On 2 April 2020, the European Insurance and Occupational Pensions Authority (EIOPA) urged all (re)insurers to temporarily suspend dividend distributions and share buybacks. The response from insurance regulators in EU countries has been mixed. In some countries the regulator has followed a similar approach. However, the German regulator, BaFin, has stated that it considers the approach to be unnecessary for insurance companies.
EIOPA’s statement expresses the need for insurance companies to take all necessary steps to preserve their capital position while there is uncertainty about how the COVID-19 crisis will impact on their solvency and financial positions. Accordingly, EIOPA ‘urges’ insurance companies to suspend all discretionary dividend distributions and share buy backs until the economic and financial impact of COVID-19 becomes clearer. EIOPA also states that companies should take a similarly prudent and flexible approach when reviewing their remuneration policy and suggests that bonuses should be set at a ‘conservative level’ and possibly postponed.
Mixed responses from regulators in EU countries
The PRA in the UK were one step ahead of EIOPA as it sent to the CEO’s of UK insurance companies a letter on 31 March 2020, setting out its expectations about the distribution of profits and payment of bonuses. The PRA expects insurance companies to pay close attention to the need to protect policyholders and maintain safety and soundness when considering any distributions to shareholders or making decisions on variable remuneration. It reminds companies of its existing expectation set out in Supervisory Statement 4/18, that Boards must satisfy themselves that a distribution is prudent and consistent with their risk appetite. This is a softer stance than that taken by the PRA with banks, where the PRA mobilised the threat of using its supervisory powers if banks did not agree to suspend dividend payments and share buybacks. Consequently, some UK insurers have decided to pause dividend payments, a move welcomed by the PRA in a statement published on 8 April.
The regulators in Italy have taken a similar approach – the Bank of Italy took a firmer stance with the banks whereas the insurance regulator, IVASS in a notice published on 30 March 2020, states that it has written to Italian insurance companies to ask them to use ‘extreme caution’ in the distribution of dividends and bonuses.
The French Regulator, the ACPR (Autorité de Contrôle Prudentiel et de Résolution), in its press release dated 2 April 2020, confirmed it was aligned with EIOPA’s position. Stressing the “uncertainty on the duration and consequences of this [Covid-19] crisis” and the necessity to “maintain, and if possible, to reinforce” own funds of (re)insurance undertakings, the ACPR called on the (re)insurance undertakings under its supervision to refrain from distributing dividends, at least until 1st October 2020 and to exercise moderation regarding the allocation of variable remunerations. In particular, the ACPR indicated that (re)insurance undertakings which would not be in a position to suspend the payment of dividends would need to explain immediately the reasons to the ACPR. The French regulator’s statement for the insurance sector comes a few days after a similar statement regarding the banking sector.
The Polish Financial Supervision Authority (KNF) has taken a similar stance, writing to insurance companies on 26 March 2020 setting out its expectation that insurance companies will retain all their profits and not undertake other actions without arrangements with the regulator, in particular activities falling outside the current scope of business and operating activities which may result in the deterioration of their capital base.
The Dutch Central Bank (De Nederlandsche Bank, “DNB“) has fully endorsed EIOPA’s approach. This approach also supports DNB’s recent recommendation to banks and insurance companies not to use their buffers for dividend payments or share buybacks until the economic and financial impact of COVID-19 becomes clearer.
The Spanish insurance supervisor, the DGSFP, published a press release with their own recommendations, which were aligned with EIOPA. In this regard, they have recommended that, as long as the COVID-19 health crisis persists, insurance companies and their subsidiaries should not distribute dividends, assume irrevocable commitments of payment or carry out share buy-backs or any other transaction likely to have an equivalent effect.
But not all regulators have agreed with EIOPA’s approach. The German regulator, BaFin, has argued that while it supported the direction to banks to carefully consider the payment of dividends and bonuses and to refrain from share buy backs, in the case of insurance companies, it considers a blanket suspension to be inappropriate. Instead, BaFin advocates close dialogue with individual firms to make sure they have a strong case for making a dividend payment in the light of the emerging risks it is facing arising from COVID-19.