The Prudential Regulation Authority (PRA) has published a consultation paper (CP42/5) on a draft supervisory statement on capital extractions by general insurance firms in run-off. The draft statement  sets out the regulator’s expectations for compliance with prudential provisions in the PRA Rulebook for firms in run-off. The supervisory statement sets out the PRA’s expectations in relation to the factors that senior management should take into account before making a request to the PRA to extract capital from a business in run-off.

The proposals do not reflect a change in policy but do set expectation of how the ORSA should be used when making decision about whether to apply for capital extractions. Key points to note in the draft supervisory statement are:

  • The draft supervisory statement complements SS3/14: The Prudential regulation Authority’s approach to schemes of arrangement proposed by PRA-authorised insurers under Part 26 of the Companies Act 2006 and the two statements should be read together by general insurance firms in run-off.
  • The board of a general insurance firm in run-off will be expected to assess carefully the level of capital required on an on-going basis to ensure that the business can be run-off in an orderly manner. The board and senior management must be satisfied that the financial position after the proposed capital extraction will remain adequate for the remainder of the run-off.
  • The PRA will expect Solvency II firms to review their Solvency Capital Requirement (SCR) and overall solvency needs as part of their Own Risk and Solvency Assessment (ORSA). In doing so, firms should take into account both restrictions on the availability of capital; and the quality of policy records and the ability to estimate potential future claims.
  • The firm will need to take into account the expected future progress of the run-off including, at least, over the period of the next 3 to 5 years. The assumptions used should reflect the firm’s experience in run-off to date. As part of this review, firms should prepare a projection of capital resources over the 3 to 5 year period.
  • Board approval for the capital extraction must be based on the results of the review of capital resources and in granting its approval, the board should be satisfied that the firm will be able to maintain adequate financial resources after the proposed extraction, meeting its SCR at all times (including under stressed scenarios).
  • The PRA will expect firms to seek its view of the proposed extraction at an early stage. Any concerns should be addressed and board approval sought and granted. The regulator will expect to be provided with a copy of the capital resource analysis that was provided to the board for approval (and should also be given copies of any other independent analyses used in the review).
  • Solvency II firms must hold capital sufficient to manage and mitigate risks identified in the ORSA. These firms should not extract capital with the result that the level of capital falls below the overall solvency needs set out in the firm’s ORSA (even where this is an amount above the SCR).

The deadline for comments on the draft supervisory statement is 20 January 2015.

For further information: CP42/5: PRA consults on capital extractions by general insurance firms in run-off