This blog series is a practical guide on solvent exit planning for practitioners and those charged with governance.
Part 2 explores the concept of a solvent exit, including a discussion of the pros and cons of targeting different levels of solvency during run off.
The PRA has been clear that the purpose of solvent exit analysis is to ensure that firms understand the dynamics of their business model and the tipping points beyond which an orderly exit from the UK insurance market would no longer possible. But there remains some uncertainty across the industry as to the definition of ‘solvent’ that applies.
On the one hand the supervisory statement SS11/24: Solvent Exit Planning for Insurers explicitly references the need to be able to meet all liabilities as they fall due i.e. a Companies Act definition of solvency.
On the other hand, in bilateral meetings with individual firms, and in broader industry forums, PRA supervisors and other PRA representatives have implied that a higher bar may be expected to ensure solvency is not unduly at risk during run off.
This is particularly pertinent for those with longer tailed liabilities and therefore more scope for solvency levels to fluctuate over the run-off period.
To support practitioners and those charged with governance, we have set out below a discussion of the pros and cons of targeting different levels of solvency during run off.
Pros of having this option:
Maintaining SCR above 100% will be acceptable to the PRA and represents the strongest level of resilience throughout the run-off period.
Given that firms are free to develop scenarios that determine the starting point for solvent exit, there may be an expectation that firms explore whether this would be possible (especially if this is seen as a strategic risk management tool as opposed to a financial resiliency analysis exercise).
Most firms have existing indicators and monitoring that is associated with remaining above 100% SCR coverage and therefore it may be easier for monitoring during run-off to fit within existing processes.
Cons of having this option:
For some firms maintaining SCR above 100% may be quite an onerous undertaking during run-off.
SCR is constructed as a buffer to manage stressed periods; therefore, given that for most firms a solvent exit would be triggered by a stress, holding 100% SCR throughout could be seen as holding a buffer on a buffer.
Pros of having this option:
Following the decision to solvently exit the market a firm may experience various costs and SCR impacts related to the transition from open to closed business such as additional expense reserves, Loss Absorbing Capacity of Deferred Tax (LACDT) impacts, loss of Matching Adjustment/Volatility Adjustment etc. If a firm can demonstrate that the trajectory of the SCR is positive over the remainder of the run-off period, then this is likely to be acceptable to the PRA.
In the normal course of business, the PRA is clear that it would expect firms to restore solvency levels to back above 100% SCR within 6 months of any dip below this. By demonstrating this in the solvent exit analysis this aligns with broader regulatory practice.
Cons of having this option:
For some firms, limiting the period below 100% SCR during the projection period to less than 6 months may still be quite an onerous undertaking during run-off.
The PRA in: Solvency II: The PRA's approach to the permissible recovery period for insurers to restore full cover for their SCR sets out circumstances under which firms that are not in run-off/closed to new business may apply for an extension to being below 100% SCR for more than 6 months including if there is a market wide stress event (called an exceptional adverse situation). This may indicate that in certain scenarios the PRA may be willing to accept a longer period below 100% SCR.
Pros of having this option:
Where firms find it difficult or onerous to restore solvency to above 100% SCR within 6 months, a slightly longer period may give additional time to take actions (e.g. derisking, expense transformation etc.) to increase the coverage ratio.
For long term business, 3 years below 100% SCR is longer than normal regulatory protocol but may still be acceptable to the PRA; especially if the SCR projection has an upward trajectory over this period and capital coverage remains well above MCR.
Cons of having this option:
Operating below 100% SCR for more than 6 months is outside of normal regulatory protocol and therefore would be at the discretion of the firms’ supervisory team. It may not be acceptable to the PRA, particularly if they believe the firm has critical economic functions, is systemically important or poses a heightened risk to the PRA’s regulatory objectives.
Extended periods operating below 100% SCR coverage ratio may be unacceptable to the Board, especially as Non-Executive Directors retain personal accountability for taking reasonable steps to safeguard policyholders.
Directors have a fiduciary duty to avoid trading whilst insolvent. Whilst an extended period below 100% SCR coverage ratio may not indicate insolvency, the sensitivity of the capital position to additional stresses may be increased and additional monitoring and analysis may be required at this level to ensure Directors can remain confident they are compliant with this requirement.
For short-tailed business, 3 years may be a significant proportion of the run-off period (or for annually renewable business may include the full run-off period). The larger proportion of the run-off period this represents, the more scrutiny this may receive from both the PRA and internally from the Board.
Pros of having this option:
Allowing the projected Solvency Capital Requirement (SCR) coverage ratio to fall below 100% for multiple consecutive years can still be consistent with a solvent run–off, provided the firm is able to meet all policyholder liabilities as they fall due.
From a strictly economic balance sheet perspective, this demonstrates that the business can sustain adverse conditions yet still meet obligations in full, which is the core requirement for a solvent exit.
Allowing the SCR to fall below 100% in the projection indicates that the business could enter run-off from a lower level of available capital while still being able to meet all policyholder obligations. This reduces the minimum capital required at the solvent exit trigger point and therefore shifts the viable trigger point to a lower threshold than under a strict 100% SCR constraint. In practice, this would also give management slightly longer to attempt to stabilise or recover the business before having to initiate a solvent exit.
Since the purpose of the analysis is to identify the last point at which a solvent exit remains feasible, recognising that the SCR ratio may dip below 100% without default may provide a more realistic view of the economic boundary for viability and solvently exiting the market.
Including scenarios where the SCR falls below 100% may provide the Board with a more rounded understanding of the pressures leading up to a solvent exit. It may help Directors evaluate how late the trigger could realistically be set, the capital trade-offs involved, and the consequences of delaying action. This broader visibility could be used to improve governance and support more robust decision-making around timing and risk appetite.
Cons of having this option:
An extended period with the SCR coverage ratio below 100% may be unacceptable to the regulator.
Even if the firm could technically meet all liabilities, operating below the required regulatory capital threshold for several years could be viewed as a breach of the capital framework, undermining supervisory confidence.
Projecting sustained periods below 100% SCR can create reputational concerns, even where the firm remains economically solvent. External stakeholders such as auditors, rating agencies, and strategic partners may view the breach as indicative of capital weakness. This could lead to heightened scrutiny, questions about management capability, anti-selective behaviour in run-off and/or increased monitoring burdens.
Projections which show breaches of regulatory capital requirements may be difficult to agree internally. Boards, Risk Committees, and senior management may be reluctant to endorse results that appear to contravene the capital framework. This can slow down sign-off and require additional justification, documentation, and assurance.
Regulators or auditors may challenge the legitimacy of modelling sustained SCR breaches, questioning whether the approach, assumptions, and/or if the calibration is appropriate. This can introduce additional model validation requirements and prolong the review cycle. If confidence in the methodology is undermined, it may have a knock-on impact on other aspects of the analysis.
Non-technical audiences, including some Board members or NEDs, may misinterpret a projected SCR breach as evidence of imminent solvency concerns rather than a boundary-testing scenario. This can lead to unnecessary alarm, unproductive discussion, or requests for further clarification, slowing progress and complicating governance.
Most firms’ risk appetite frameworks expressly prohibit operating below 100% SCR, meaning results that show breaches can be inherently misaligned with established governance thresholds. This can trigger internal escalation, require temporary waivers, or necessitate revisions to the risk appetite statement and/or other internal documentation before the analysis can be accepted.
Even if intended as a theoretical scenario, projections showing multiple years below 100% SCR could prompt regulators to take a more interventionist stance. They may intensify monitoring or request additional analysis. This undermines the purpose of the exercise, which is to identify the boundary for a solvent exit.
Should the regulator reject this approach, the firm would need to redo the solvent exit analysis, revisit assumptions and recalibrate projections, leading to additional time, governance, and cost pressures.
Operating below 100% SCR also leaves the firm more exposed to tail risks: if a 0.5% probability stress event occurred during this period (this may be for a second time, if the first 0.5% probability event put the firm into solvent exit), the firm could become insolvent.
From the regulator’s perspective, there is limited benefit in permitting firms to remain undercapitalised for prolonged periods, as doing so increases the risk of policyholder detriment and contradicts the underlying prudential objective of maintaining adequate capital buffers.
As a result, relying on prolonged sub-100% SCR projections introduces regulatory, operational, and prudential risks.
Pros of having this option:
Although it is unlikely that this scenario feature in the final SEA document, modelling the point at which the capital level falls below the MCR can help internally clarify the absolute limit beyond which the business can no longer viably run off. It provides a reference for understanding the hard boundary of solvency and highlights how far deterioration would need to progress before run-off ceases to be feasible.
Showing the MCR breach internally can act as an extreme stress-test benchmark. It demonstrates the severity of conditions required to push capital to this level and helps contextualise other, more realistic projection scenarios. This supports internal capital discussions, even though the outcome is unacceptable in practice.
Furthermore, although not suitable for inclusion in the final SEA document, modelling the point at which the MCR is breached can provide internal insight into how rapidly capital can deteriorate when buffers are exhausted. It highlights the non-linear behaviour of capital near the lower boundary, where relatively small stresses can produce disproportionately large impacts on solvency. This understanding supports internal risk discussions, even though the scenario would not be acceptable for decision-making.
This scenario helps illustrate the combination of conditions that would drive the firm into regulatory insolvency, helping to frame conversations about resilience and the types of events that could cause severe capital impairment.
Cons of having this option:
Any projection showing the SCR falling below the MCR would be highly likely to not be acceptable to the regulator and the Board & senior management. This method would attract a significant challenge and justification. The MCR represents the minimum capital below which a firm is deemed unable to guarantee payment of its liabilities, so breaching it would fundamentally undermine confidence in the run-off plan.
Once below the MCR, even a small unmodelled shock or a modest deterioration in experience could render the firm insolvent. The capital buffer at this point is effectively exhausted, making the scenario extremely fragile to any deviation from assumed conditions.
The concerns raised in the sub-100% SCR case: regulatory challenge, reputational risk, governance issues, and fragility to shocks, are all amplified when the projection falls below the MCR. In this case, the implications are not limited to regulatory non-compliance but extend to potential insolvency and loss of policyholder protection, which misses the intentions of the solvent exit analysis regulation.
Ultimately, falling below the MCR means the firm can no longer legally or practically be considered solvent, and the run-off cannot be described as a solvent exit at that point. An MCR breach immediately invalidates the purpose of the analysis because the scenario is already beyond the boundary of regulatory solvency. As such, while useful internally to understand the threshold, it would likely never appear in the final SEA output.
Although for many firms the approach to solvent exit modelling will be well developed at this stage, it is never too late for practitioners to challenge approaches and assumptions. And for those that are still to complete solvent exit analysis a mindful and purposeful decision about an acceptable solvency trajectory during exit should be core to analysis performed.
One way in which this point can be considered and analysed, especially when comparing across solvency trajectories under different assumptions and scenarios, is by constructing a table that allows ease of comparison by highlighting key financial metrics linked to the exit period. Setting out, for example:
For those charged with governance, the above analysis can be used to calibrate expectations and provide informed challenge.
There is unlikely to be a single correct answer to the question ‘what does solvent mean in the context of solvent exit’ and for most firms the answer will depend on several factors including underlying capital sensitivity, supervisory team expectations and management/Board risk appetite. However, regardless of whether you are a practitioner or someone charged with governance, we believe that the following questions will be important things to consider:
By considering alternative assumptions, velocity of impacts, and the factors that could lead to increased regulatory risks, practitioners can move from a static lens to a dynamic lens of the solvency trajectory during exit; which ultimately can lead to a more robust analysis.
