PS12/23 – Dealing with insurers in financial difficulties

Following a corresponding consultation in February this year (EventID 19762) and the implementation of the Financial Services and Markets Act 2023 (FSMA 2023) this summer, the Prudential Regulation Authority (PRA) has published a final policy statement as regards „insurers in financial difficulties“.
#### Background
To recall, the FSMA 2023 (back in February the FSMA 2023 bill) requires the regulator to implement new rules and regulations to deal with insurers in financial trouble. Subsequently, the PRA proposed a number of Rulebook modifications, a new Statement of Policy (SoP) titled Dealing with insurers in financial difficulties, and amendments to the existing Statement of Policy as regards Policy Holder Protection to come up with an adequate framework.
The key aim was to manage the risks posed by insurers in financial difficulties by allowing a firm to exit the market safely or return to viability and reduce the impact and cost of disorderly failure where an insurer is, or is likely to become, unable to pay its debts. Additionally, the proposed changes should enhance policy holder protection in such circumstances by ensuring continuous policy coverage in case of a firm’s failure.
The key proposals concerned the
– specification of the operation of the Financial Services Compensation Scheme (FSCS) in case of write-downs that is the reduction of liabilities – including policy values – of an insurer in case of financial difficulties,
– the notification requirements of insurers with respect to policy holders after a write-down order has been effected before court, and
– the expectations of the PRA as regards the application for a write-down and the appointment of a write-down manager.
Details on the proposed provisions may be found in EventID 19762.
#### Responses and the way forward
In its final policy statement now, the PRA briefly describes the responses it has received to its consultation and its way forward in this matter. Thereafter, the PRA only received a total of three responses; commenters thereby generally agreed to the PRA’s proposed approach to deal with insurers in financial difficulty, but sought clarification as to the scope of application of the new (policyholder protection) rules. As a consequence, the PRA will go forward as proposed with
– minor changes to the definition of „insurer under write-down“ and
– the addition of a new definition of „affected market participants“
for clarification purposes only.