Not for the guests, but for the cooks: EIOPA’s internal note on criteria for a convergent approach on dividend distribution restrictions for insurers
EIOPA’s Board of Supervisors tabled on 30 March 2021 an item: ‘dividends distribution – criteria for a convergent approach’. A revised version of a note previously tabled in EIOPA’s Management Board was discussed, and national supervisors agreed with a common supervisory approach at the EU level. At the same time, they argued for a revision and two instead of three eligibility categories or criteria for a supervisory assessment regarding dividend distribution were retained. Members also agreed that “an internal note with specific criteria” is better fit for purpose, deciding explicitly not to publish any note on the issue at this point in time. The note would be sent for approval in written procedure.
That note did not come out of the blue: during the 68th meeting of EIOPA’s Board in February, the Head of Risks and Financial Stability Department presented the feedback EIOPA had received from national supervisors on the criteria to assess dividend distributions. EIOPA’s Chair Bernardino proposed that, based on the information received, EIOPA staff would draft a note with qualitative and, if possible, quantitative indicators to ensure a common approach by supervisors. NCAs expressed overall support to the follow-up and the need to explore “some type of quantitative conservative thresholds”, as well as the need for a prudent and consistent approach reflecting also on the issue of internal dividend distribution for groups.
What could be intended by “eligibility categories or criteria for a supervisory assessment regarding dividend distribution”? In that context, it is maybe useful to examine a recent circular issued on 26 January 2021 by one of EIOPA’s Board members, the National Bank of Belgium, titled Dividenduitkeringen en variabele beloning in de context van de COVID-19-pandemie/ Distributions de dividendes et rémunération variable dans le cadre de la pandémie de COVID-19, reference NBB_2021_005. The Belgian circular refers both to the 2020 statements of EIOPA (on this topic see my earlier blog) as well as to the recommendations of the ESRB. The NBB concluded the circular with recommendations laying down three criteria that relate both to the insurer’s solvency position and to the materiality of the benefit in relation to equity and to prior distributions.
- Criterion 1: materiality of the benefits. These must be compared to the cumulative amount of all distributions (dividends and share buybacks) up to and including 30 September 2021 and must be lower than the maximum of the accumulated amount of benefits referred to in 2018 or 2019.
- Criterion 2: the solvency ratio without transitional measures. A distinction is made between insurers with a solvency ratio < 150%, those with a solvency ratio > 200% and those with a solvency ratio between 150% and 200%.
- Criterion 3: Materiality of the distributions in relation to equity in Solvency II. The cumulative amount of all distributions up to and including 30 September 2021 is compared with the total eligible equity for the SCR. A distinction is made between significant benefits (> 10% SCR) and limited distributions (<10% SCR).
In turn, these criteria according to the circular, form the basis for splitting up all Belgian insurers in three categories: those which are urged not to distribute, those which the NBB will invite for a dialogue and those with limited distribution potential. Are EIOPA’s criteria going in the same direction? Even if they would, we don’t know because it is ‘an internal note’.
In light of the above, I have many questions, but here are just a few:
- Solvency II, in line with its micro-prudential nature, is silent about the potential for supervisory actions in case the SCR is not breached or where there is no risk of non-compliance in the next three months as informed by the insurer to the national supervisor. What is the legal basis for such supervisory initiatives, whether called a circular, an internal note or a recommendation?
- Even if we would accept that actions to limit distribution in case of no breach of the SCR are included in the Solvency II framework (quod non), does the Solvency II directive allow for national supervisors to recommend eligibility criteria to restrict distributions during a pandemic, not classified as a systemic risk nor as an emergency situation nor as an adverse development or exceptionally adverse situation? Does EIOPA have the competence to foster a convergent approach about an issue for which no level 1 nor level 2 provisions exist in Solvency II?
- The supervisory initiative taken by EIOPA and members seems to be of a macro-prudential nature: is that in line with the micro-prudential mandate of each supervisor separately and EIOPA conjointly? And if not, should the micro-prudential nature of Solvency II be altered and become hybrid with, as a consequence altering also the nature of the mandate of EIOPA beyond micro-prudential supervision as EIOPA is proposing in its Opinion to the Commission on the Solvency II review? And what would this mean for the capacity of the industry to attract capital?
- Or is EIOPA’s competence derived from the ESRB’s recommendation? In that case, can an ESRB recommendation override the Solvency II directive?
- Under the hypothesis that EIOPA has the necessary competence, is an ‘internal note’ the proper instrument? What are its implications for the (credibility of the) future of the Authority’s task to contribute to the consistent application of legally binding Union acts? And to transparency?
But more importantly, and after all these years of work on Solvency II, what is the value of the SCR?
Or are these the wrong questions?