Enhancing the insolvency tools for insurance companies

In July 2022, the UK government proposed two key changes to the existing insolvency arrangements in respect of insurance companies as part of a wider set of reforms to the existing Financial Services and Markets Act 2000 (FSMA 2000).

These changes enhance the court's existing power to write down the liabilities of an insurance company under section 377 of FSMA 2000 and introduce a ban on the operation of termination provisions - so-called ipso facto provisions - for certain contracts.

The amendments seek to promote continuity of cover for insurance policyholders "by allowing earlier intervention by the regulatory authorities when an insurer was suffering financial distress, reduce costs to industry, and help maintain public confidence in the UK’s insurance sector."

The two changes are set out in schedules 12 and 13 of the Financial Services and Markets Bill (FSMB), which is at the committee stage in the House of Lords at the time of writing. 

In addition, and as part of its Solvency II review, the Treasury has proposed the introduction of a resolution regime for insurance companies, similar to the existing one for banks.

To aid understanding of the provisions contained in the two schedules (as well as the proposals for a resolution regime), we have prepared a high-level summary for you to download. It covers the existing insolvency arrangements in respect of insurers and a summary of the key changes proposed, both to the insolvency tools as set out in the FSMB and in relation to the insurance resolution regime. The summary also contains detailed analysis for each of the changes in the form of a Q&A.

_{Update: The Financial Services and Markets Act 2023 received Royal Assent on 29 June 2023, so the changes set out in Schedules 12 and 13 of the Financial Services and Markets Bill and discussed in our Q&A paper are now on the statute book.}