EIOPA Recommends Dividend Distributions Within Thresholds of Prudency
EIOPA published a report that examines the financial stability risks in the European insurance and pension sector. Results of EIOPA's qualitative survey among national competent authorities suggest that both international and country-specific macroeconomic conditions pose significant concerns, with corporate bond downgrades being identified as a key risk for the insurance sector. Additionally, given the latest macroeconomic developments and ongoing uncertainties, an increase in liquidity risk cannot be ruled out looking ahead. Based on its risk assessment, EIOPA recommends to insurers that any dividend distributions should not exceed thresholds of prudency.
The EIOPA report highlights that, apart from the prolonged period of ultra-low rates, credit risk, equity, and property risk are also relevant for the sectors. The low profitability of investments as well as insurers’ underwriting profitability driven by low premium growth pose potential concerns. However, EIOPA notes that European insurers have been able to withstand the dramatic situation as, in particular, the Solvency II regime helped them to better align capital to risk, build-up resilience, and enhance their risk management practices. While risks surrounding the economic growth outlook remain high, they appear to have become less pronounced and there are the first signs that the near-term impact on insurers’ financial position could be captured within the Solvency II confidence levels. Nonetheless, uncertainty remains high and it is key that insurers act to preserve their capital positions in balance with the protection of policyholders and beneficiaries.
Therefore, EIOPA strongly recommends insurers to maintain extreme caution and prudence within their capital management. Any dividend distributions, share buy-backs, or variable remunerations should not exceed thresholds of prudency and institutions should ensure that the resulting reduction in the quantity or quality of their own funds remains at levels appropriate to the current levels of risk. Supervisory authorities should ensure that insurers' assessment of the overall solvency needs is forward-looking while accounting for the current level of uncertainty on the depth, magnitude, and duration of the impact of COVID-19 in financial markets and for the repercussions of that uncertainty in their business models and solvency, liquidity, and financial position.
Keywords: Europe, EU, Insurance, Solvency II, Financial Stability Report, COVID-19, Solvency Capital Requirement, Liquidity Risk, Corporate Bonds, EIOPA
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
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