Insurance regulatory update: Impact of COVID-19 on insurance regulation and supervision

Last update:  10 April 2020 [see also our newsletter “Possible insurance questions and disputes related to Coronavirus”]

1.    Since the beginning of the COVID-19 (“Coronavirus”) outbreak, Belgian, EU and international insurance regulators have taken various measures to respond to the crisis. 

This E-zine provides an overview and summary of these initiatives.

2.    On 17 March 2020, the European Insurance and Occupational Pensions Authority (“EIOPA”) has issued a Statement on actions to mitigate the impact of COVID-19 on the insurance sector.[1] This Statement has been supplemented by EIOPA’s:

• Recommendations of 20 March 2020 on supervisory flexibility regarding deadlines of supervisory reporting and public disclosure by insurers (“Coronavirus Recommendations”) [2];
• Call to action of 1 April 2020 for insurers and intermediaries to mitigate the impact of Coronavirus/COVID-19 on consumers [3];
• Statement of 2 April 2020 on dividends distribution and variable remuneration policies in the context of COVID-19 [4]; and
• Update of 2 April 2020 on other measures impacted by COVID-19 pandemic [5].

3.    EIOPA realises that the virus outbreak is unprecedented and has significant consequences for the global economy and financial services. In particular, it warns that "insurers are likely to face progressively difficult conditions in the immediate future, both in terms of navigating challenging market conditions and in maintaining operations" and considers the outbreak as a “major development” as referred to in Article 54 of Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (“Solvency II Directive”).

4.    EIOPA currently adopts measures to respond to the crisis and coordinates national competent authorities’ (“NCAs”) actions to deal with the new challenges insurers face. Currently, it focuses on four areas: business continuity, fair treatment of consumers, the solvency and capital position and dividend distribution and variable remuneration.

Business continuity
 

5.    EIOPA emphasises the importance of contingency measures. Insurers should develop a ready-to-implement plan to ensure business continuity. 

Such measures could include, for example, digital communication tools, remote access to client files and IT systems, sickness absence management and implementation of additional health and safety requirements. 

However, insurers should remain cautious to comply with all applicable prudential rules and rules of conduct. In particular, the improvised use of new technologies may cause challenges with regard to outsourcing rules and cybersecurity.

6.    Furthermore, insurers should concentrate their efforts on monitoring and assessing the impact of the Coronavirus and include appropriate information in the published information.

7.    EIOPA calls upon NCAs to be flexible regarding the times of supervisory reporting and public disclosure regarding end 2019. More specifically, the Coronavirus Recommendations provide that NCAs should offer allow delays in reporting and public disclosure with regard to annual reporting, quarterly reporting and the Solvency and Financial Condition Report (“SFCR”).  

In addition, EIOPA has limited requests for information and consultation to essential elements to assess and monitor the impact of the outbreak and its economic consequences.  In practice, EIOPA extended the deadline of the Holistic Impact Assessment for the 2020 Solvency II Review from 31 March 2020 to 1 June 2020. An overview of the impact on and the status of other public consultations, requests to the market and data requests is available on EIOPA website [5].
 
8.    On an international level, the International Association of Insurance Supervisors (“IAIS”) adjusted its work programme to provide operational relief to member supervisors, insurers and other stakeholders. All adjustments, such as postponed public consultations and coordinated initiatives, are available on its website.[6] 

9.    In Belgium, the National Bank of Belgium (“NBB”) took different initiatives with regard to the Coronavirus, such as the establishment of the Economic Risk Management Group (“ERMG”)[7]. With regard to the insurance sector, the NBB will focus its supervision and regulation on critical and essential tasks related to the impact of the Coronavirus. In particular, it has decided to:

• suspend the NBB Insurance Stress Test 2020;
• limit audits and prioritise audits with regard to risks related to the Coronavirus and compliance with laws and regulations;
• postpone the publication of circulars with regard to governance and cloud outsourcing;
• delay the application of Circular NBB_2020_3 on the impact of deferred tax under the Solvency II Directive (but the NBB accepts voluntary compliance);
• collect qualitative and qualitative data regarding the impact of the Coronavirus on a weekly basis; [8] 
• collect data regarding possible intentions to distribute profits to shareholders and policyholders.[8]

Furthermore, the NBB has implemented the EIOPA’s Coronavirus Recommendations with regard to the extension of delays in reporting and public disclosure (discussed above) and communicated the new deadlines in its Communication of 31 March 2020. [9]

10.    The Financial Services and Markets Authority (“FSMA”) has published a newsletter regarding the Coronavirus addressed to insurance intermediaries.[10] The FSMA announces not to take any initiatives that could hinder the business continuity of insurance intermediaries, such as comprehensive requests for information.

Fair treatment of consumers
 

11.    EIOPA emphasises the importance of preserving trust in the sector by ensuring fair treatment of consumers.
 
12.    It expects insurers and intermediaries to act in the best interests of consumers and, if policyholders fail to fulfil contractual obligations due to the practical implication of the Coronavirus, to act in a flexible manner (e.g. late notification of claims, impossibility to carry out medical examinations, use of usual residence as a workspace).

13.    In particular, EIOPA requires insurers and intermediaries to take the following measures:[3]

• Providing clear and timely information on contractual rights and ensuring a consistent application of possible exclusions. 
•  A fair treatment of consumers, including explicit communications.  
• Providing information about contingency measures, including information on how these measures may affect the insurance contract and the services provided. Examples of possible impacts are:
  • Continuity of services (e.g. moving services to online channels in greater extent);
  • Validity of insurance contracts (e.g. temporary automatic extension for the duration of the emergency situation);
  • Changes to the claims management procedures or to other consumer services; or
  • Additional organisational arrangements to deal with consumer inquiries related to the Coronavirus/COVID-19 (e.g. publication of FAQs for consumers, contact details, helpline etc.).
• Applying product oversight and governance (“POG”) requirements. This may include a product review where necessary.
• Acting in a flexible manner to avoid consumers losing coverage due to processes and timeframes.

14.    Finally, EIOPA emphasises that the above measures should not undermine the solvency and capital position of insurance undertakings. In particular, it warns insurers not to impose retroactive coverage of claims not envisaged within contracts to avoid material solvency risk.
 
15.    In Belgium, the insurance industry has taken an own initiative to support policyholders affected by the Coronavirus. 

Assuralia, the umbrella organisation for insurers and reinsurance operating on the Belgian market, has announced extraordinary measures to protect vulnerable consumers and companies.[11] The NBB, the FSMA and the Belgian Government support this initiative.[12], [13] In particular, the industry allows a deferral of repayment of mortgage credit loans and loans to businesses until 20 September 2020 and a deferral of premium until 30 September 2020 for group insurances, fire insurances connected to mortgage credit and other b2b insurances.

Solvency and capital position
 

16.    As the Coronavirus outbreak causes significant disruption of financial markets, it may develop into the litmus test of the Solvency II Directive as one of the main instruments to ensure financial stability.

17.    In an effort to appease the markets, EIOPA, supported by the IAIS, emphasises that the insurance sector is well capitalised and able to withhold shocks associated with the Coronavirus, even when they are severe.

18.    However, if an insurer would not comply with the Solvency Capital Requirement (“SCR”) and the Minimum Capital Requirement (“MCR”), EIOPA and the NCAs stand ready to use supervisory tools in a coordinated manner.

19.    EIOPA monitors the situation closely and prepares to take appropriate action. It now publishes extraordinary calculations on weekly basis to monitor the evolution of the relevant risk-free interest rate term structures (“RFR”) and the symmetric adjustment to equity risk (“EDA”) on its website.[14] Furthermore, EIOPA may further strengthen the coordination between NCAs, introduce new regulations, apply supervisory tools and/or issue proposals for legislative intervention to the European institutions. 

20.    The NBB shares EIOPA’s concerns and collects information, on a weekly basis, about the and solvency position of insurers subject to its supervision.[8] 

Dividend distribution, variable remuneration and profit participation
 

21.    EIOPA warns the insurance industry to ensure prudent dividend and other distribution policies (including variable remuneration).

22.    In its Statement of 2 April 2020, it urges that insurers and reinsurers temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders until further notice.[4] 

23.    The dividend ban applies to (re)insurance groups at the consolidated level. It also applies to significant intra-group dividend distributions or similar transactions, whenever these may materially influence the solvency or liquidity position of the group or of one of the undertakings involved. The group and solo supervisors will jointly monitor the materiality of this impact.

24.    With regard to variable remuneration policies, EIOPA expect (re)insurers to review their current remuneration policies, practices and rewards. In practice, (re)insurers should act conservatively with regard to the distribution of bonuses and other forms of variable remuneration and consider postponing these benefits.

25.    However, if (re)insurers are legally required to pay out dividends or large amounts of variable remuneration, they should contact their NCA and explain the underlying reasons (“comply-or-explain”).

26.    The NBB has implemented these recommendations by its Circular of 7 April 2020. It has urged (re)insurers to suspend all dividend distributions and share buy backs until (at least) 1 October 2020 and to act in a prudent and conservative manner with regard to variable remuneration and profit participation.[15]

References

[1] EIOPA, “Statement on actions to mitigate the impact of Coronavirus/COVID-19 on the EU insurance sector”, EIOPA-20-173, 17 March 2019, available here. 

[2] EIOPA, “Recommendations on supervisory flexibility regarding the deadline of supervisory reporting and public disclosure - Coronavirus/COVID-19”, EIOPA-BoS-20/236, 20 March 2020, available here.

[3] EIOPA, “Call to action for insurers and intermediaries to mitigate the impact of Coronavirus/COVID-19 on consumers”, EIOPA-BoS-20-261, 1 April 2020, available here.
 
[4] EIOPA, “Statement on dividends distribution and variable remuneration policies in the context of COVID-19”, 2 April 2020, available here.

[5] EIOPA, “Update on other measures impacted by COVID-19 pandemic”, EIOPA-20/258, 2 April 2020”, available here.

[6] IAIS, “IAIS Executive Committee takes steps to address impact of COVID-19 on the insurance sector”, 27 March 2020, available here.

[7] NBB, “Nationale Bank bestrijdt economische gevolgen coronapandemie”, 19 March 2020, available here. 

[8] NBB, “Circulaire NBB_2020_008 betreffende de rapportering m.b.t. de gevolgen van de COVID-19 pandemie voor de verzekeringssector”, 31 March 2020, available here.

[9] NBB, “Mededeling NBB_2020_010 betreffende het uitstel voor bepaalde kwalitatieve rapporteringen en bepaalde rapporteringen van de erkend commissarissen in het kader van de Covid-19-pandemie”, 31 March 2020, available here.

[10] FSMA, “Newsletter: special instructions to intermediaries and lenders in connection with COVID-19”, 19 March 2020, available here. 

[11] Assuralia, “Verzekeringen voelen volop mee met heel het land: soepel omgaan met klanten in nood en blijvend bescherming bieden”, 26 March 2020, available here.

[12] NBB, “Ook de verzekeringssector levert inspanningen in de strijd tegen de sociaal-economische impact van de coronacrisis”, 26 March 2020, available here; 

[13] FSMA, “COVID-19 – Maatregelen Verzekeringssector”, 26 March 2020, available here.

[14] EIOPA, “EIOPA publishes extraordinary information for Solvency II Relevant Risk Free Interest Rate Term Structures and Symmetric Adjustment to Equity Risk with reference to 24 March 2020”, 27 March 2020, available here.

[15] NBB, Circular NBB_2020_012 on dividend distribution, variable remuneration and profit participation in the context of the COVID-19 pandemic”, 7 April 2020, available here.