Foreword By The Chairman

AuthorGabriel Bernardino
The Covid-19 outbreak further highlighted the importance of the S olvency II regu-
latory framework. One the one hand, the market-consistent and risk based approach
helps insurers to better align capital to risk, build-up resilience and enhance the risk man-
agement practices. On the other hand, the the adjustments included for long-term guar-
antees allow to partially mitigate market volatility associated with the Covid-19 outbreak
ref‌lected in own funds and/or solvency capital requirements.
A solid and comfortable capital buer helped insurers to withstand the initial se-
vere market shocks experienced with the Covid-19 crisis. However, ahigh level of un-
certainty on th e magnitude of economic disruption and further dissemination of the
virus threatening health of European citizens increases downside risks looking ahead.
The prolonge d low yield environment has already been afundamental risk for both
insurance and pension sectors and the Covid-19 outbreak further increased its potential.
The forthcoming recession will negatively aect corporate sector prof‌itability, resulting
in rating downgrades, increas ed defaults and unemployment. In a ddition, commercial
real estate prices are expected to drop by adopting more extensively a work from
home arrangement by f‌irms. Finally, ahigh interconnectedness of insurers with banks
could further suppo rt spill-overs of mentioned risks from the real sector to insurers
and pension funds.
Strains to demand and insurers’ underwriting prof‌itability might take some time to un-
fold in parallel with the deterioration of the macroeconomic environment. In addition,
some insurers run the risk of becoming involved in lengthy and costly legal battles in
relation to claims occurred as aconsequence of the lock down measures. To preserve sol-
vency, it is important that there is no retroactivit y implying that insurers face claims
that they did not cover. All these factors might lead to materialisation of the risks on
insurers’ balance sheet with a substantial lag and high uncertainties.
From the outset of the pandemic, EIOPA has been working closely with national com-
petent authorities to ensure bu siness continuity, f‌inancial stability and consumer protec-
tion. Measures, such as recommendations on supervisory f‌lexibility regarding dead-
lines of reporting and public disclosure are aimed to help insurers continuing to serve
their customers. Furthermore, given the overall uncertainty of the scale and duration of
the crisis, EIOPA has urged insurers and pension funds to adopt aprudent approach and
mitigate the impact of Covid-19, for example by temporarily suspending all discretion-
ary dividend distributions and share buy backs, with the objective to preserve capital
and contribute to f‌inancial stability. Finally, to ensure continuing fair treatments of
customers, EIOPA has asked insurers to identify their products aected as a result of
Covid-19 and consider proportionate remedial measures in cases in which there are pos-
sible unfair treatment of customers.
The Solvency II regime has some layers of f‌lexibility. If the crisis deepens and if there will
be asignif‌icant number of companies in diculty, EIOPA is prepared to issue adecla-
ration of adverse developments. This measure will allow national authorities to extend
the recovery period, providing insurers more time to rebuild capital levels if needed.
Recovery plans need to be assessed and granted consistently across countries.

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