6.4.2020 – Non-mandatory dividend payments and share buybacks should be suspended as far as possible, variable remuneration should be applied conservatively and postponed if necessary. This is what Eiopa and FMA suggest to insurance companies.
Distribute dividends – yes or no? In the wake of the Corona crisis, this question has become the subject of discussion in recent days. The European insurance regulator Eiopa is now involved in this. On April 2, it published a corresponding statement (link to Eiopa).
It is crucial that access to and maintenance of insurance services are ensured that insurers remain able to act as risk carriers and investors. To do this, it must be ensured that a “robust” level of own funds is available.
Do not suspend mandatory dividend payments and share buybacks
In the publication of uncertainty, Eiopa speaks about the extent and duration of the Covid 19 effects on financial markets, on the economy and on the “repercussions of this uncertainty” on the solvency and financial situation of insurers.
In view of this, it “urgently” encourages the latter to temporarily suspend non-mandatory dividend payments and share buybacks, which serve as remuneration for the shareholders.
The deferral is said to be reviewed as soon as the financial and economic impact of Covid-19 becomes clear.
Review compensation policy
It is also expected that (re) insurers will review their current remuneration policies and ensure that they reflect prudent capital planning and the current economic situation.
Against this background, the variable part of the remuneration policy should be set at a “conservative” level and a shift should be considered.
(Re) insurers who consider themselves legally bound to pay dividends or large amounts of variable remuneration “should explain the underlying reasons to their national competent authorities,” said Eiopa.
FMA expects recommendations to be implemented
The Financial Market Authority (FMA) subsequently spoke up in a press release on Friday.
In it, she affirmed “the urgent recommendation to insurance companies […]to refrain from distributing dividends for the past and the current financial year and to buy back shares ”. The current difficult situation should also be taken into account in the variable remuneration.
“This initially applies for at least six months, but at least until the economic and financial effects of the current crisis can be more precisely assessed,” the FMA says.
When asked by the editors whether the recommendations were strictly binding or whether binding guidelines had been adopted, the FMA stated that the supervisory authorities generally assume that what they urgently recommend will be complied with voluntarily.
“Contribute everything” to continue to perform the risk transfer function
“In view of the great uncertainties about the duration and impact of the crisis, insurance companies must do everything they can to continue to fully fulfill their important risk transfer function for business and society,” said the two FMA board members, Helmut Ettl and Eduard Müller, in their Broadcast.
It is a matter of “standing together and doing everything so that we can cushion the economic shock caused by the Covid 19 crisis as far as possible and create the ideal conditions so that we can start all over again soon after the crisis”.
The German reaction
In response to the Eiopa statement, the German counterpart to the FMA, the Federal Financial Supervisory Authority (Bafin), initially referred to the expectations it had expressed around one and a half ago that financial institutions should refrain from buying back shares and carefully consider distributions of dividends, profits and bonuses.
“The Bafin does not currently consider a blanket distribution ban for insurance companies and pension funds”, continues.
“When it comes to dividend policy, the individual situation of insurers must of course be taken into account, especially their risk-bearing capacity,” says Bafin Executive Director Frank Grund. “We are in close dialogue with the companies in this regard and expect a convincing reason if they want to pay dividends.”
Any risks arising from the current crisis situation should be taken into account appropriately.