COVID-19: dividends and distributions for insurers

A number of UK insurers have today announced that they will not pay dividends to shareholders.

This step has been welcomed by the Prudential Regulation Authority (PRA), which last week wrote to all UK-based insurers reminding them of the importance of managing financial resources prudently.

In its earlier letter, the PRA stopped short of applying a dividend block and, although many insurers have decided not to pay dividends, some insurers have committed to paying out.

So far, national regulators across the EU have not taken a uniform approach to dividends and other distributions, meaning insurers will need to consider their plans on a country-by-country basis. For example, the French regulator, the ACPR, has instructed insurers to stop paying dividends altogether until 1 October 2020, while in Germany, BaFin has said that it does not think a blanket ban on dividends is required at this stage.

The European insurance regulator, the European Insurance and Occupational Pensions Authority (EIOPA), urged insurers across Europe to temporarily stop dividends, share buybacks and bonuses. However, although EIOPA oversees the regulatory and supervisory standards and practices in the EU, the implementation of its guidelines and recommendations is the responsibility of national regulators.

The PRA’s message to insurers and its ‘advisory’ approach to refraining from making distributions can be contrasted to the firmer approach it has taken with banks, which have been strictly instructed to suspend dividends and buybacks on ordinary shares until the end of 2020 and to cancel payments of any outstanding 2019 dividends.

This is despite the PRA noting that banks (like insurers) currently have strong capital positions. For insurers, this capital position can provide support during a global financial crisis. However, the capital position for banks could be weakened rapidly as a result of many factors, including the liquidity risk arising from the predominantly short-term nature of bank liabilities.

Protecting policyholders and maintaining safety and soundness through robust capital planning is the key message for insurance firms in the current environment. With increasing levels of uncertainty as to what the medium to long-term impact of COVID-19 will be on the economy, this is no small task for insurers, particularly when factoring this uncertainty into their solvency and financial position.

In relation to executive remuneration, insurance firms are expected to review their current remuneration policies, practices and rewards in light of the COVID-19 pandemic and have been advised that the variable part of remuneration policies should be ‘set at a conservative level and should be considered for postponement’.

Although insurance firms may have a robust capital position at present, the social and reputational impact of making distributions during this time of uncertainty means decision-making for boards is more difficult than ever.

Striking a balance between the importance of dividend income to shareholders, maintaining capital and protecting policyholders, together with wider social pressures in terms of supporting the real economy in the coming months, will all have long-lasting effects for firms.