Broking Business Winter 2020/2021: Resilience versus wind-down in 2021

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Many insurance firms have coped well with the effects of the pandemic. But, as the fallout continues, what should their focus be this year?

Covid-19 has had a mixed impact on insurance intermediary firms, very much depending on their sector expertise.

2020 was a year of survival for many firms, buoyed up by several factors. The rate increases across the markets, combined with their ability to reduce expenses, have helped them preserve profits through the Covid-led restrictions imposed on us all. And they’ve benefited from various Government-led initiatives such as the furlough scheme, bounce-back loans and CBILs.

This year is going to be more of a challenge. It’s strongly predicted that there will be an economic slowdown caused by the inevitable end to the Government initiatives, the need to repay debt and the wider exposure to customer bad debts arising from these conditions.

In preparation for this, the FCA has been monitoring the situation and engaging with firms to try to prevent outcomes that harm customers and to protect client money. Its initiatives have included:
  • the Covid impact assessment survey sent to some 13,000 firms across various sectors
  • the ‘Dear CEO’ letter on operational resistance and client money procedures
  • guidance notes on financial and operational resilience
  • the insistence on firms establishing ‘wind-down plans’ – in case it all goes wrong.

It’s clear the FCA is predicting many firms will be under financial stress in 2021. It therefore expects them to have sufficient capital and operational resources to get through this period and, if not, to give them early warning that they will be unable to do so.

Operational resilience

The FCA expects firms to be operationally resilient and, in particular:

  • consider their business services and how disruption to these can have an impact beyond their own commercial interests
  • set a tolerance level for disruption and ensure they can deliver their services within these limits during severe (but plausible) scenarios
  •  map and test important services to identify vulnerabilities in their operational resilience, and drive change where needed.

Financial resilience

Similarly, the FCA expects firms to be financially resilient. They should:

  • plan ahead and ensure sound management of their financial resources, rather than employing a ‘wait and see’ approach
  • assess their current capital requirements against their current capital availability and make sure they meet their regulatory capital requirements at all times. They must also have a sufficient buffer to account for any plausible eventualities
  • if they find they have insufficient capital, plan to add more to make up for any shortfall. And, if difficult, engage with the FCA early on to plan how to exit the market in an orderly manner, taking steps to reduce harm to customers and the market and, where relevant, protect client money at all times
  • maintain an up-to-date wind-down plan that takes into account the current challenges posed by Covid.

Wind-down plans

Wind-down is the process by which a firm:

  • identifies the steps and resources needed to wind down its business, especially in a situation where resources are limited
  • evaluates the risks and impacts of a wind-down and considers how to mitigate them.
A wind-down plan is designed to reduce the risk of negative effects on the consumers and market participants when a firm closes out its regulated business, and to safeguard client money at all times. 

Wind-down plans will be different for every firm, based on circumstances. But they share some common characteristics. What should they all consider?

  1. The scenarios that could lead to a firm no longer being economically viable.
  2. The adequacy of governance processes for the wind-down.
  3. The procedures to monitor, control and support timely wind-down decision-making
  4. The overall plan to steer the firm to wind down its business in an orderly way.
  5. The resources, both financial and non-financial, needed to carry out and support an orderly wind-down process.

The concept of a wind-down plan has always been there. In these difficult times it is now a regulatory requirement where circumstances dictate. 

For more information about any issues raised in this article, please contact Paul Goldwin.