The efficiency of the regulatory framework of Solvency II is being tested by the crisis caused by the outbreak of the COVID-19 pandemic.
According to the European Insurance and Occupational Pensions Authority’s (EIOPA) financial stability report, released on July 2020, the significance of the Solvency II impositions has proved to be of the utmost importance. The insurers are facing unprecedent challenges due to the pandemic and EIOPA along with National Competent Authorities (NCAs) bears a significant supervisory role in maintaining and ensuring financial and operational resilience.
According to the recently released position paper of Insurance Europe, insurers have proved to be resilient to financial distress during the lockdown and liquidity seems to have been a manageable issue. During the pandemic lockdown insurers have successfully managed to provide their services effectively by applying business continuity plans. At these rough times, insurers have answered with fee waivers, temporary fee deferrals and even partial refunds of premium payments.
A few months after, insurers share the common concern whether the regulatory framework of the jurisdiction at which they are providing their services, will be amended so that insurance contracts would have to be retroactively amended to cover the pandemic. In such scenario, insurers may be found in a difficult position to cover claims, to the detriment of their reputation, image and reliability. Additionally, insurers are concerned over the long -term financial effects of the COVID-19 crisis, as the new evolving reality may demand alternative ways of every-day living. Therefore, insurance contracts covering health, employers’ liability, personal accident, pension schemes, unit-linked policies or even motor insurance may have to adapt to the newly emerging circumstances.
EIOPA’s recent publication states that the market- consistent and risk- based approach of Solvency II, expressed by the minimum capital requirements has prevented insurance companies from financial distress and has assisted the insurance sector to mitigate market volatility and enhance risk management practices. However, Solvency II has only been tested on the direct effects of the worldwide lockdowns, whereas the pandemics’ future financial effects remain unknown. Thus, the role of EIOPA and NCAs is key for the ultimate goal of returning to economic growth.
On the one hand it is essential for insurers to have flexibility by their NCAs on regulatory reports submissions and other regulatory requirements. EIOPA seems to have adequately acted on such demand during the COVID-19 lockdown. On the other hand, this position may not be continued as EIOPA’s role is key in analysing the impact of the pandemic and monitoring of the developments of COVID-19 to the financial position of the insurance industry.
Additionally, and further to the Solvency II rule on automatic suspension of dividend payment where the Capital Solvency Requirement drops below minimum, EIOPA urged insurance companies to follow prudent dividend and remuneration policies in March 2020. A few months after the first financial shock, insurers seem to suggest that a uniform approach in refraining from dividend payments is not effective as it does not take into account that many people depend on dividend payments for their pension provision.
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