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UK: Capital extractions within the general insurance run-off sector

27 May 2014

The PRA's Supervisory Statement SS4/14 confirms the PRA's approach regarding requests to extract capital from a general insurer during its run-off.

It is clear that the PRA considers that capital extractions weaken the level of policyholder protection.

The tools proposed to mitigate this risk are scrutiny of the firm's current and expected future financial position, and a capital buffer over and above the ICA/ICG requirement.

The concern that the PRA is addressing

The PRA considers that a capital extraction is of potential concern since general insurers in run-off may have limited access to new capital and fewer options to restore capital levels.

The accelerated return of capital to shareholders is a concern which also underpins the PRA's Supervisory Statement SS3/14 on schemes of arrangement.

The insurer's assessment of its capital position

The board and senior management will need to adhere to the following process:

  • The insurer must thoroughly review its capital position to assess its solvency after the capital extraction, including reviewing its MCR and preparing an up-to-date ICA.
  • The insurer must consider the expected development of the run-off over the next three to five years.  This includes projecting the insurer's MCR and ICA over that period.
  • The board must approve the capital extraction and must be satisfied that the insurer will maintain adequate financial resources and meet its MCR and ICA at all times over the next three to five years.

The PRA's review process

The PRA's views must be requested at an early stage.  It will expect to see the latest ICA and the analysis showing the projected development of the MCR and the ICA.  The PRA may issue new ICG to the insurer following its review.

The PRA may require the insurer to commission an independent review if the capital extraction is significant or if the PRA has concerns over the robustness of the insurer's data or analysis.

The PRA indicated in Consultation Paper CP7/13 that it would be more likely to require an independent opinion where the capital extraction would leave a level of projected coverage of less than 200% of the ICA/ICG.  That level was described by the PRA as a “relatively low level of projected coverage”.

The PRA has now accepted that 200% may not necessarily represent a low level of coverage for all run-off firms (and has clarified that this means a percentage of the firms' ICA).  Nonetheless, the PRA will refer to this threshold as an indicator of when an independent opinion is more likely to be required.

The capital position after the capital extraction

The PRA will expect the insurer to hold capital above the ICA/ICG level at all times.  In light of the PRA's original comments on levels of projected ICA/ICG coverage, the amount of this capital buffer may turn out to be significant.

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