The UK Government has published a Consultation1 which sets out its proposals for targeted (but significant) amendments to certain aspects of the existing UK insolvency arrangements for insurers.  These existing arrangements comprise a modified version of standard corporate insolvency procedures, with certain additional provisions, with the key options in the event of insurer financial difficulty/failure being a run-off or transfer of insurance business, a scheme of arrangement or the administration or winding up of the insurer.

In this consultation the UK Government is proposing significant enhancements to the Court's existing powers under s377 Financial Services and Markets Act 2000 ("FSMA") to write down the value of an insurer's contracts, including clarifying that such powers extend to (almost) all unsecured liabilities and making them available prior to the proved insolvency of the insurer.  It is also proposing the introduction of a moratorium on the exercise of contractual termination rights in certain service contracts (examples given include IT contracts) and financial contracts (examples given include interest rate swaps, currency forwards and capital raising instruments) which would apply in conjunction with the enhanced write-down procedure or the administration of an insurer. 

The proposals are therefore of interest to insurers and their policyholders and reinsurers, as well as to their contractual counterparties. 

The UK Government has not yet introduced a specific resolution regime for insurers (such as those regimes which exist for banks and other financial institutions), although the Consultation notes that this is the intention in due course.


The UK Government has proposed enhancements to the Court's existing powers under s377 FSMA to order a reduction of the value of an insurer's2 contracts (a "write down")3.  This existing power has never been used in practice.

The proposed enhancements and amendments include:

  • Clarifying who may apply to the Court for a write-down, being the directors or shareholders of the insurer, the PRA (in consultation with the FCA), policyholders, creditors or any combination thereof. Any write-down application would require PRA consent.
  • Enabling the power to be exercised prior to the proved insolvency of the insurer as an alternative to entering into administration or liquidation4.
  • The creation of a new "write-down" manager position (appointed as an officer of the court to support a write down).
  • Amending existing legislation to ensure that, in the event of a write down, the value of those policyholder claims which are protected by the Financial Services Compensation Scheme ("FSCS") would be the higher original value (subject to normal compensation limits) as opposed to the lower post write down-value. It also intends to amend legislation to ensure that the PRA has the powers to, at its discretion, amend the relevant PRA rules regarding compensation through the FSCS.
  • Introducing a "permanent" moratorium on legal process where an insurer is subject to a write down under s377 FSMA, preceded by an "interim" moratorium from the point at which the write-down application is presented to the Court. The "permanent" moratorium would last for an initial period of 12 months and could be extended thereafter. The moratorium would not prevent applications to the Court to commence insolvency proceedings and would not apply to contracts entered into after the court approval of the write-down.
  • A new moratorium on certain contractual termination rights in both service contracts and financial contracts held with insurers which apply upon the application to the court for, and during, an administration or a write down under s377 FSMA or if a winding up petition is presented. This is discussed further below.
  • For life insurance policies only, a stay on policyholder surrender rights on application to the court for, and during, an administration, a write down under s377 FSMA or a winding up.

The Government's intention is that the proposals would promote continuity of cover by allowing earlier intervention by the regulatory authorities before, and in order to avoid, insurer insolvency (such as administration or liquidation).  The further intention being that this would stabilise the insurer and maintain sufficient solvency to allow a solvent run-off (with policyholders continuing to receive payments under their policies) and orderly exit from the market.  However, inherent in the operation of s377 FSMA, is that some policyholders would see reductions in the payments received when making a valid claim under their policies.  Whilst FSCS coverage for the shortfall may be available in respect of some policies, this would not always be the case as the FSCS is designed mainly to protect individual and small business policyholders.

The Government hopes that the amendments would reduce the costs to industry by unlocking loss absorbency through the expanded use of s377 FSMA and by reducing the extent of value reduction in a subsequent insolvency.  Reducing losses may reduce the compensation paid by the FSCS and hence the costs passed on to industry through the FSCS levy.

The write-down mechanism

The current version of s377 FSMA enables the Court to reduce the value which an insolvent insurer owes under its contracts as an alternative to making a winding-up order in respect of the insurer. 

However, the existing power is only set out in broad terms such that there is uncertainty concerning certain aspects of its operation (such as: which parties may apply to the Court for a write-down; and which debts can be written down by the Court). 

The Government is therefore seeking to clarify and enhance the Court's current write-down power.  The proposed amendments include, among others:

  • Clarifying that (almost all) unsecured debts of the insurer5 could be subject to a write-down, including policyholder contracts and liabilities, while respecting the statutory order of priority6.Secured creditors would be outside the scope of the write down. The proposed exceptions include: liabilities with an original maturity of less than seven days, certain employee liabilities, liabilities arising from financial contracts (to avoid a further downgrade in the insurer's financial position) and liabilities arising from commercial and trade creditors for critical services7.
  • Allowing the write-down power to be exercised earlier. That is, once the Court is satisfied that the insurer is, or is likely to become, unable to pay its debts, and that the write-down is reasonably likely to lead to a better outcome for insurer's creditors as a whole, including policyholders, when compared against the next most likely scenario, were it not to sanction the write-down. The Court would need to take into account the order of priority that would apply in a winding up when considering the interests of the different groups of creditors. It is proposed that, if this test is met, the Court would retain its existing power to make the write-down subject to any terms and conditions which it considers appropriate. On the making of the order, the insurer or the write-down manager would issue commutations to policyholders and other affected creditors.
  • Clarify that any write-down would not affect recoveries under any outwards reinsurance (i.e. a statutory variation of the pay as paid doctrine).The statutory variation would apply to all reinsurance contracts governed by UK law, but would not apply to those governed by the laws of other jurisdictions (for which the Government suggests that re-papering might be sensible).It would apply retrospectively and to future contracts.
  • Introducing a new write-down manager role. Prior to their appointment by the Court, the "nominee" write-down manager would lead the design of the write-down proposal to be put to the Court. This would expected to include an assessment of whether the write-down is reasonably likely to lead to a better outcome for insurers' creditors as a whole, including its policyholders (being the test which the Court would apply when deciding whether to sanction the write-down).Once appointed, the write-down manager would ensure the write-down works as intended to stabilise the insurer, thereby providing continuity of cover for policyholders. As well as ensuring the write-down was serving the interests of the insurer’s creditors, the Government proposes that the write-down manager, in carrying out their duties, be required to have regard to: (1) any action including directions given to the insurer by the PRA (and FCA); and (2) the interests of the FSCS. However, unlike an insolvency practitioner, the write-down manager would not be ‘in possession of the insurer’ and so their powers would generally be limited to making recommendations to the insurer’s directors.
  • Setting out the grounds for termination of the write-down (i.e. if the court was satisfied that it had no reasonable chance of success or, alternatively, if it is satisfied that the purpose of the write down had been achieved).The write-down would also terminate on the liquidation of the insurer through a voluntary or compulsory liquidation or on the administration of the insurer.
  • Clarifying that written-down liabilities would be deferred (off balance sheet) and not extinguished and could be reactivated (for example: written up if the insurer's financial position is later found to be better than assumed in the initial write-down; the insurer enters into administration or liquidation; or the availability of a surplus following completion of a solvent run off).

The moratorium on contractual suspension and termination provisions

The Consultation notes that insurers typically hold financial contracts (such as interest rate swaps, currency forwards and capital raising instruments) and service contracts (such as those for the provision of business critical services such as IT or reinsurance contracts) which may include provisions which permit a party to terminate/suspend the contract or take certain actions in the event that the other party enters into insolvency proceedings or suffers financial distress.  The Government's position is that the termination of such contracts could significantly impact on an insurer's financial position and operational continuity and could slow or destabilise the recovery/insolvency process. 

The Government is therefore proposing an automatic statutory moratorium on certain termination/suspension rights (including the exercise of such rights and the ability to take legal action to enforce such rights) for financial and service contracts where the termination/suspension rights arise solely as a result of the insurer's entry into insolvency proceedings or a write-down under s377 FSMA (including petitions or applications to the Court for these). 

It is proposed that the statutory moratorium would also affect termination/suspension rights if triggered by one of the following events and the counterparty has not exercised the resulting termination/suspension right prior to the moratorium subsequently taking effect:

  • the insurer coming under financial stress/hardship (no matter how defined in the contract); or
  • the insurer failing to make a payment, or to make a payment on time (in this case the operation of the moratorium would be conditional on all payment terms being met during the operation of the moratorium, but would not require payment of previous arrears).

Termination/suspension rights arising from events unrelated to the insurer's financial position or ability to meet contractual payment terms should not be affected by the moratorium.

The Consultation notes that the contracts defined as "financial contracts" and "service contracts" for the purposes of the moratorium will be defined in legislation.  The moratorium would apply only to UK law governed contracts.

The moratorium would comprise: an "interim moratorium" (which could come into force when an application for administration or write-down is made to the Court or a winding up petition is presented and would remain in place until the application/petition is heard or withdrawn); and a "permanent moratorium" would apply during an administration or write-down, lasting an initial 12 months subject to extensions.  The "permanent" moratorium would not apply during the course of a winding-up.

The moratorium will be subject to the insurer continuing to meet its payments and other substantive obligations (such as delivery obligations and the provision of collateral) under the relevant contract on an ongoing basis.

The Court would have the power to vary the moratorium where is assesses that failure to do so would be likely to cause financial hardship to affected counterparties, or where the variation benefits the purpose of the write-down or administration (and where it would not cause hardship to any counterparty).  It is also proposed that individual counterparties would also be able to seek an exemption on the grounds of financial hardship.  While the moratorium is in force, the directors of the insurer (where there is no insolvency practitioner in post) or the insolvency practitioner would be able to allow a counterparty to exercise a contractual termination/suspension right where, in their view, this is not detrimental to the purposes of the administration/write-down or where it is otherwise required by their statutory duties. 


If enacted in the form proposed in the Consultation, this would represent a significant development for insurers, their policyholders and for many of their counterparties.

The Consultation closes on 13 August 2021.

1  Amendments_to_the_Insolvency_Arrangements_for_Insurers.pdf (  The Consultation closes on 13 August 2021

2  For the purposes of the proposals, an “insurer” includes any person who is carrying on a regulated activity of the kind specified by article 10(1) or (2) of the Regulated Activities Order (effecting and carrying out contracts of insurance) but who is not: exempt from the general prohibition in respect of that regulated activity; a friendly society; or a person who effects or carries out contracts of insurance all of which fall within paragraphs 14 to 18 of Part I of Schedule 1 to the Regulated Activities Order in the course of, or for the purposes of, a banking business.

The proposals do not apply to Lloyd's of London business, which is the subject of separate statutory procedures.

3   References in this note to a write-down (pursuant to s377 FSMA) are to the process as amended in the manner proposed by the Consultation.

4  It is not proposed that it would be available once a company had entered into administration or liquidation, although it would be available while an administration application or winding up petition was outstanding.

5  The example of unsecured bonds is given.

6  As provided for by the Insurers (Reorganisation and Winding Up) Regulations 2004.

7  It is expected that the Court would determine which commercial and trade creditors provide critical services.