The PRA has put down a clear marker that policyholder interests must come first when insurers are looking for ways to return capital to shareholders. It is particularly concerned that schemes of arrangement used by solvent insurers to achieve an early exit from the market can expose policyholders to a forced commutation of their cover and to settlement of their claims at less than full value. Shareholders, on the other hand, benefit from having earlier access to their capital than if the business had been run off in the usual way.
The PRA’s conclusion that this type of scheme is “unlikely” to be compatible with its policyholder protection objective (see CP6/13, issued on 9 September 2013) has generated a considerable amount of unease. Its approach is representative, perhaps, of the shift of both the PRA and the FCA towards greater protection of consumers. However, the PRA needs to recognise that it may also deter proposals that would be supported by the vast majority of a properly defined solvent creditor class.
The PRA’s consultation on capital extractions by general insurers in run-off (see CP7/13, also issued on 9 September 2013) is less controversial than CP6/13. Both consultations close on 26 October 2013.
Please click here for our briefing on the PRA’s comments on schemes of arrangement and their implications for insurers.