Prudential Regulation Authority Rulebook

7.1

As laid out in Conditions Governing Business 2.6 and Non-Solvency II Firms – Governance 3.6, an insurer, other than a small non-Directive insurer, must take reasonable steps to ensure continuity and regularity in the performance of its activities, including the development of contingency plans. In light of this obligation, an insurer, other than a small non-Directive insurer, is expected to develop a liquidity contingency plan.

7.2

As part of its liquidity contingency plan, an insurer, other than a small non-directive insurer, is expected to maintain a clear process and plan for recognising and addressing a liquidity stress. This should be documented and maintained, and should set out the strategies for preserving liquidity and making up cash flow shortfalls in adverse situations. This plan is expected to set a framework with a high degree of flexibility so that an insurer can respond quickly to a variety of liquidity stresses which disrupt its ability to fund some or all of its activities in a timely manner and at a reasonable cost.

7.3

The PRA expects a liquidity contingency plan to:

• be consistent with paragraph 1.63(d) of EIOPA Guideline 26 and set out alternative sources of funding, assessing the amount that can be raised from particular sources, the costs involved and the time needed to raise the funds and the applicability to different scenarios;
• set out the process to invoke the plan, taking into account an insurer’s liquidity risk appetite and any established liquidity risk limits. This includes how an insurer would identify a liquidity stress event, using a range of early warning indicators;
• set out a decision-making process and a range of actions that could be taken in response to a liquidity stress and set out clear escalation and prioritisation procedures, detailing when and how each of the actions can and should be activated;
• assign roles and responsibilities to specific decision-makers and set out clear reporting lines; and
• set out clear communication plans for both internal and external stakeholders.

7.4

In the development of its liquidity contingency plan, an insurer is expected to take into account:

• its ongoing analysis of liquidity risk and the outcomes of its own stress tests, including the impact of stressed market conditions on its ability to monetise assets or require market-imposed haircuts;
• the extent to which typically available market funding options are not available;
• the risk of non-enforceability by the insurer of contingent funding arrangements, such as ‘Materially Adverse Change’ or ‘MAC’ clauses or ‘Conditions Precedent’ or other covenants, that may limit their use in stressed conditions;
• the financial, reputational or other consequences for the insurer of executing its liquidity contingency plan; and
• its ability to transfer liquidity between entities, considering any legal, regulatory or operational constraints, including where relevant, cross-border constraints.

7.5

In the case of groups, the PRA expects an insurer to develop a liquidity contingency plan that limits intra-group contagion in a stress event. This could involve the plan assuming limited, if any, reliance by individual entities on other group entities for liquidity and treating the parent company as a lender of last resort. A liquidity contingency plan for the group is also expected to be consistent with those of the relevant individual legal entities.

7.6

To ensure it remains operationally robust, the PRA expects an insurer will periodically test its liquidity contingency plan through simulation exercises and update it as appropriate. The appropriate frequency of testing and updating will depend on the scale and complexity of the insurer’s activities and its contingency plan. Key aspects of this testing are expected to include:

• ensuring that roles and responsibilities are appropriate and understood;
• testing key assumptions and identification of dependencies, such as the ability to sell or repo assets, or periodically draw down credit lines. Further contingencies are expected to be identified if those dependencies are unavailable; and
• evaluating the accessibility of committed facilities and whether contractual or operational constraints could limit the insurer’s ability to access them.