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Coronavirus - Dividends distribution and variable remuneration policies - UK

  • United Kingdom
  • Coronavirus
  • Coronavirus - Country overview
  • Coronavirus - Insurance issues

07-04-2020

In the week commencing 30th March 2020, the European Insurance and Occupational Pensions Authority (“EIOPA”) released a statement giving guidance on suggested attitudes towards dividends distribution and variable remuneration policies for (re)insurers in the context of COVID 19. The Prudential Regulation Authority (the “PRA”) issued a ‘Dear CEO’ letter to insurers at the same.

A “prudent” approach

EIPOA have previously acknowledged the importance of ensuring that (re)insurance services can continue to absorb risk from policyholders in the midst of COVID-19. To do so, it is crucial that (re)insurers  take steps to protect their own funds.

EIPOA stressed that the preservation of (re)insurers’ capital position should include prudent dividend and other distribution policies, including variable renumeration. This will involve looking carefully at finances and judging whether they can reasonably distribute funds.

According to the statement, the recommended assessment of solvency should:

  • be forward looking;
  • take account of uncertainty on depth, magnitude and duration of COVID-19 in financial markets/economy; and
  • consider the long term effect of uncertainty on finances.

Suspension of distributions

On that basis, the EIOPA has recommended that (re)insurers temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders.

This position should be reviewed once the true financial/economic impact of COVID-19 emerges.

To what extent should suspension be implemented?

All (re)insurance groups should take these measures into account, both:

  • at the consolidated level; and
  • in the context of significant intra-group dividend distributions; or
  • in similar transactions when there is a material impact on the solvency of one of the group or entities involved.

Materiality should be considered and monitored both at group level and for solo supervisors.

What about variable renumeration policies?

The EIOPA has also recommended that (re)insurers:

  • review their current policies, practices and rewards;
  • ensure that their policies reflect prudent capital planning; and
  • ensure the policies reflect the current economic situation.

The variable aspect of the policies should be set at a conservative level, and (re)insurers should consider postponement.

(Re)insurers that consider themselves legally obliged to pay-out dividends or large amounts of variable renumeration should be able to justify this to their National Competent Authority.

How are European regulators approaching distributions?

The approach of EIPOA is consistent with the European Central Bank, which has advised banks not to pay out dividends until at least October to preserve capital, to enable them to continue lending throughout the pandemic.

Elsewhere in Europe, EIPOA has been supported - with various reports of (re)insurers in the Netherlands and Italy suspending their dividend payments in line with requests from their respective national regulators. The French regulator, the ACPR, has gone even further –instructing (re)insurers to stop paying dividends altogether until October 1st 2020.

However, Europe is not uniform in its stringent approach. Whilst German regulator BaFin now requires justification from (re)insurers to pay out dividends, they have denounced a blanket ban on pay outs.

What did the PRA say?

The PRA has confirmed that it agrees with the  prudent approach of EIOPA  - underscoring the importance of (re)insurers in managing their financial resources to be able to meet their commitments to policyholders in line with the Financial Conduct Authority’s expectations - as well as investing in the economy. However, critically, the PRA has fallen short of applying a dividend block.

(Re)insurers are also reminded of the PRA’s existing expectation as at Supervisory Statement 4/18 – that their own boards should be satisfied that any distributions made are prudent and consistent with their risk appetite.

Analysis

Whilst the consequences and impacts of COVID-19 are still being assessed by insurers and the long-term impact will vary significantly across the sector, it is clear that some (re)insurers will be more or less impacted. As such, the approach regulators take needs to be sensitive to the relevant groups involved and the lines of business and assets they are exposed to. With that in mind, it is possible that, absent dividend blocks, the PRA and European regulators may seek to use other powers available to them (i.e. capital add-ons) to control the amount of capital released by re(insurers).