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EIOPA's Guidance on Foreseeable Dividend Deductions: What Insurers Need to Know and How to Respond
Francis is a Principal Consultant in charge of our insurance practice in Dublin. He has 15 years of experience within the life and non-life (re)insurance industry. His expertise covers the areas of financial reporting, prudential regulation, and actuarial modelling. Francis has worked in both industry and consulting with extensive exposure to Solvency II and BMA-regulated clients and a keen eye on new regulatory developments.
Introduction
Many insurers are wrapping up their year-end regulatory returns - and with that comes the opportunity to reassess how foreseeable dividends are being handled under Solvency II.
EIOPA’s February 2025 Supervisory Statement1 sheds light on supervisory expectations and provides much-needed clarity around dividend deduction practices. In this blog, we break down the three approaches commonly used in the market, outline when each is appropriate, and explore how these choices impact solvency metrics. We also explain how Finalyse can help insurers align with regulatory guidance efficiently and with confidence.
In February 2025, the European Insurance and Occupational Pensions Authority (EIOPA) published a Supervisory Statement on the deduction of foreseeable dividends from own funds under Solvency II. This statement, based on Commission Delegated Regulation (EU) 2015/35 and the updated Implementing Regulation (EU) 2023/894, aims to clarify and harmonise supervisory expectations across EU member states regarding how insurers should treat foreseeable dividends in their Solvency II own funds calculations.
Notably, EIOPA is currently reviewing Commission Implementing Regulation (EU) 2023/894 as part of the broader Solvency II review. This review may result in future changes to reporting standards and supervisory expectations. In the meantime, the Supervisory Statement offers initial guidance to promote consistent interpretation and enhance convergent supervision across EU member states.
In addition, as of 31 December 2023, the instructions for template S.23.01 (Own Funds) under Commission Implementing Regulation (EU) 2023/894 require undertakings and groups to deduct in full the annual foreseeable dividend when reporting to supervisory authorities. This formalises expectations around dividend treatment and elevates its importance in regulatory submissions.
Why It Matters
For insurance and reinsurance undertakings, the treatment of foreseeable dividends is not just a technical accounting issue. It has direct implications on reported Solvency II ratios, potentially influencing capital planning, shareholder communication, and even dividend strategy. Misalignment with regulatory expectations may invite supervisory scrutiny or reputational risk.
Under Solvency II, “foreseeable dividends” refer not only to declared dividends, but also to any expected distributions or charges that are reasonably anticipated—even if not yet formally approved. This includes interim dividends and other payouts that reduce the availability and permanence of own funds.
The Three Approaches to Dividend Deduction
EIOPA has identified three main approaches currently in use by insurance firms for deducting foreseeable dividends from own funds:
1. Annual Full Deduction
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.
2. Quarterly Accrued Deduction
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.
3. Deduction After Board Approval
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's Supervisory View
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.
Practical Implications for Insurers
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.
How Finalyse Can Help
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.