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Law360, London (December 3, 2020, 11:10 AM GMT) -- The Bank of England told insurers on Thursday to be prudent about rewarding shareholders amid the uncertainty that they continue to face during the coronavirus crisis after several companies ignored guidance and pressed ahead with dividend payments this year.
Charlotte Gerken, executive director for insurance supervision at the central bank, said that insurance companies must decide whether to line the pockets of their shareholders based on their exposure to risk as the pandemic continues.
Regulators have urged financial institutions, including insurers, to halt dividends, buybacks and bonuses during the COVID-19 outbreak. Companies in the finance sector should preserve their capital holdings to lend to the economy, pay out to policyholders and protect themselves during the economic fallout.
"In the face of high uncertainty, firms need to continue to make decisions based on their individual exposures and risk appetites. Those decisions include whether or not to make distributions including dividends," Gerken told insurers during a virtual conference on Thursday.
"Firm-specific stress testing of affordability is a key input to board's decisions. And we expect firms to continue to do this and maintain high levels of prudence in the face of continuing high uncertainty," she added.
She acknowledged that insurers operate in a range of markets and that the pandemic has hit them in significantly different ways.
Prudential Regulation Authority chief Sam Woods wrote to the boards of insurance companies in April, urging them to be mindful of their policyholders before deciding on whether to make dividend and bonus payments.
The guidance mirrored that issued by the European Insurance and Occupational Pensions Authority. Insurance companies that believe they are legally required to pay out dividends or large bonuses must explain why to their national regulators, EIOPA said in April.
But major European insurers went ahead and handed their profits to shareholders. Munich Re, Legal & General and Allianz all set out plans to defy the guidance, and their national supervisors failed to intervene.
EIOPA told the European Parliament in October that the resistance demonstrated that the EU watchdog needed tougher supervisory powers to keep the sector under control.
--Editing by Ed Harris.
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