Restructuring & insolvency

In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Restructuring & insolvency.

Key developments in 2023

Important insolvency changes are afoot.

On 26 January 2023, HM Treasury published a consultation document in which it set out its intention to introduce a dedicated insurer resolution regime in the UK. The timing of these changes is, at present, uncertain.  The Government has indicated that it plans to legislate when parliamentary time allows.  A large majority of the respondents to the consultation suggested that the industry would require a minimum 12-month lead-in time.

Certain tools, including modified insolvency procedures, are already available to manage insurer failure.  However, HM Treasury was concerned that such arrangements may be insufficient to manage failures involving: (1) one of the largest firms, especially a rapid failure; (2) multiple insurers concurrently; or (3) insurers offering ‘niche’ business lines where replacement or substitute cover cannot easily be obtained. 
The new regime seeks to provide the UK authorities with new powers and tools to address such scenarios and to mitigate against the risk of an insurer failure threatening the stability of the wider economy.  It is proposed that the new regime will be based on the special resolution regime already in place for banks and building societies, which was most recently used in relation to the rescue of UK entities of Silicon Valley Bank.

In the meantime, it appears that the PRA will increasingly focus its attention on exit planning.  Only the largest and systemically most important insurers are likely to be subject to pre-resolution planning requirements under the new insurer resolution scheme.  However, the PRA indicated in their Dear CEO letter of 10 January 2023 that, separate from those reforms, they may require all insurers to prepare exit plans (to a level of detail commensurate with the size and impact of the insurer).  Consultation is ongoing in this regard.  All insurers should continue to keep a close eye on developments and to seek legal advice as necessary to assist them in complying with these future requirements.

What to look out for in 2024

The last two quarters of 2023 have seen the highest number of corporate insolvencies in over a decade in the UK.  This trend unfortunately looks likely to continue in 2024.  According to the latest Red Flag Report produced by Begbies Traynor, nearly 480,000 businesses in the UK reported that they are 'in significant' financial distress.  The report notes that the pressures of higher interest rates, inflation and weaker consumer confidence are being felt beyond just the consumer facing sectors (such as hospitality and retail) and are becoming widespread, particularly within the construction and property sectors.

This economic backdrop is all likely to have a significant impact upon the insurance market.  With increased numbers of insolvencies, there is a greater risk of insurance policies (such as D&O and business interruption cover) being called upon and premiums increasing as a result.  Businesses and directors may also look to address any gaps in their existing insurance coverage to mitigate against the increased insolvency risk.  For example, businesses with highly integrated supply and customer chains and which therefore may be most at risk of counterparty insolvency, could increasingly look to obtain trade credit insurance.  Trade credit insurers however may consider that they need to adopt a cautious approach when underwriting any such new business, in light of the uncertain economic outlook and increased levels of risk and pay-outs already being made under existing policies.

Written by Will Beck.