EIOPA's Guidance on Foreseeable Dividend Deductions: What Insurers Need to Know and How to Respond

EIOPA has identified three main approaches currently in use by insurance firms for deducting foreseeable dividends from own funds:

Under this method, firms deduct:

• Dividends from the previous financial year (T-1), even if not yet formally approved by the Board, and
• An estimate of dividends based on the full current year (T) earnings.

Pros:
- Conservative and prudent.
Cons:
- May result in “double deduction” from both years T-1 and T.
- Profit estimates for the current year may be unreliable, especially early in the year.
- Can distort own funds and Solvency II ratios.

This method involves:

• Deducting dividends from realised earnings of the previous year, and
• A pro-rata deduction of dividends based on actual profits recorded in the current quarter.

Pros:
- Better alignment of profits and dividends.
- Reduces own funds volatility.
- Offers a more accurate and economically sound view.
Cons:
- Requires quarterly updates and estimation discipline.
- Interim results may still change, requiring later adjustments.

Here, dividends are deducted only once they have been formally declared or approved by the Board.

Pros:
- Avoids premature deduction of uncertain obligations.
Cons:
- May understate liabilities if dividends are foreseeable but not yet approved.
- Less consistent with the principle of economic substance under Solvency II.

EIOPA is not mandating one specific method, but its preferences are clear:

• Quarterly accrued deduction: generally, fully acceptable approach and Supervisors are not expected to take action against firms using this approach.
• Annual full deduction: Acceptable in stable, predictable environments—e.g. when fixed dividends are paid from retained earnings.
• Post-approval deduction: Only considered appropriate where firms face genuine difficulty in estimating foreseeable dividends.

This guidance is designed to promote consistency and proportionality while improving the comparability of solvency disclosures across jurisdictions.

Insurers should take proactive steps in light of this guidance:

• Review your current dividend deduction approach: Does it align with EIOPA’s expectations?
• Evaluate your internal forecasting capabilities: Can you reliably estimate quarterly earnings?
• Update your documentation and internal controls: Clearly define and support your dividend treatment in your Solvency II reporting.
• Engage with your supervisory authority: Ensure transparency and pre-empt potential challenges or misunderstandings.

At Finalyse, we support insurers interpret and implement regulatory guidance effectively. Our multidisciplinary team combines actuarial, financial, and risk expertise to help you:

• Assess the impact of various dividend deduction strategies on your Solvency II ratios.
• Implement robust processes for quarterly earnings estimation and pro-rata dividend treatment.
• Enhance your reporting and disclosures to meet supervisory expectations.

Whether you’re transitioning to a new approach or simply validating your existing framework, Finalyse helps ensure your practices are aligned, efficient, and regulator ready.

1: Supervisory Statement on the deduction of foreseeable dividends from own funds under Solvency II - EIOPA