Insurance-related restrictions on dividend payments and other distributions

Like every other individual and company in the world, Luxembourg insurance and reinsurance companies (“Companies” or “Company”) cannot avoid the consequences of the COVID-19 pandemic. Since 1 August 2020, Companies have been restricted in making dividend payments and other distributions.

1. History of the measures

Back in March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) released a statement on the payment of dividends and variable remuneration policies in the context of the COVID-19 pandemic. All (re)insurers were required to take measures to preserve their capital position, balancing protection of the insured, following prudent dividend and other distribution policies, including variable remuneration. At that time, EIOPA urged (re)insurers to suspend all discretionary dividend payments and share buy-backs, and the European Systemic Risk Board (ESRB) did the same in one of its recommendations (ESRB/2020/7).

Following this, in July 2020, the Luxembourg insurance sector supervisory authority (Commissariat au Assurances (CAA)) published a Circular letter 20/15 of 31 July relating to the recommendation of the ESRB of 27 May 2020 on the restrictions applicable to distributions during the COVID-19 pandemic.

The purpose of the Circular letter is to recommend that Companies should refrain, as from 1 August 2020 and at least until 1 January 2021, from taking one of the following measures: (i) making a dividend payment or irrevocably undertaking to make a payment of dividends, (ii) repurchasing common shares, and (iii) creating an obligation to pay variable compensation to a significant risk taker.

The only exception to such distributions’ interdictions can occur when the two following conditions are concurrently met: (i) extreme care has been taken in deciding on such distribution, and (ii) such distribution cannot result in a violation of the approved risk tolerance limits relating to the Company’s own risk and solvency assessment (évaluation interne des risques et de la solvabilité (ORSA)).

In December 2015, the ESRB published a recommendation amending Recommendation ESRB/2020/7 on restriction of distributions during the COVID-19 pandemic (ESRB/2020/15). The main novelties of this Recommendation are reflected in the CAA Circular letter and outlined below.

2. New CAA Circular letter

On 1 January 2021, the CAA went a step further and published the Circular letter 21/1 relating to the Recommendation ESRB/2020/15.

The Circular letter enshrines the novelties of the Recommendation ESRB/2020/15 and extends until 30 September 2021 the restrictions applicable to a Company on making dividend payments and other distributions stated above.

In addition, the Circular letter provides procedures which should be followed by Companies if they consider proceeding with any of the abovementioned distributions.

First of all, in the case of distribution covered by the exception, a Company would need to notify the CAA of the distribution at least 15 days before the date of decision of the proposed measure, providing the CAA with a notification file including at least the following explanation and/or documents:

– a description of the impact of the measure on the solvency and liquidity situation;

– an adaptation (including the proposed measure) of the capital plans tested at the level of the regular report to the controller (rapport régulier au contrôleur (RSR));

– an update of the specific stress tests related to the COVID-19 crisis (following the projected measure) at the ORSA level; and

– in the event that these stress tests presented potential insolvency situations, a description of the respective recovery measures.

In the case of a distribution not covered by the exception, a Company considering paying dividends would need to request from the CAA a derogation at least 30 days in advance, providing the CAA with a derogation file including the following:

– a notification file as for the distributions covered by the exception; and

– a formal request for derogation with an explanation of the rationale of such payment with a recovery plan (according to the model defined in Article 65 (Recovery plan and finance scheme) of the CAA Regulation 15/03 of 7 December 2015 on insurance and reinsurance undertakings, as amended).

3. Potential next updates

Given the temporary nature of the abovementioned measures, the CAA has already stated – in Circular letter 21/1 – that it will conduct a more in-depth assessment of the economic situation and, taking into account possible future recommendations by European authorities, consider whether the deadline should be extended beyond 20 September 2021.