CP3/23 – ‘Dealing with insurers in financial difficulties’

The Bank of England’s Prudential Regulation Authority (PRA) has launched a new consultation on proposed modifications to its Rulebook and the issuance of a new Statement of Policy – Dealing with insurers in financial difficulties to implement the changes outlined in the Financial Service and Markets Bill as regards „insurers in financial difficulties“. According to the PRA, the proposed modifications and the new Statement of Policy (SoP) are aimed at managing „the risks posed by insurers in financial difficulties by allowing a firm to exit the market safely or return to viability, reducing 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.
Specifically, the PRA proposes rules to specify 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.
Some key provisions are briefly described below:
– the firm whose liabilities are subject to a write-down – or better its write-down manager (WDM) would have to enter into a trust deed with the FSCS before latter can make any payments;
– the trust deed would require the firm or its WDM to open a dedicated bank account for this purpose;
– the insurance undertakings would subsequently effect the payment of stakeholders from this account;
– the FSCS would receive the right to recover any top-up payments that were paid to an undertaking, if a firm subsequently recovers and becomes viable;
– in case of insolvency, the FSCS could only initiate compensation payments to policy holders once the write-down order has been lifted by court or is terminated;
– the notification issued to affected stakeholders would have to be made promptly following the recognition of the write-down order by court; and
– the content of the notification must clearly indicate the effects of a write-down order upon the stakeholders, including policy holders.
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As these are only the key proposed new rules in this context, please refer to the original legal document for further, detailed information.