The regulator’s aim is to clarify the support available to insurers when they hit financial difficulty

The Bank of England has launched a new consultation process on the steps insurers can take should they encounter financial difficulties.

Regulator the Prudential Regulation Authority (PRA) has also proposed new rules in response to the amendments introduced by the Financial Service and Markets Bill 2022-23 (FSM Bill) concerning insurers in financial difficulties, with firms having until the end of March to respond.

The aim is to streamline and clarify the ways in which insurers can be supported if they encounter financial trouble.

The proposals also concern the process to wind down failed firms if the business cannot be saved.

In May 2021, the Treasury published a consultation document that set out proposals to enable the UK authorities to better manage insurers in financial difficulties. This also clarified when the Financial Services Compensation Scheme (FSCS) would step in to pay stricken policyholders.

The proposed amendments included clarifications and enhancements to the court’s existing power to order a reduction of the value of an insurer’s contracts – a write-down – together with a change to the protection offered by the FSCS in the event of a write-down.

Upcoming changes

The FSM Bill introduced to Parliament last year included a number of provisions, including changes to:

  • Align the condition for applying to court for a write-down order with the test for administration – where a firm “is, or is likely to become, unable to pay its debts”.
  • Allow the court to make a write-down order where this is “reasonably likely to lead to a better outcome for the firm’s policyholders and other creditors as a whole – compared with not making the order”.
  • Create the role of a court-appointed write-down manager, to monitor implementation of the write-down plan.
  • Impose a six-month extendible suspension of certain termination rights under supply and financial contracts and a stay on the surrender of with-profits and unit-linked policies, subject to appropriate exemptions.
  • Introduce powers to provide FSCS top-up funding.

The PRA explained that it was keen to deliver greater clarity, saying that the implementation date for the changes resulting from the new consultation process would come into force in or around July 2023, with consultation closing on 31 March.

The proposals included new rules on payment triggers, payment mechanisms, recovery rights, declaring an insurer in default and final compensation owed.

Under the plans an insurer would be declared in default only after it had completed the write-down process without returning to viability, thus triggering an insolvency event.

Default conditions

“The PRA proposes that the FSCS would only be able to declare an insurer to be in default and provide compensation to policyholders if the wind-down order has been terminated or completely lifted by the court,” the PRA explained.

“The FSCS would not be able to declare a firm in default while a wind-down order is in force – even if only in part.

“However, if FSCS wishes to declare a firm in default, in accordance with chapter 10 of the Policyholder Protection Part of the PRA Rulebook (PPP), it would be able to apply to the court for the wind-down order to be lifted.

“The PRA considers that the purpose of the wind-down order is to promote continuity of cover by maintaining an insurer’s solvency to provide it with a chance to return to viability or allow an orderly run-off and exit from the market.

“Allowing the FSCS to declare an insurer in default while it is still subject to a wind-down order could undermine this.”