Prudential Regulation Authority Rulebook

4.1

When assessing potential dividend payments^[11], the PRA expects insurers to be able to demonstrate that any planned dividend payments are appropriate in relation to actual and projected business performance, as well as the current and future capital position of the insurer, taking account of its documented risk appetite.

4.2

For this purpose, the PRA expects insurers to consider whether the level of their capital resources held following payment of a planned dividend would be in line with the insurer’s risk appetite; and to have a dividend policy that takes account of the sources of the insurer’s earnings and their sustainability. In this context, insurers are also expected to consider how the dividend may be adjusted in the event of adverse financial performance by the insurer that could result either from adverse market (or other external) conditions, or from insurer-specific issues.

4.3

Accordingly, it will be important for insurers to consider the level, timing, and source of capital generation, including for example whether it comes from new business, the back book or one-off management actions; and hence to consider the longer term implications of their dividend policies, including whether future dividends could be supported by future capital generation. Insurers are expected to have suitable MI to inform this analysis.

4.4

The PRA would not normally expect insurers (other than insurers in run-off) to seek the PRA’s pre-approval of dividends provided: the insurer is within risk appetite; the dividend payment leaves the insurer’s capital position within risk appetite and it is likely to remain so; and the insurer’s SCR coverage is above 100%. However, the PRA expects to be informed in advance where a firm is close to risk appetite, or where a proposed dividend would take a firm close to risk appetite. PRA supervisors may wish to review the sustainability of insurers’ capital management and dividend policies as part of regular supervision, and may take a particular interest for insurers that operate with capital levels that are close to the SCR or which fluctuate unexpectedly.

4.5

If an insurer’s capital management policies are calibrated such that frequent or foreseeable breaches of SCR occur or are likely to occur, the PRA may consider whether the insurer is meeting the requirement in Conditions Governing Business 2.1 to have in place an ‘effective system of governance which provides for sound and prudent management of its business’. Similarly, if the level of capital of an insurer regularly or persistently falls outside of its risk appetite, or an insurer makes frequent changes to its risk appetite for its planned levels of capital, the PRA may consider whether this indicates failings in the governance process by which the insurer sets its risk appetite.