Prudential Regulation Authority Rulebook

2.1

The PRA expects senior management and boards of run-off firms to assess carefully the level of capital required on an ongoing basis to ensure that the firm can run-off their business in an orderly fashion, including under adverse conditions. If a firm in run-off wishes to extract capital during the course of a run-off, the PRA expects the firm’s board and senior management to consider such proposals carefully and to be satisfied that the financial position after the proposed extraction will still remain adequate for the duration of the run-off.

2.2

Where a run-off firm wishes to undertake a capital extraction, the PRA expects the firm first to take the following steps:

1. (a) The firm should undertake a thorough review of its capital position in order to assess the adequacy of its financial position after the proposed extraction. For firms subject to the requirements of Solvency II (Solvency II firms), this analysis should include a review of the firm’s Solvency Capital Requirement (SCR) and its overall solvency needs as required for inclusion in a firm’s ORSA. In assessing its capital needs, a firm should take into account relevant factors such as:
2. 1. (i) any restrictions on availability of capital; and
   2. (ii) the quality of the policy records it holds and how this might impact its ability to estimate potential future claims, and make allowance for these factors as appropriate. The firm should also consider as far as reasonably practicable how its financial position might change in the future.

1. (b) As well as assessing its current capital needs, the firm should consider the expected future progress of the run-off of the business, including as a minimum over the next 3–5 years, based on realistic assumptions on relevant factors such as claims, reserve development and investment income, and taking into account any other expected changes in the business. These assumptions should reflect the firm’s experience during the run-off to date, and be consistent with the firm’s business plans. The firm should use this information to prepare a projection of its likely capital resources and capital requirement (ie SCR for Solvency II firms) over this future period. For Solvency II firms, the projection should also incorporate the forward looking computation of its overall solvency needs over a 3-5 year period. The firm should also consider plausible downside risks to these projections and show the possible effects of these scenarios on the future capital position.

1. (c) The firm should seek board approval for the capital extraction proposal, having taken into account the results of the capital review, the future projections referred to above, and any other relevant information. The PRA expects a firm’s board to approve a capital extraction proposal only if the board is satisfied that the firm will be able to maintain adequate financial resources after the proposed extraction – including that it would expect to continue to meet its capital needs, (including the SCR and overall solvency needs for Solvency II firms) at all times over a 3–5 year period, including in the event of a change in the stress scenario.