On 17 March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a statement (Statement) on actions to mitigate the impact of Coronavirus/COVID-19 on the EU insurance sector. This was followed on the 20 March by EIOPA’s publication of “Recommendations on supervisory flexibility regarding the deadline of supervisory reporting and public disclosure – Coronavirus/COVID-19” (Recommendations).
The Statement acknowledges the difficulties currently faced by insurers both in relation to volatile market conditions and the challenges of maintaining normal operations. EIOPA stresses the importance of maintaining services to customers, and accordingly, to offer “operational relief”, they propose supervisory “flexibility” around the deadlines for year-end reporting and public disclosure. EIOPA’s proposals in relation to this flexibility are addressed in detail in the Recommendations as set out below. EIOPA also promises to limit future information requests and the issuance of consultations to “essential” matters, and in one very specific move, it has extended the deadline for the Holistic Impact Assessment for the 2020 Solvency II Review from the original 31 March to 1 June 2020.
The Recommendations are addressed to National Competent Authorities (NCAs) and include the following key points for financial year-ends and for financial quarter-ends.
For financial year-ends between 31 December 2019 and 31 March 2020
The Regular Supervisory Report, at both solo and group reporting level, may be delayed by 8 weeks This would mean, for a solo undertaking with a 31 December 2019 year-end, a deadline of 2 June 2020 instead of 7 April 2020. As a result, certain key annual quantitative reporting templates (QRTs) may be delayed by 2 weeks; these include, for example, Balance Sheet, Own Funds, and SCR calculation. The remaining annual QRTs may be delayed by 8 weeks.
NCAs should treat national-specific or additional requirements (e.g. audit requirements) similarly. The Solvency and Financial Condition Report (to be publicly disclosed) may be delayed by 8 weeks, except for certain key annual QRTs (again including Balance Sheet, Own Funds, and SCR calculation) that may only be delayed by 2 weeks.
Undertakings should consider the current situation as a “major development” as referred to in article 54(1) in the Solvency II Directive and publish, at the same time of publication of the information referring to the year-end, any appropriate information on the effect of COVID-19 in the published information.
For financial quarter-ends between 31 March 2020 and 29 June 2020
The quarterly QRTs may be delayed by 1 week (this would mean, for a 31 March 2020 quarter-end, a deadline of 12 May 2020 instead of 5 May 2020), apart from the QRT reporting on derivative transactions, which may be delayed by 4 weeks.
However, EIOPA goes on to say that “early submissions are encouraged” for this quarterly reporting and mandates “a proportionate approach to less material aspects of the calculations”. Furthermore, undertakings are expected to estimate their SCR as at the quarter-end reference date, rather than use the “last calculated” SCR, that would normally be acceptable.
Returning to EIOPA’s Statement, in which EIOPA says that the insurance sector is well capitalised and able to withhold severe but plausible shocks to the system. It notes the tools available to the regulatory authorities within the Solvency II framework, referencing in particular the ability in extreme situations to extend the recovery period applicable when undertakings experience difficulties in meeting their solvency requirements. EIOPA confirms the willingness of the relevant authorities to use those tools, and even where necessary to seek additional measures from EU institutions to ensure the stability of the insurance sector and safeguard policyholder protection. However, there is a warning to insurance companies to “preserve their capital position” and a reminder to pursue prudent dividend or other distribution policies, with explicit reference to variable remuneration.
Commentary
EIOPA’s recognition of the challenges the current crisis presents to insurers is very welcome, as are the specific concessions recommended on annual reporting. However, while this flexibility may take some pressure off teams striving to meet prescribed deadlines, it should be borne in mind that highly choreographed project timelines (involving production, assurance, audit & board processes) will have long been in place at undertakings and a relaxation of the ultimate regulatory deadline will not automatically solve all the problems they may face in completing a comprehensive year-end process under current conditions. EIOPA itself acknowledges in the Recommendations that splitting the annual returns into two separate parts with separate deadlines may create its own issues.
Concessions on Q1 quarterly reporting are relatively limited in the Recommendations, whereas undertakings may well need greater flexibility at that point, notwithstanding that the scale of reporting and extensiveness of sign-off processes are considerably less than for annual reporting. However, given the recent extreme market volatility and other effects of the COVID-19 situation, it is understandable that EIOPA would wish to ensure that updated information is available to NCAs at an early date.
It should also be noted that decisions on deadlines ultimately rest with NCAs, and that the Recommendations are issued to NCAs on a “comply or explain” basis, with NCAs having two months to reply to EIOPA on their intentions. It is hoped that NCAs, including the Central Bank of Ireland, will clarify as quickly as possible their intentions in relation to these regulatory deadlines.
Finally, in the light of the EIOPA Statement, and of course the broader economic and social background, boards will need to be especially prudent when considering any distributions, or discretionary payments under employee bonus or other variable remuneration arrangements.
For more information, please contact John Larkin, Eoin Caulfield, Ian Murray or your usual William Fry contact
Contributed by Mike Frazer
