This blog series is a practical guide on solvent exit planning for practitioners and those charged with governance. Part 3 looks at the key elements involved in defining solvent exit scenarios.
Actuarial modelling and resource assessment is a critical component of solvent exit planning. Its primary purpose is to assess whether a firm enters solvent exit at a point where it still holds sufficient financial resources to meet all liabilities as they fall due throughout the entire run off period.
This includes maintaining a sufficient solvency capital requirement (SCR) level to ensure an orderly run-off and identifying whether additional resources would be required to complete the exit safely.
Modelling typically reflects both the conditions leading up to exit (including the solvent exit scenario, point of non viability and management’s decisions prior to exit), and the period following the decision to enter solvent exit, covering the full run off horizon.
Defining the scenario is central to solvent exit modelling. Key elements include:
The point of non-viability is reached when management concludes that the business model is no longer viable due to a combination of financial and non-financial factors.
An important early step in solvent exit planning is to identify the firm-specific drivers that would fundamentally disrupt the business model and ultimately trigger a solvent exit.
These may include capital strain, liquidity pressure, business model failure, or the exhaustion of feasible management actions to support recovery. Clearly defining the point of non-viability ensures that the modelling reflects realistic pathways towards the exit decision.
The PRA SS11/24 requires firms to base its preparations for a solvent exit on the prospect that it may need to execute a solvent exit in either stressed or non-stressed circumstances.
Firms often need a stressed backdrop to reach the starting point of exit, even if the eventual exit is strategic. This is particularly relevant where a firm is currently highly solvent or profitable.
The scenario should reflect how quickly conditions worsen. Different deterioration paths can materially affect available management actions, solvency outcomes, and timing of the exit decision.
Fast deterioration (for example market shocks, liquidity events, operational failures, rapid sentiment driven lapses) tests how quickly financial resilience can erode and whether management actions remain feasible to support recovery.
For modelling practicality, firms may assume that the stress event, the implementation of management actions, and the exit decision occur in close succession or even simultaneously (for example at time zero).
This approach simplifies balance sheet projection while still capturing the compressed decision-making period typical of fast deterioration.
Slow deterioration (for example sustained profitability decline, prolonged expense strain) tests whether the firm reaches a position where exit becomes strategically or financially necessary.
From a modelling perspective, slow deterioration can be represented by multi-year adverse trends (for example gradual expense increase, declining margins, increased lapses) that cumulatively drive the firm toward non-viability.
This allows the scenario to capture a realistic deterioration pathway, the phased deployment of management actions, and the point at which these actions are no longer sufficient to sustain the business.
Scenarios must reflect which management or recovery actions are realistically available (and would be taken) before and after the exit decision. Prior to the decision, firms may retain a broad set of levers, such as pricing changes, expense controls, investment adjustments, or reinsurance actions.
However, post-decision flexibility typically reduces materially, as many business-as-usual actions are no longer feasible or appropriate in the context of an orderly exit. However, in some cases flexibility may increase, where management may take value-destructive actions (for example accelerated de-risking, ceasing new business immediately) when these are required to protect policyholders and support an orderly run-off.
Clearly distinguishing which actions remain credible at each stage is essential to ensuring the scenario reflects realistic behaviour and governance constraints.
In summary, firms typically adopt a stressed scenario as the backdrop to determine the starting balance sheet for solvent exit analysis. It is common to use an existing model or scenario as the base, drawing on scenarios developed for the ORSA, capital management planning, or recovery and resolution planning.
However, solvent exit modelling generally requires additional exit-specific considerations that need to be reflected at different stages of the exit pathway: pre-exit, at the exit decision point, and during run-off. These commonly include:
These features may be incorporated through explicit out-of-model balance sheet adjustments or embedded within the modelled projection, depending on modelling capability and proportionality.
In practice, solvent exit modelling is often an iterative exercise, with scenarios and adjustments refined to identify the minimum level of financial resources required and the appropriate exit starting point. Many firms find it more practical to apply certain adjustments outside the model (for example redundancy and retention payments), while others embed these directly into the model logic where systems allow.
