 By Ed Harrison, Principal and Matthew Ferone, Associate Consultant from LCP
What should the Solvent Exit Analysis cover?
The SEA should cover the following points:
• Solvent exit actions: The management actions needed to extinguish all liabilities and cancel PRA permissions, as well as the timeline over which the various steps will occur.
• Solvent exit indicators: A set of KPIs that the firm will monitor to forecast whether it is at risk of needing to exit the market.
• Potential barriers and risks, including measures to remove or mitigate these risks. The PRA notes that historically material barriers to solvent exit have only been identified when the process begins!
• Resources and costs required, noting in particular that a solvent exit strategy may lead to additional costs (or reduced asset sale values) compared to running as a going-concern.
In addition, the SEA also needs to set out the communication plan to relevant stakeholders, clarify the decision making / governance process for solvent exit, and ensure that there is an appropriate risk / compliance review process in place to ensure the plan is robust.
What new measures are needed to comply with the SEA requirements?
For many firms the starting point will be to review their existing resolution plan against the PRA’s expectations and then to adapt it.
A key focus area for firms will be setting the KPIs that might highlight a need for the firm to exit the market, as well as the trigger points for more in-depth discussion. The PRA expects firms to monitor trends and forecasts of these indicators – an extension of many current risk reporting dashboards.
In addition, firms will need to perform a detailed assessment of how the firms risk profile changes when the firm moves to exit the market, and identify major barriers. For example a Lloyd’s syndicate may be exiting the market because of adverse reserve runoff and may therefore need to consider alternatives to the typical reinsurance-to-close process.
What is a Solvency Exit Execution Plan?
The SEEP is a detailed plan for how to wind the business up in an orderly fashion.
Because it is very detailed, firms do not need to maintain a SEEP, but would be required to produce one within one month if they are at risk of needing to exit the market.
The need to produce a SEEP would most likely follow a breach of one or more trigger thresholds in the SEA, or if the board believes there is a reasonable prospect of exiting the market.
The suggested points firms should include within their SEEP are:
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Timelines for solvent exit, including the sale of assets and transfer/payment of liabilities.
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A detailed assessment of financial and non-financial resources, a valuation of all liabilities and assets on an expected and stressed basis.
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Risk identification and mitigation: the SEA risk analysis should be updated to reflect the specific circumstances of the current situation.
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Communications plans for different stakeholders, detailing for example how the firm will deal with policyholder complaints or withdrawal of services.
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Governance arrangements, and a target operating model for the firm as it winds down.
What should firms consider?
The best firms will take a proportionate approach, embedding the Solvent Exit Analysis in routine risk management tools, whilst also ensuring that their approach meets regulatory expectations.
Firms can make use of existing resolution plan documents and piggy-back exit indicators on the existing risk management framework – or better still take the opportunity to update some of those longstanding risk measures and tolerances!
We recommend identifying which liabilities are best suited to being transferred, run-off or reinsured as part of a solvent exit. It is equally important to understand under what market conditions or runoff circumstances each option may be unavailable.
Working with the risk function to test existing contingency plans by workshopping simulated scenarios will be an effective measure to identify potential barriers to a solvent exit, so that you can review lessons learned and create an improved set of actions within your SEA.
Overall, the firms whose risk and actuarial teams have strong links with the business will be best placed to produce value-adding exit analysis, which not only meet regulatory requirements but help provide insight into key business risks.
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