Prudential Regulation Authority Rulebook

1.1

The purpose of this statement is to set out the Prudential Regulation Authority’s (PRA’s) expectation of compliance with existing prudential provisions within the PRA Rulebook for run-off firms in the general insurance sector.

1.2

This statement is aimed at general insurance firms in run-off and highlights some factors that the PRA expects the senior management of a run-off firm to take into account when considering making a request to the PRA to extract capital from the firm during the course of a run-off. This statement also explains the approach that the PRA intends to take when considering such requests.

1.3

Insurers must comply with relevant provisions in the PRA Rulebook including the Risk Management chapter of the Conditions Governing Business Part of the PRA Rulebook, which includes requirements to undertake an Own Risk and Solvency Assessment (ORSA). This supervisory statement complements another PRA supervisory statement – SS3/14 ‘The Prudential Regulation Authority’s (PRA’s) approach to Schemes of arrangement proposed by PRA-authorised insurers under Part 26 of the Companies Act 2006’^[1] and the two should be read together for general insurers in run-off.

1.4

This supervisory statement provides additional clarification of the PRA’s expectations of firms in respect of these existing requirements. Its purpose is to explain the PRA’s expectations that:

• firms in run-off hold sufficient regulatory capital to continue to meet their obligations to policyholders as they fall due; and
• firms satisfy themselves and the PRA that this remains the case after a proposed capital extraction.

1.5

This statement expands on the PRA’s general approach as set out in its Approach Document,^[2] and is designed to help ensure the PRA meets its statutory objectives of ensuring safety and soundness of the firms it regulates and securing an appropriate degree of protection for policyholders.

1.6 to 1.13

[Deleted]

1.14

General insurance firms in run-off occasionally approach the PRA with requests to extract capital. The PRA recognises that this may be a legitimate request in certain circumstances, for example where claims estimates have developed favourably over a long period, and where significant levels of surplus regulatory capital have been generated.

1.15

However, capital extractions during the life of a run-off inevitably weaken the level of protection available for remaining policyholders. This is of particular concern for the PRA in respect of firms in run-off, since these firms, compared to other insurers, may have more limited access to further capital, and often have fewer management actions available to them to restore capital levels if the need subsequently arises. For example, the financial position of run-off firms can be adversely affected by unexpected reserve deterioration as new risks emerge or through changes in the expected frequency or severity of known risks. In addition, the historic policy data available to some run-off firms can be incomplete, making it more difficult to estimate potential future claims with a high degree of accuracy.