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KPMG Comments on PRA’s Toughened Stance on Insurance Run-Off Mechanism

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The Prudential Regulatory Authority (PRA) issued a draft supervisory statement (the Statement) earlier this week regarding Schemes of Arrangement for general insurance firms (Schemes) to replace previous guidance issued by the FSA in 2007. The Financial Conduct Authority (FCA) has yet to issue a consultation, but KPMG is already concerned that the PRA’s proposals could potentially be detrimental to both insurers and policyholders.

Whilst the Statement continues to recognise the use of Schemes as a valuable tool where an insurer is unable to meet its regulatory solvency position, it takes the opposite starting position in relation to Schemes for solvent general insurance firms.

Mike Walker, Head of Insurance Restructuring at KPMG in the UK, commented:

“If this Statement is adopted as it stands, it represents a significant tightening in the regulatory approach to the use of Schemes by solvent companies.

“KPMG’s UK Non-Life Run-Off Survey 2012 shows that over 250 Schemes of Arrangement for solvent insurance companies have been sanctioned by the courts to date. This demonstrates that courts and policyholders, as well as the FSA, have hitherto regarded these arrangements as offering a fair solution. KPMG is concerned that the PRA could believe that Schemes may no longer be an appropriate tool for solvent firms.”

Mr Walker explained: “ ‘Opt out’ schemes may help address any regulatory concerns. Obviously both policyholders opting out and the regulators need to be comfortable that sufficient provision is made for alternative cover in the post-Scheme environment.

“KPMG believes it is important that Schemes should continue to be available to all general insurers in the future, assessed on their individual merits, and no presumption made as to their benefit or detriment to policyholders.

“Solvent Schemes are not proposed simply to allow shareholders to extract capital, nor do they always seek to implement closure. Schemes can allow the market to operate more efficiently, assist in a restructure or allow groups to move excess capital around internally to support other lines of business.”