA would expect insurers to meet the requirements in the proposed rules. A firm would be expected to provide, in its SEA, evidence that it meets all the expectations in Chapter 2. A list of the minimum contents that a firm should set out in its SEA is provided in the ‘Preparing a solvent exit analysis’ section of that draft SS.

2.9 The proposed expectations are intended to inform insurers’ understanding of when and how they would exit from their insurance business^{footnote [15]} while still solvent, the indicators they would use to support the decision-making on when they would need to stop writing new business to achieve a solvent run-off, the main barriers and risks they might face in doing so, and how they would make timely and effective decisions concerning a solvent exit.

Once solvent exit is a reasonable prospect

2.10 The PRA proposes to clarify its expectations of insurers for whom solvent exit has become a reasonable prospect. The proposed expectations cover (a) producing a detailed SEEP and (b) executing and monitoring a solvent exit. These are outlined in Chapter 3 of the draft SS – Solvent exit planning for insurers.

2.11 Under the proposals, insurers would be expected to produce a detailed SEEP within one month when there is a reasonable prospect that the firm may need to execute a solvent exit or if a PRA supervisor informs the firm that it should prepare for one. A firm would need to provide its SEEP to the PRA. The plan should contain sufficient detail to demonstrate whether the firm could successfully execute a solvent exit.

2.12 During the execution of a solvent exit, insurers would be expected to keep the PRA, and other stakeholders as appropriate, informed throughout its execution. Firms would also need to continually monitor the execution of the solvent exit.

2.13 These proposals would help to facilitate a more timely and useful SEEP, which underpins a successful solvent exit. They would also support clearer decision-making and communication during a solvent exit, and better monitoring of the solvent exit as it progressed. On that basis, the proposals would help to ensure that any solvent exit that is started has a high likelihood of completing successfully – in an orderly, timely, and ultimately solvent manner.

PRA objectives analysis

2.14 The PRA considers that the proposals in this CP would advance its primary objectives to promote the safety and soundness of firms and secure an appropriate degree of policyholder protection. The proposals in this CP would help insurers to develop a clear and considered route for an orderly and timely solvent exit. Such an exit should reduce risks to the firm and reduce market disruption from disorderly exits. In addition, an orderly solvent exit should result in improved outcomes for policyholders (when compared with an excessively protracted exit or insolvency).

2.15 At the same time, the PRA considers that the proposals would advance its secondary objective to facilitate effective competition. Ensuring firms can solvently exit PRA-regulated activity with minimal disruption to the market is fundamental to a well-functioning and dynamic market. It allows new entrants in and non-viable firms out. It would also provide some assurance to investors that an exit route exists that does not rely on insolvency procedures. The PRA considers that the proposals would also advance its new secondary competitiveness and growth objective under FSMA 2023, supporting the competitiveness of the UK, supporting growth and benefiting consumers. The proposals reinforce strong prudential standards and effective competition, which are key to instilling trust and confidence among investors, firms and other regulators. A robust, effective and trusted regulatory regime ensures that the UK remains competitive and attractive as a place to do business.

Cost benefit analysis (CBA)

Benefits

2.16 Increased likelihood of a successful solvent exit: Preparing for a solvent exit as part of BAU; and before the need to execute one arises, increases the likelihood that a firm can initiate and complete a solvent exit successfully. The focus in the proposals on timely decision-making, informed by clear and forward-looking indicators, and overseen by appropriate governance, would make it more likely that a solvent exit is started when it has a higher probability of being completed successfully.

2.17 An increased likelihood of a successful solvent exit should therefore help reduce the risk of losses to firms. Improving the chances of a solvent exit will also have benefits for stakeholders such as policyholders, shareholders and creditors. A real-life example of where solvent exit planning might have made a difference is where a firm recently ran into severe difficulties. However, consideration of how to deal with the firm’s share of a substantial off-balance sheet liability did not start until it had decided that imminent solvent run-off was its only option. Earlier solvent exit planning as part of BAU could have prevented considerable and urgent work, and may have reduced exit costs, to the benefit of policyholders. It may also have been possible to consider other methods of exit such as a transfer of business under Part VII of FSMA 2000.

2.18 More efficient and less costly exits for firms: Based on its experience, the PRA considers that solvent exit planning in BAU would help reduce the time and costs involved in any solvent exits that do occur, as insurers would have already established their governance procedures, considered potential risks, and understood the timings for possible actions needed to complete a solvent exit. The proposed SS is intended to provide firms with a better understanding of the PRA’s expectations when executing a solvent exit, so that they are more able to meet the expectations in a timely manner. This should facilitate a more efficient, less costly, exit for firms.

2.19 Reduced disruption to the wider market: The PRA considers that the increased likelihood of a successful solvent exit that the proposals support helps reduce the risk of disruption to the wider market that may arise from disorderly market exits. By helping to ensure that solvent exits are well thought through, well communicated, and executed in an orderly, timely, and clear manner, the proposals should help reduce uncertainty across the wider market and the potential risk of contagion.

2.20 Potential to reduce costs of exit being borne by industry through the Financial Services Compensation Scheme (FSCS): The FSCS levy, borne by PRA and FCA authorised firms, covers both management expenses and compensation costs. In the PRA’s consideration, when a firm successfully completes a solvent exit and maintains market confidence by proactively managing risks and ensuring smooth policyholder transitions, insurers can lower the likelihood of failure and subsequently reduce the need for FSCS compensation payments.^{footnote [16]} Solvent exit planning also shields against reputational damage, preventing customer disputes, and supports regulatory compliance. This contributes to financial stability and minimises the need for FSCS intervention and in turn translates into costs savings for firms in the long run.

2.21 A more dynamic and competitive market: Disruption to the market through disorderly exit causes turmoil for policyholders, erodes market confidence and potentially increases regulatory scrutiny. The PRA considers that solvent exit planning would support a well-functioning and competitive market by increasing the likelihood of a successful and orderly solvent exit. The proposals should help provide confidence to firms and potential entrants, and the wider market, that there exist well understood routes to exit and should enable less efficient firms to exit more easily. 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. The market would also become more resilient and transparent, benefiting insurers, investors, regulators and policyholders alike.

Costs

Costs to firms

2.22 The PRA recognises that there would be costs to firms to implement and continually comply with the proposals. Two fundamental aspects of the proposals should significantly reduce the costs for firms compared to the absence of solvent exit planning. First, the proposals are clear that firms would be able to leverage and adapt their existing capital management planning work or existing recovery plans if such plans are in place to meet, or begin to meet, some of the proposals for solvent exit purposes. Examples of existing work include and are not limited to the resolution planning already in place for larger firms and IAIGs; and exit plans that must be completed by new firms as part of the authorisations process. The proposals are proportionate, being clear that a firm’s BAU planning should be proportionate to the nature, scale and complexity of the firm. The PRA’s estimate of the costs to firms is provided below.

Estimating costs to firms

2.23 Affected firms: As set out in Chapter 1, this CP is relevant to UK Solvency II firms, the Society of Lloyd’s and its managing agents, and non-Directive firms. The analysis of costs considers the impacts across this cohort of firms based on the PRA records. The number of firms (solo entity and managing agents) affected is 370, consisting of 112 life firms, 240 non-life firms, and 18 composite firms.

2.24 Operational compliance costs to firms: The incremental operational compliance costs to affected firms arise from the requirement on firms to implement a framework for preparing for solvent exit, to produce and maintain a SEA, and to embed solvent exit planning into BAU. To estimate these costs,^{footnote [17]} the PRA gathered input from PRA supervisors on the additional amount of time and effort they expect firms under their review to expend to comply with the new requirements. The PRA also reviewed estimates from reports by skilled persons under section 166 of FSMA 2000 to help inform this input. The PRA then conducted desk-based analysis using this input along with salary data from the 2023 Hays Salary Guide on key staff and job roles expected to undertake the incremental work.

2.25 Table 1 reports the estimated one-off and ongoing operational compliance costs for in-scope firms individually and Table 2 covers the same in aggregate across all firms based on this analysis. Given the regard for proportionality, the table reports indicative ranges (Small & Low complexity firms and Medium, Large & complex firms) for each measure. In summary, the PRA estimates:

• one-off staff costs of between £12,300 and £68,300 per firm, summing to one-off costs of £6 million in aggregate for all in-scope firms;
• annual ongoing costs of between £3,200 and £18,700 per firm, summing to ongoing costs of £1.5 million per year in aggregate for all in-scope firms; and
• the annual ongoing annual costs of £1.5 million in aggregate for all in-scope firms would add up to a net present value (NPV) of £44 million across all in-scope firms (A NPV value is the sum of future costs discounted to today).

2.26 One-off costs to firms: The PRA anticipates additional time would be spent by firms to familiarise themselves with the proposals, conduct a gap analysis, set up internal governance, and put together the first SEA. The PRA estimates that, on average across firms, this incremental time would be equivalent to two full-time employed (FTE) staff, with the average monthly wage in the private sector.^{footnote [19]} The amount of time required for each firm would depend on the nature, scale and complexity of the firm and the extent to which it may be able to leverage its infrastructure around any existing capital management or recovery plans. The PRA considers that the additional tasks would be completed by a variety of staff across several different job categories, and that direct one-off implementation costs would range between £12,300 and £68,300 per firm, summing to £6 million in aggregate for all in-scope firms.

2.27 Ongoing costs to firms: The PRA anticipates ongoing costs for firms to review their SEA and make any necessary changes, as well as monitor relevant indicators. The additional time needed will depend on the nature, scale and complexity of firms (and the possibility that a firm may change its business model throughout its life). To account for this, the PRA has provided a range of the estimated ongoing compliance costs. The PRA estimates annual, incremental time would be equivalent to not more than two FTEs and assumes additional tasks would be fulfilled by staff across a variety of job categories. On this basis, annual ongoing compliance costs would range between £3,200 and £18,700 per firm, summing up to £1.5million annually in aggregate for all in-scope firms.

2.28 Total costs to firms: Combining one-off and ongoing costs, the PRA estimates the NPV of total direct compliance costs would be between £105,000 and £602,000 per firm. In total across the industry, the one-off cost of £6 million and the NPV of the ongoing costs of £44 million add up to an NPV of £50 million.

Costs to the PRA

2.29 There would be additional costs to the PRA for supervising against the proposed rules and expectations on solvent exit. Supervisory time and resource will be required to review and engage with firms regarding their solvent exit documentation. The PRA expects that some of this cost will be offset by improved efficiency of any solvent exits that do occur.

Figure 2: Overall assessment of costs against benefits

2.30 The PRA considers that the cost to firms from these proposals would not be excessive and would be outweighed by the benefits. The proposals would allow firms, where appropriate, to make use of the work, analysis, and governance that they already have in place for existing capital management planning work or existing recovery plans if such plans are in place to meet, or begin to meet, some of the proposals, which would significantly reduce costs. The proposals are also designed to apply proportionately to the nature, scale, and complexity of a firm. The expected benefits of the proposals are far-reaching, including minimising disruption to the wider market and reducing the burden on FSCS funds (and hence avoiding additional costs to the industry).

2.31 Overall, the PRA views the costs to firms and the PRA itself to be outweighed by the long-term benefits to firms, policyholders and financial stability. The overall costs to firms in scope, including one-off costs and annual costs, is estimated to an NPV of around £50 million. The PRA considers that both life and non-life firms would benefit similarly from the proposed policy and the analysis of costs has been across both life and non-life firms. To put these costs into context, the FSCS compensation paid to insurance policyholders between 2013 and 2023 amounted to £1.3 billion, of which £650 million related to compensation for non-life firms within the scope of this policy. While over that period there has been no FSCS compensation to policyholders of life insurers,^{footnote [20]} the FSCS is also exposed to potential compensation claims to policyholders of life insurers. Even without allowing for savings on the life insurance side or savings over a longer timeframe than ten years; if the policy led to a 10% reduction (£65 million) in the 2013 to 2023 FSCS compensation, there would be a net savings to the industry through lower FSCS levies. FSCS compensation paid to policyholders of a failed insurer are ultimately borne by the rest of the insurance industry and the PRA therefore considers that the policy represents a net benefit to insurers. Additional benefits, which the PRA has not quantified, include:

• reducing the potential for market disruption and a loss in market confidence;
• improving outcomes for policyholders;
• reducing costs to the PRA of overseeing exits; and
• supporting a more competitive market.

‘Have regards’ analysis

2.32 In developing the proposals in this CP, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022.

2.33 The FSMA regulatory principles that are considered most significant to the proposals in this CP are those relating to proportionality, efficient use of the PRA’s resources, and transparency. The proportionality principle is embedded within the proposed expectations by stating that a firm’s solvent exit planning should be proportionate to the nature, scale, and complexity of the firm. In addition, and where appropriate, firms may use their work under SS4/18 to meet, or begin to meet, some of the proposals. The PRA would also expect to see an overall increase in its efficiency as the proposals would support more timely and orderly solvent exits. Such an outcome should reduce the amount of the PRA resource required to oversee or facilitate such exits.

2.34 The PRA considers that the proposals are in line with the principle of transparency since the policy materials the PRA proposes to introduce are intended to give increased clarity to insurers over the PRA’s intended approach and its expectations of firms.

2.35 The ‘have regards’ that gave rise to specific considerations in relation to the proposals in this CP are set out above. Where analysis has not been provided against a ‘have regard’ for a proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for that proposal.

Impact on mutuals

2.36 The PRA has a statutory obligation to consider the impact of its proposals on mutual societies (section 138K FSMA 2000), referred to as ‘mutuals’. The PRA considers that the impact of the proposals in this CP on mutuals is expected to be no different from the impact on other insurers.

Equality and diversity

2.37 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not. In line with its responsibility under the Equality Act, the PRA has performed an assessment and considered the equality implications in formulating its proposals. The PRA considers that the proposals in this CP do not give rise to equality and diversity implications. The PRA will continue to consider the equality and diversity implications of the proposals during the consultation period, and in relation to further consultation concerning future operative proposals.