by Lieve Lowet
This is part two of the series of three articles about my investigation into the recent measures taken by European authorities as a result of the situation that has arisen. This article is more specifically about Solvency II. For insurers, there is no equivalent measure to Article 141 CRD. There is no such legal base in the Solvency II framework directive to ‘urge’ not to distribute. Article 71(1)(l)(i) of the Solvency II Delegated Regulation refers indirectly to the cancellation of distribution (dividends) in case of non-compliance with the SCR or where the distribution would lead to such non-compliance when legal or contractual arrangements allow for such cancellation. But it does so in the context of the classification of tier 1 basic own funds. In the past, EIOPA has referred to the cancellation or referral of dividend distribution when the validity of the business model is at risk: this was a recommendation to national supervisors e.g. after the 2016 stress test to address the vulnerability identified in the exercise. And in its recent consultation paper on the Solvency II review (EIOPA-BOS_19-465-CP-0pinion 2020), EIOPA’s draft advice links the potential by supervisors to limit or withhold dividend payments and other voluntary capital distribution to a sustainable solvency position when insurers use e.g. long-term guarantee measures. It also touches upon the prohibition of payments of dividends outside the EEA as another method of group supervision or as an alternative for the capital surcharge in case of systemic risk. Pious wishes?
The ESRB in its 2018 report Macro-prudential powers, measures and instruments for insurance pleads for a power for supervisory authorities to impose dividend restrictions in situations where the (re)insurance market developments could generate systemic risk. Even if the ESRB’s plaidoyer would have been followed, and even if the Solvency II framework directive would have such provisions, is the Covid-19 crisis a systemic risk crisis? De la Rosière (Reflections on the health and financial crisis, SUERF policy note, issue nr 148, April 2020) does not seem to think so: he does not mention the Covid-19 crisis as a systemic risk.
Nor does Felix Hufeld, BaFin’s President. And EIOPA, which opens its statement of 17 March with references to close communication and collaboration with the European Systemic Risk Board and the other supervisory authorities, does not even refer to the Covid-19 pandemic as a high impact catastrophic event, qualifying as an exceptionally adverse situation, and affecting a significant share of the market or LOBs (see Article 138,4 Solvency II directive).
The ministers of finance of the EU on 16 April also welcomed EIOPA’s recent statements and recommendation on EIOPA’s identification of tools allowing for flexibility within the current Solvency II framework for insurance undertakings. The ministers urged insurers to follow up on EIOPA’s statements to take timely and comprehensive measures to preserve their capital position, including the temporary suspension of all discretionary distributions, and to continue to act in the best interests of consumers. Tools allowing for flexibility within the Solvency II framework? Really?
Article 16 of the EIOPA regulation
There was only one recommendation, and it concerned supervisory reporting flexibility. How does one marry that recommendation of 20 March with the reporting requirements of the Delegated regulation 2015/35? Which tool did EIOPA identify? EIOPA refers to Article 16 of the EIOPA regulation as the legal basis for the recommendation. According to that Article, guidelines and recommendations shall be in accordance with the empowerments conferred in the legislative acts referred to in Article 1(2), such as the Solvency II directive, or in Article 16 of the EIOPA regulation itself. But does this mean that deadlines laid down in a regulation can be shifted by a statement from EIOPA using mere moral persuasion? With all the creativity of the world, I cannot find in the Solvency II directive competences allowing EIOPA to do accordingly, even in terms of pandemic crisis.
I hesitate to conclude that EIOPA’s recommendations, let alone statements, can put aside by moral persuasion or ‘material technocratic influence’ (either by making those choice or by technical influence, see Mendes, J., EU Executive Discretion and the limits of Law, 2019) hard and long debated democratic legal frameworks, especially because Solvency II has no provision equivalent to Article 141 CRD. EBA and EIOPA dealt with the issue of dividend suspension through statements, an ‘instrument’ not even foreseen in the revised ESA regulations. No statement, whether it was from EBA or EIOPA, referred to any legal basis. But EBA seems to have a legal base, whereas EIOPA…
There are other questions these ESA actions raise. Would an EU coordinated approach across the different financial sectors have been useful? Why was the Joint Committee not involved ‘to ensure cross-sectoral consistency’? Some national supervisors have moved cross-sectoral, which is especially relevant for financial conglomerates. This is for example the case in Belgium where the National Bank, supervising both insurers and banks, issued a circular to insurers using the ECB’s “at least till 1 October 2020” deadline for (re)insurers, a deadline which EIOPA did not put forward. The NBB also translated ‘other distribution policies’ into rebates and profit participations. An indirect reference to Article 27 CRR?
The next article in this series of 3 articles by Lieve Lowet is about the price to be paid by the insurance sector and will be published tomorrow on the Risk & Compliance Platform. The first one was published yesterday, see related items.You can respond and ask Lieve questions via the comments button at the bottom of this article.
The author, Lieve Lowet (See photo) is an EU Affairs consultant and lobbyist since 2003, focuses on European dossiers relevant for the insurance and pension sector. From 2003 to 2008, she was Secretary-General for the international mutual insurance association AISAM (now AMICE), which accounted for 15% of the European and 6% of the world insurance market. Prior, she worked for McKinsey as a European banking and insurance expert.
