Articles - Implications of Regulators guidance on business transfers

The UK’s insurance regulators issued new guidance on insurance business transfers in January and February 2022. We consider the main areas of change and provide our views on the likely implications for future insurance business transfers. On 12 January 2022, the Prudential Regulation Authority (PRA) published its Policy Statement 1/22 (PS1/22) on insurance business transfers.

 By Dan Diggins, Head of Regulated Roles and Scott McGruther-Johnson, Consulting Actuary at Hymans Robertson

 The PRA also updated its Statement of Policy ‘The PRA’s approach to insurance business transfers January 2022 (Updating April 2015)’ which sets out its approach and expectations for insurance business transfers. Shortly afterwards, on 15 February 2022, the Financial Conduct Authority (FCA) published its guidance paper (FG22/1) on insurance business transfers. There is relatively little new material in the updated regulatory guidance. However, there are various amendments that offer clarity and guidance on a number of specific areas, including those changes brought about by the UK’s exit from the EU. These updates should also help firms to understand current trends, adhere to industry standards and meet their regulatory requirements.

 The top ten key amendments to consider and what this means:
 While the updates don’t cover much new ground, they have provided helpful clarity in a number of areas. Here are the top ten things you need to know:

 There is greater clarity on the information firms are expected to provide during the early stages of the transfer including the minimum information required before an Independent Expert (IE) can be appointed.

 For non-life firms proposing transfers which would materially increase their technical provisions, the PRA may decide to commission a section 166 Skilled Person’s review before considering the proposed transfer. Where they do so, this will inevitably lead to additional work for the recipient and may lead to the transfer being delayed, made conditional on findings from the Skilled Person’s review being addressed, or even cancelled. This is a potentially significant development.

 A trend of increasing regulatory focus on the independence of the IE continues and a greater onus is placed on the IE to demonstrate and maintain their independence throughout the engagement. There is a greater focus on the strength of the IE’s supporting team, including the capabilities, experience and independence of the IE’s peer reviewer.

 Since the UK’s exit from the EU, the PRA no longer has an obligation to consult other EU regulators on proposed transfers.

 Historically, such consultations had a minimum timeframe of three months. Similarly, firms no longer need to apply to the court to waive requirements to notify policyholders in EU states. The removal of these requirements may make it possible to execute future business transfers more quickly than was previously possible.

 The theme of clear policyholder communications continues and firms will need to give careful consideration to whether their communications provide policyholders with all the information they require in a manner that can be easily understood. The focus on vulnerable customers continues in this regard.

 The requirement to explain to policyholders how they can make representations directly to court, rather than indirectly by counsel, ensures that they are aware of how to make their views available for consideration. This initiative feels consistent with the trend of increasing focus on policyholder communication and engagement. Firms will need to carefully communicate with policyholders to mitigate the risk of additional work which could result from increased policyholder representations at court.

 The PRA signifies an intent to extend the IE’s scope to cover the wider chain of events and/or permutations where these are features of a proposed transfer. This is not new. However, formally setting this expectation should avoid situations where material features of a complex series of inter-related actions fall outside of the scope of the IE and receive insufficient independent scrutiny. In turn this should lead to greater protection to policyholders.

 The requirement to consider uncertainties associated with run-off, including those features that may emerge after Solvency II’s one-year time horizon and so which may not be adequately reflected in the capital requirements, should also lead to greater policyholder protection. The formal recognition that some risks are not adequately reflected in capital requirements will prevent firms from placing too much reliance on the regulatory balance sheet when assessing benefit security.

 From a process perspective, the PRA and FCA have clarified expectations of at least six weeks to review documents. Firms will need to build adequate time for the regulatory review of their documents, including court submission, into their project plans, or risk costly delays to the process.

 The FCA’s recognition that an electronic form of communication may provide adequate notification for some policyholders is likely to be well received by the industry because this method of communication will likely be logistically easier, faster and cheaper for companies to use. However, there is a need to demonstrate that this approach would provide adequate notification and this may not be straightforward for some policyholder cohorts.  

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