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General insurers need thorough review on capital extraction when firms run-off, says PRA

Senior management and boards of non-life firms who run-off need to assess carefully the level of capital required to ensure they can do so “in an orderly fashion”, the Prudential Regulation Authority (PRA) has said.


29 JULY 2016 | CINTIA CHEONG

A bank vault © Shutterstock
Firms in run-off occasionally approach the PRA with requests to extract capital. © Shutterstock


In an update of its supervisory statement, the regulator says such firms occasionally approach them with requests to withdraw capital. 

The PRA recognises that these requests may be legitimate in certain circumstances, but points out that the move “inevitably” weakens the level of protection available for remaining policyholders. 

“This is of particular concern for the PRA in respect of firms in run-off, since these firms, compared to other insurers, may have more limited access to further capital, and often have fewer management actions available to them to restore capital levels if the need subsequently arises,” said the PRA in the statement.

“For example, the financial position of such firms can be adversely affected by unexpected reserve deterioration as new risks emerge or through changes in the expected frequency or severity of known risks.”

Firms in run off should undertake a thorough review to assess its financial position after the proposed extraction, according to the regulator.

For insurers subject to the requirements of Solvency II, the PRA expects this analysis to include a review of a firm’s solvency capital requirement (SCR) and its overall solvency needs in its own risk and solvency assessment (ORSA). 

Factors such as any restrictions on availability of capital should be taken into account, the regulator added.

Firms should also review the quality of policy records they hold and the impact on potential future claims. 

The PRA added that once capital needs are assessed, a firm should examine the expected future progress in the run-off of the business, including a minimum period of over the next three to five years. 

In addition, it should seek board approval for the proposal, having taken into account the results of the capital review, the future projections, and any other relevant information. 

The document also sets out details of the PRA review process, where insurers should request views from the regulator at an early stage and ensure that any concerns are dealt with before the change is implemented.