Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Policy Updates From the UK Prudential Regulation Authority

Skadden Publication / The Standard Formula

Robert A. Chaplin Caroline C. Jaffer James J. Pickstock

The UK Prudential Regulation Authority (PRA) has issued significant policy updates to enhance the regulatory framework for insurers and financial institutions in the UK:

  • Key among these is the Policy Statement on solvent exit planning for insurers (PS20/24), which mandates insurers to prepare for an orderly market exit through a Solvent Exit Analysis (SEA) and a Solvent Exit Execution Plan (SEEP).
  • Additionally, the PRA has proposed a new framework for reporting operational incidents and managing third-party risks (CP17/24), emphasizing operational resilience and the importance of timely, accurate reporting.
  • Enhanced liquidity reporting requirements (CP19/24) have also been introduced to close existing gaps and provide granular data on insurers’ liquidity positions, including new templates for cash flow mismatches, committed facilities and liquidity market risk sensitivities.
  • The PRA’s annual letter to chief executive officers outlines its 2025 priorities, focusing on implementing the Solvency UK reforms, managing risks in the bulk purchase annuity market, and enhancing operational resilience, with a strong emphasis on climate risk management.

These updates reflect the PRA’s commitment to maintaining the stability and competitiveness of the UK financial sector, urging stakeholders to ensure compliance to support financial stability and policyholder protection. We examine each of the proposals and announcements in turn and analyse the key aspects to consider.

PS20/24: Policy Statement on Solvent Exit Planning for Insurers

PS20/24 focuses on solvent exit planning for insurers, which is designed to ensure that insurers can “exit” the market in an orderly manner without causing significant disruption to policyholders or the financial system, with changes to come into effect from 30 June 2026.

This Policy Statement, published in December 2024, finalises the proposed policy and rules set out under CP2/24, as discussed in our 14 March 2024, update “PRA Announces Final Adjustments to ‘Solvency UK’ Rules and Consults on Requirements for ‘Solvent Exit’ Plans”.

The Policy Statement emphasises the importance of solvent exit planning as a critical component of an insurer’s risk management framework. There are new rules in the form of new a “Preparations For Solvent Exit” Part of the PRA Rulebook, as well as expectations in the form of supervisory statement (SS11/24). The following changes are to take effect:

  • BAU planning. There are new rules on planning for a solvent exit as part of its “business as usual” (BAU) basis. Insurers must document those activities in an SEA.
  • Expectations when solvent exit becomes a prospect. These new expectations, set out in SS11/24, only apply where a solvent exit becomes a reasonable prospect for a firm. In this case a firm must a produce a SEEP when a solvent exit becomes a reasonable prospect for an insurer.

New Rules: ‘Preparations For Solvent Exit’ Part of the PRA Rulebook

This new part of the PRA Rulebook will require insurers to prepare for a solvent exit so that, if the need arises, they can effect a solvent exit in an orderly manner.

Insurers must produce an SEA and update it whenever a material change has taken place that may affect its preparations for a solvent exit, and/or at least once every three years. Insurers must be able to provide to the PRA, on request, the current version of its SEA.

Where an insurer is a UK Solvency II firm which is part of a group, an insurer must take into account in its SEA the implications of, and any risk arising from, being part of the group.

Expectations Set Out in SS11/24

SS11/24 sets expectations for how a firm should prepare for an orderly solvent exit and provides detail on the contents of the SEA, the production of a SEEP, executing a solvent exit and the contents of the SEEP.

Some key points to note:

When a firm might consider a solvent exit. The PRA gives examples of when firms might consider a solvent exit, including when the firm (or part of its group) is facing financial issues, such as suffering underwriting losses, or non-financial issues, such as a major governance failure or loss of critical IT infrastructure with no signs of timely recovery.

Contents of the SEA. The level of detail in the SEA should be proportionate to the nature, scale and complexity of the firm. The SEA must include the following:

  • Solvent exit actions. These are main options that a firm considers appropriate for a solvent exit such as a run-off, sale or partial sale, a merger with another insurer or mutual, a transfer of all or part of its business under Part VII of the Financial Services and Markets Act 2000 (FSMA), a solvent scheme of arrangement and/or restructuring plan, or a combination of these. For each option, a firm should set out in its SEA the actions that would be needed to cease its PRA-regulated activities while remaining solvent. These will likely comprise several management action options to facilitate a complete solvent exit.
  • Solvent exit indicators. A firm should identify and monitor indicators that would inform it about when it may need to initiate a solvent exit and whether the execution of a solvent exit is likely to be successful. The firm should identify, and set out in its SEA, the trigger point at which it would be able to achieve a run-off of its liabilities to its existing policyholders (and while taking into account all other liabilities) in full as they fall due, should its Part 4A FSMA permission to effect contracts of insurance be removed.
  • Potential barriers and risks. The PRA lists internal and external potential barriers and risks to a firm’s execution of a solvent exit, of a financial and non-financial nature. Examples are broad ranging, from barriers such as refinancing needs during the exit process and over-reliance on cross-border collateralised reinsurance contracts which transfer part or all of the asset and liability risks, to a loss of access to critical IT infrastructure, or loss of key staff that are needed to complete a solvent exit.
  • Resources and costs. A firm should set out in its SEA the financial resources, including capital, reinsurance, funding and liquidity, needed to execute a solvent exit.
  • Communications. A firm should set out in its SEA the internal and external stakeholders that may be impacted by a solvent exit.
  • Governance and decision-making. A firm should set up clear governance arrangements, with a senior manager accountable, for BAU preparations for a solvent exit, including the review and approval of the SEA; as well as the escalation and decision-making regarding a solvent exit, including whether a SEEP should be produced.
  • Assurance. A firm should undertake adequate assurance activities for its solvent exit preparations. This assurance can be conducted internally, or externally as the firm considers appropriate.

Producing a SEEP, executing a solvent exit and contents of the SEEP. This covers the PRA’s expectations that apply when a SEEP is needed, during a firm’s execution of a solvent exit and what should be included in the SEEP, and includes:

  • When a SEEP is needed. A firm will be expected to produce a SEEP when there is a reasonable prospect that the firm may need to execute a solvent exit, which could be informed by its solvent exit indicators, or when the firm is requested by the PRA to produce a SEEP.
    • Challenge/review/approval. The firm’s board of directors (or equivalent) should provide sufficient challenge on, and review and approve the SEEP.
    • Detail. The SEEP should be sufficiently detailed so that the firm and the PRA can be informed how the firm will stop its regulated activities.
    • Fit for purpose. The SEEP needs to be appropriate for the firm (considering, for example, its business model and structure, and the particular circumstances leading up the solvent exit). Emerging barriers and risks should be dealt with. A firm’s SEA is a starting point for the SEEP.
    • Resources. The SEEP should be supported by:
      • Projections over the period of the solvent exit of future premiums and claims cashflows, gross and net of reinsurance, expenses, and SCR and MCR.
      • Analyses of risk factors and how these would be managed. For example, the composition of assets and liabilities by maturity and currency, currency risk, reinvestment risk, concentration risk, lapse risk and contractual risk in respect of derivative or reinsurance contracts.
      • Realistic exit valuations of assets and liabilities, including appropriate adjustments to their value.
    • Communications. The PRA expects a firm to set out in its SEEP a clear and detailed communication plan for stakeholders impacted by the solvent exit.
  • Actions during the execution of a solvent exit. There are several actions the PRA expects of firms, whilst going through a solvent exit. These include:
    • Informing the PRA the firm has decided to initiate a solvent exit.
    • Keeping the PRA informed throughout (as other stakeholders, where appropriate). o Updating its supervisor promptly where there are risks or concerns about successfully completing the solvent exit.
    • Ongoing monitoring of whether the solvent exit is likely to succeed.
    • Ongoing monitoring of solvent exit indicators and the implementation of SEEP, to inform a firm’s decision-making.
    • Undertaking the application to cancel a firm’s permissions, taking into account the timelines for doing so.
    • Continued compliance with PRA Threshold Conditions, and all applicable PRA Rules including the PRA Fundamental Rules.
  • Contents of the SEEP. There is a non-exhaustive list of contents of what the SEEP should include which mirrors some of the content headings of the SEA as well as a detailed execution plan for the solvent exit.

Changes to the Proposals After Consultation

The PRA made a number of changes to the final policy after considering the responses to CP2/24. Some of the key changes include:

  • Exclusion of Lloyd’s of London managing agents from the scope due to the unique structure of the Lloyd’s market, including the chain of security and the reinsurance to close processes. The PRA will cooperate with the Society of Lloyd’s on solvent exit planning for managing agents to ensure appropriate similar orderly exit outcomes within the Lloyd’s market.
  • Clarification that the Insurance Resolution Regime (IRR), if introduced, may impact the policy.
  • Further clarity and elaboration on a firm’s solvent exit planning, including the relevance of policyholder liabilities and other liabilities, and the expectation that a firm’s SEA should include an option of a run-off of the firm’s policyholder liabilities.
  • Clarification that a firm can draw on and adapt its work on Own Risk and Solvency Assessment (ORSA), capital management plan, or recovery and resolution planning to meet the expectations in a firm’s SEA. Further the SEA can be set out in a separate document or as a discrete section of the ORSA, capital management or recovery and resolution plan.
  • Removal of the timing expectation of one month for a firm to produce a SEEP. Instead, the PRA will set a timescale for the firm to provide its SEEP.

CP17/24: Operational Incident and Outsourcing and Third-Party Reporting

On 13 December 2024, the PRA issued a consultation paper, CP17/24, proposing to establish a framework for timely, accurate and consistent reporting of certain operational incidents, and notification and reporting of material third-party arrangements. The consultation closes on 14 March 2025, and the proposed implementation date for the reforms in CP17/24 is no earlier than the second half of 2026.

CP17/24 is part of a series of policy development initiatives undertaken by the PRA to create a stronger regulatory framework to promote operational resilience. CP17/24 sets the context for the proposed changes, emphasising the increasing reliance on third-party service providers and the growing complexity of operational risks. The PRA highlights the need for a more structured and consistent approach to managing these risks, particularly in light of recent high-profile incidents that have underscored vulnerabilities within the financial sector. The proposed policy’s aim is to allow the PRA to collect good quality, consistent data focusing on operational incidents and material third-party arrangements which pose the most risk to firms and the financial sector in order to advance the PRA’s objectives. This aim is to be achieved by prioritising the most significant risks to operational resilience and setting out standardised reporting requirements (designed to be interoperable with similar regimes in other jurisdictions).

The CP17/24 provisions which deal with operational incident reporting are relevant to all banks and insurers (as defined in the paper). Those provisions that deal with outsourcing and third-party reporting are relevant to all PRA-regulated firms.

CP17/24 proposes amendments to the PRA Rulebook, as well as a new draft supervisory statement providing expectations in respect of operational resilience, and amendments to the PRA’s current expectations on outsourcing and third-party risk management contained in SS2/21.

Operational Incident Reporting

The PRA proposes a standardised framework for reporting operational incidents.

Definition of operational incidents. Incidents, which may be either a single event or a series of linked events, are defined as those that disrupt a firm’s operations such that it disrupts the delivery of a service to an end user external to the firm, or impacts the availability, authenticity, integrity or confidentiality of information or data relating or belonging to such an end user.

Proportionate approach. The PRA proposes to take a proportionate approach to operational incident reporting (and the proposals would not be triggered by a potential, uncrystallised event).

Reporting thresholds. Firms would be required to report an operational incident when it meets one or more of the thresholds set by the PRA in new rules to be included in the PRA Rulebook. These include where the operational incident poses a risk to:

  • The stability of the UK financial sector (where the firm is a systemically important firm or a Solvency II insurer (as defined in accordance with the appropriate regulations).
  • The safety and soundness of the firm.
  • The appropriate degree of policyholder protection (for insurers).

This is not intended to be a definitive list, but rather a range of factors should be considered when determining whether an operational incident meets the thresholds. Damage to the firm or the sector’s reputation, or being unable to provide an adequate service are provided as examples. Cyber attacks, process failures, system update failures and infrastructure problems are all set out in detail in the new draft supervisory statement as potential examples of operational incidents.

Important business services. Where an operational incident involves the disruption of one or more importance business services of a firm, impact tolerances must be set by the firm and further action must be taken to manage the potential impact, among other steps.

Phased reports and timelines. Firms are expected to provide:

  • An initial report within 24 hours (this could be with limited information as it is understood a firm may be focussed on managing the operational incident).
  • Where the incident has not been resolved at the time of the initial report, an intermediate report will be required as soon as practicable, and multiple intermediate reports if numerous significant changes occur.
  • A final report within 30 working days (or up to sixty working days where this is not possible).

Content of reports. Specific information is to be included in incident reports, such as the details of the incident, impact assessment and incident closure (including root cause analysis, lessons learned and remedial actions taken).

Outsourcing and Third-Party Risk Management

CP17/24 outlines the PRA’s proposals for expanding the scope of its data collections from material outsourcing arrangements to all material third-party arrangements (not just those in respect of outsourcing). The aim is to better assist the PRA in identifying systemic risks posed by third-party providers and support the recommendation of potential critical third parties (or “CTPs) to be designated by HMT.

What counts as a material third-party arrangement? New definitions are to be incorporated into the PRA Rulebook whereby “third-party arrangement” is broadly defined as a “as any arrangement whereby a person provides a product or service to a firm whether or not this would otherwise be undertaken by the firm itself, provided directly or by a sub-contractor, or provided by a person within the same group as the firm”.

The PRA plans to only capture data on “material” third-party arrangements to be defined in the Glossary Part of the PRA Rulebook. These are those third-party arrangements which are of such importance that a disruption or failure in the performance of the firm could:

  • Pose a risk to the firm’s safety and soundness (and for insurers, an appropriate the degree of policyholder protection) or the stability of the UK financial system.
  • Cast serious doubt upon the firm’s ability to satisfy threshold conditions, the Fundamental Rules and other parts of the PRA Rulebook relating to Operational Resilience.

Determining which third-party arrangements are material will be a matter of judgement for firms, and the PRA does not propose to produce a definitive list.

Notifications. Firms (other than Non-Directive Firms) will be required to give the PRA notice when entering into or significantly changing, a material third-party arrangement, which due to the relevant risks, necessitates a high degree of due diligence, risk management or governance by the firm. Further guidance of when the PRA would expect such a notification has been set out in the amended SS2/21.

The PRA has set out in CP17/24 the proposed categories of data fields it plans to collect (includes details of the parties, the product and service provided, whether this constitutes an Important Business Service, and the country where the service provided, where they rank in the supply chain, and the due diligence firm have conducted for each arrangement).

Register. The proposals refer to plans for banks, insurers and large credit unions (with at least £50 million in total assets) to maintain and submit a structured register of all of their material third-party arrangements to the PRA through the FCA RegData platform. The data fields required to be maintained are the same as those required for notifications.

To minimise the reporting burden on firms, the PRA provided proposed templates for the Notifications and Register, which are appended to CP17/24.

CP19/24: Closing Liquidity Reporting Gaps and Streamlining Standard Formula Reporting

On 11 December 2024, the PRA issued CP19/24 proposing to close liquidity reporting gaps for large insurance firms with significant exposure to derivatives or securities involved in lending or repurchase agreements. In addition, this CP19/24 also sets out the PRA’s proposals to remove the expectation for life insurers with internal model (IM) permissions to annually submit the SF.01 template containing Solvency Capital Requirement (SCR) information calculated using the Standard Formula (SF).

The consultation closes on 31 March 2025, and the proposed implementation date for the reforms in CP19/24 will be 31 December 2025. However, the PRA proposes to apply the proposed liquidity reporting thresholds retrospectively. Firms would be subject to the requirements if they meet the thresholds at the proposed implementation date of 31 December 2025, based on their balance sheet over the three quarterly reporting periods prior to implementation.

Background to the Proposals

The PRA defines liquidity risk as the risk that a firm is unable to realise investments and other assets in order to settle financial obligations when they fall due. The PRA considers that SS5/19 — liquidity risk management for insurers — remains an important part of the PRA’s supervision of liquidity risks, but considers that this needs to be supplemented by closing the gaps in the PRA’s reporting framework.

The PRA notes that UK life insurers are increasingly using derivatives and other financial instruments to manage various risks to their business. CP19/24 provides background to insurers’ exposure to these instruments, citing that the gross notional derivatives exposure of UK life firms has more than doubled to £1.4 trillion since 2018. The PRA considers that such instruments can be a significant source of liquidity risk because they can require firms to increase margin or collateral payments when market conditions change, resulting in rapid and substantial outflows. They note the impact on individual insurers can be material, depending on the size of their derivative positions and their level of preparedness for margin calls.

The PRA refers to market stresses over the past five years that have given the regulator the opportunity to assess liquidity risk management in practice, including the “dash for cash” uncertainty of March 2020, in the early stages of the Covid 19 pandemic, and the liability-driven investments (LDI) episode in September 2022, due to a proposed change in UK fiscal policy which resulted in falls in gilt prices, the impact of which was increased by the forced selling of gilts by LDI funds (necessitating UK insurers to raise a material amount of liquidity to meet margin calls on derivative positions). CP19/24 provides interesting detail on the effect these episodes had, and the lack of information available to the PRA at the time.

The November 2024 Bank of England system-wide exploratory scenario (SWES) exercise is also referred to by the PRA, noting that in the SWES’s hypothetical scenarios insurers faced significant liquidity needs, comparable to the liquidity demands faced during the LDI episode.

Additionally, the PRA notes that international standard setters such as the International Monetary Fund (IMF), the Financial Stability Board (FSB), the International Association of Insurance Supervisors (IAIS) and the European Insurance and Occupational Pensions Authority (EIOPA) have considered liquidity risks in an insurer or non-banking financial institutions context. It also notes several institutions collect additional and more granular information than the UK on this topic, including the EU (with higher standards in France and Belgium) and the US.

The PRA engaged with industry, through regular meetings with industry representatives, ahead of producing the proposals.

Proposals for Enhanced Liquidity Reporting

CP19/24 proposes amendments to the Reporting Part of the PRA Rulebook as well as introducing four new proposed liquidity reporting templates and instructions, which are appended to the paper.

The enhanced reporting requirements would not apply to the Society of Lloyd’s and its managing agents, third-country branches or non-Solvency II firms.

The requirements will only apply to firms that meet the liquidity risk conditions as provided for in the new rules. These include the following:

  • The value of the institution’s total assets (with some exclusions) exceeds £20 billion over three consecutive quarterly reporting periods on average.
  • The total notional value of all the institution’s derivative contracts not held in unit-linked and index-linked contracts exceeds £10 billion at any time.
  • The total value of the underlying security on- and off-balance sheet, excluding assets held for index-linked and unit-linked contracts, involving the lending or repurchase agreements exceeds £1 billion at any time.

If firms meet any of these conditions, they must commence liquidity risk reporting on the first reporting reference date after these conditions have been met.

When a firm falls below the thresholds on three consecutive annual reporting dates, it must cease to report.

The rationale is to allow the PRA sufficient information to supervise large firms and monitor liquidity risk more effectively in the insurance sector, both in normal times and in stress. The proposals would allow the PRA timely access to:

  • Granular data on the cash flows that expose firms to short-term liquidity needs.
  • Information on the availability of liquid assets that could be used to meet these liquidity demands.
  • Information on the market variables that could lead to material outflows.

The PRA notes that this information would allow it to assess the soundness of firms’ liquidity positions and ensure it can engage with firms to address their vulnerabilities ahead of market stresses.

Cashflow mismatch template (long and short form versions). One of the new templates proposed is “cash flow mismatch template” which would cover a range of information related to a firm’s liquidity position, including:

  • Cash flows resulting from (re)insurance contracts, debts and other financial contracts.
  • Counterbalancing capacity provided by investments.
  • Outflows contingent on external events such as downgrades or market shocks.

The template has two versions, long and short. The short form template included a subset of data on the fastest-moving drivers of liquidity strain at insurers.

The long form template is proposed to be submitted monthly (with a 10-business day remittance period), whilst the short form template is to be provided within one business day after month end.

Firms with individual ring-fenced funds or matching adjustment portfolios should submit a cashflow mismatch template for each ring-fenced fund or matching adjustment portfolio.

Committed facilities template. The PRA proposes to introduce a requirement for solo firms and groups to report on committed credit and liquidity facilities, at the solo and group level. The template will capture all committed credit and liquidity facilities received from third parties with a total committed amount that is greater than £10 million — or the foreign currency equivalent.

Firms must submit this template annually within 70 business days from their financial year end.

Liquidity market risk sensitivities template. The PRA proposes that solo firms report on the sensitivity of their assets and collateral demands to changes in market conditions using a liquidity market risk sensitivities (L-MRS) template. This template would capture the sensitivity of:

  • The effect of changes in market conditions on the value of unencumbered assets, including government bonds, investment grade corporate bonds and shares.
  • Variations in the mark-to-market value of derivatives, as well as the value of the collateral held in respect of derivatives, securities financing transactions or reinsurance contracts, to changes in market conditions.

The aim is to focus on the value of key elements for a firm’s liquidity position, allowing the PRA to estimate in an efficient way whether certain changes in market conditions might give rise to the potential liquidity strain. Further information is available in the instructions to the template.

The proposal is that firms must submit the L-MRS template 30 business days after the end of each quarter. This is more frequent than the existing solvency MRS, submitted half-yearly.

Removal of the Expectation for Life Insurers With IM Permissions To Annually Submit the SF.01 Template

The proposals update supervisory statement SS15/16 Solvency II: Monitoring model drift and standard formula SCR reporting for firms with an approved internal model.

The PRA acknowledges that the template may be less effective in detecting model drift in internal models for life insurance firms. For example, SF treatment of non-vanilla assets, particularly internally securitised and internally rated assets such as equity release mortgages commonly invested by life insurers, can lead to significant changes in the SF SCR year-on-year while the IM SCR remains more stable.

As such, the SF SCR is less informative of model drift for life insurance firms with such investments, and the PRA is proposing not to require it in the future, and the current deadline for life insurers to submit this template for year end 2024 has been extended to 15 September 2025. Non-life and composite IM firms, however, will be expected to continue submitting the template.

PRA: New Year Updates

On 9 January 2025, the PRA published its annual letter to chief executive officers outlining its key priorities for the UK insurance sector for 2025, which we summarize below.

Additionally, we explore 10 key takeaways from the Parliamentary House of Lords Financial Services Regulation Committee meeting with top PRA officials on 8 January 2025.

Letter to CEOs: Priorities for 2025

The PRA’s letter is not exhaustive in listing its priorities, but it is usually a useful guide to the issues that are top of mind for the regulator, and supplements ongoing supervision and firm specific feedback. This year the PRA’s priorities this year include the following:

Solvency UK implementation and policy reforms. The PRA has completed the Solvency II review and reinstated assimilated law into the PRA Rulebook. The focus for 2025 is to ensure these reforms are embedded to achieve objectives such as fostering a vibrant, innovative and internationally competitive insurance sector; protecting policyholders; ensuring safety and soundness of firms; and supporting firms to make long-term investments to support growth. Key initiatives include:

  • Setting up a new Matching Adjustment (MA) permissions team to assess MA permissions more quickly.
  • Streamlined internal model application assessments to allow firms to address modelling limitations or uncertainty in a pragmatic way.
  • Implementing a new “mobilization” regime within the New Insurers Start-up Unit;
  • Consolidating and clarifying the approach to authorising and supervising third-country branches, moving the need to hold branch capital and lessening the reporting burden.
  • Consultations to reforms proposed in November 2024, to the UK ISPV regime to support competitiveness and growth.

BPA market developments, including funded reinsurance. The PRA continues to observe rapid growth in the bulk purchase annuity (BPA) market, driven by high demand for corporate defined-pension-scheme risk transfer solutions. This growth necessitates prudent management to ensure that competition for BPA business does not weaken pricing discipline or risk management standards. The PRA considers that the structure and complexity of BPA transactions is evolving, introducing features like long price locks and trustee termination options, which may require firms to implement new risk management approaches or limits to their exposure to these features.

In 2025, the PRA will maintain its focus on funded reinsurance due to concerns about the rapid build-up of risks in the sector, which could pose systemic risks if not properly controlled. The PRA’s supervisory statement SS5/24 on funded reinsurance outlines expectations for UK firms’ use of funded reinsurance. However, firms’ self-assessments indicate that they are not yet fully meeting these supervisory expectations, with many requiring further work to address gaps.

Examples of such gaps given in the letter include:

  • Internal investment limits. Current limits for aggregate exposures are insufficient to prevent systemic risk build-up.
  • Single name exposure limits. These do not align with the expectation that single counterparty exposures should not threaten firms’ solvency risk appetite upon recapture.

The PRA expects firms to make rapid progress in addressing these gaps. A funded reinsurance recapture scenario will be included in the 2025 Life Insurance Stress Test (LIST 2025) launched in January 2025. If firms do not achieve the necessary risk management practices, the PRA may consider further use of its powers to address these risks.

Cyclicality in the general insurance (GI) market. The PRA advises general insurance firms to remain vigilant to changes in pricing conditions and maintain underwriting discipline, and focus on adequate reserves. The PRA notes that it considers that GI firms continue to make overly optimistic assumptions about future profitability in their internal models, so the PRA will continue to focus on this and firms should expect to justify their assumptions. The PRA also cautions against assuming that reinsurance rates will soften materially in the near future. Underwriting risks for cyber events will continue to be a focus and the PRA plans to analyse data it has obtained. Firms should ensure they can identify, manage and quantify their risk across their GI portfolios, including considering their scenario testing as well as emerging risks such as artificial intelligence.

Evaluating and maintaining resilience. LIST 2025 will provide insights into the financial resilience of the largest UK life insurers, with individual firm results published for the first time for 11 major annuity writers. The PRA will also focus on liquidity resilience, encouraging improved liquidity reporting and early application for eligible firms in the Bank of England’s new collateralised loan facility for non-banks. The PRA also intends to release the results of the 2024 thematic review of life insurance liquidity risk appetites.

Solvent exit planning. The PRA flags the new provisions of PS20/24 encouraging exit of the market in an orderly way coming into force on 30 June 2026.

Operational resilience, cyber security and third-party risk. By March 2025, firms must demonstrate their ability to remain within impact tolerances for all important business services during severe disruptions. The PRA expects significant progress in strengthening response and recovery capabilities, addressing cyber threats and managing third-party risks.

Climate Risk Management. The PRA emphasises the need for further progress in embedding climate risk management practices, particularly in scenario analysis and risk management. A consultation on updating SS3/19 is planned to support firms’ progress in this area as the PRA’s climate expectations are not yet fully implemented.

In summary, the PRA’s 2025 priorities focus on the evolution of the insurance industry (embedding Solvency UK reforms, managing BPA and funded reinsurance risks, cyclicality in the GI market) and evaluating and maintaining resilience (financial resilience of life insurers, liquidity resilience, solvent exit planning, and addressing operational and climate risks).

Ten Takeaways From House of Lords Financial Services Committee Meeting

The January House of Lords hearing featured discussions with PRA Deputy Governor for Prudential Regulation Sam Wood and Executive Director for Prudential Policy David Bailey. The focus was on how the PRA has met and could continue to meet its secondary competitiveness and growth objective (SCGO) mandate introduced by the Financial Services and Markets Act 2023, in order to ensure the competitiveness as the UK as a market for financial services on a global stage. This affects PRA policymaking but does not affect decision-making regarding individual firms.

1. Basel 3.1 Adjustments

The session highlighted significant changes to the initial proposals for Basel 3.1, aimed at supporting competitiveness and growth. The PRA is considering further adjustments to the Basel 3.1 framework to ensure it aligns with the new SCGO. These adjustments are intended to reduce the regulatory burden. The PRA referred to reducing the capital requirement for SMEs by about a quarter relative to the international standard while maintaining safety and soundness. The specific details of these adjustments were not fully elaborated, but the focus is on making the framework more conducive to growth.

2. Matching Adjustment Investment Accelerator

A new proposal, referred to as the “matching adjustment investment accelerator”, is under consideration. This would address the situation where insurance companies need to invest rapidly but face delays in obtaining authorisation for certain types of investments. The proposal suggests a sandbox-like approach, allowing insurers to proceed with investments and seek approval retrospectively. This measure is expected to facilitate quicker investment decisions and enhance the growth potential of the insurance sector.

3. Reduction in Reporting Burden for Banks

The PRA is exploring the scope to reduce the reporting burden on banks, similar to the cuts already made on the insurance side. This initiative is part of the broader effort to streamline regulatory requirements and reduce compliance costs for financial institutions without compromising the quality of regulatory oversight.

4. Rationalisation of Regulatory ‘Have Regards’

The PRA alluded to the possibility of simplifying and rationalising the existing regulatory clusters of “have regards” or considerations the regulator must take into account. The current framework includes multiple clusters related to climate and environment, growth and competitiveness, financial services agenda, competition and regulatory principles. The proposal suggests consolidating these clusters to reduce bureaucratic complexity and make the policy-making process more efficient. At present, collectively they make the policy-making process more bureaucratic, which in turn affects what the regulators have to publish and what firms have to read. Simplification and rationalisation of the “have regards” could ease the regulatory burden on financial institutions and support their growth objectives.

5. Enhanced Focus on Competitiveness and Growth in Supervision

The PRA is rolling out training for supervisors to ensure they understand the importance of the SCGO and how it should influence the overall approach to supervision. But, as mentioned above, this does not affect individual, firm-specific decisions that supervisors are taking.

6. Timeliness of Authorisations and Approvals

The PRA is placing a greater focus on the timeliness of authorisations and approvals. This includes expedited authorisation procedures for certain types of insurance special purpose vehicles (ISPV), with a target turnaround time of 10 days. The emphasis on quicker decision-making processes is intended to reduce delays and support the growth ambitions of financial institutions.

7. Strong and Simple

The PRA is consulting on a simplified capital regime for smaller UK-focused banks under the “strong and simple” regime. This initiative aims to significantly reduce the cost of regulation for smaller firms, enabling them to grow faster and compete more effectively. The focus is on ensuring that the regulatory framework is proportionate to the size and complexity of the firms. The next version of strong and simple is expected over the course of March or April.

8. Potential Changes to Minimum Requirement for Own Funds and Eligible Liabilities (MREL) Requirements

The PRA is currently consulting on increasing MREL thresholds to address concerns that the current thresholds are too low (lower than the EU and US) and create a significant burden for smaller banks. The consultation is considering whether the thresholds can be raised to reduce the compliance burden and support the growth of smaller banks.

9. Engagement with External Researchers

The PRA is also in the process of setting up a network of external researchers to advise on competitiveness and growth. Drawing on that expertise, the PRA has rolled out training across the organisation to ensure that considerations of competitiveness and growth are fully weighed by those exercising policy-making functions.

10. Reduction in Deferral Period for Bankers’ Pay

The PRA is consulting on a proposal to significantly reduce the length of deferral for bankers’ pay. This measure is seen as important to maintain London’s competitiveness as an international financial centre. The reduction in the deferral period is expected to make the UK more attractive to top talent in the banking sector, thereby enhancing the overall competitiveness of the financial services industry.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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