The Australian Prudential Regulation Authority (APRA) has today updated its capital management guidance for insurers in the COVID environment, acknowledging the “difficult path ahead.”
APRA chair Wayne Byres says the updated guidance balances the need for insurers to keep supporting households and businesses, while also maintaining a “prudent approach” in the face of a very sharp and severe economic contraction.
“Today’s announcement strikes a balance in recognising the strength of the financial system, while at the same time acknowledging the difficult path ahead,” Byres said.
“Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by COVID-19. On that basis, APRA believes that banks and insurers do not need to continue to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy.
“In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from COVID-19, and restrictions on dividends from their New Zealand operations. APRA has therefore set an expectation that dividend payout ratios for ADIs will be maintained below 50 per cent for this year.”
The regulator's updated guidance replaces its recommendations made in April this year that insurers should “seriously consider” deferring decisions on the appropriate level of dividends until the outlook is clearer.
The regulator says that uncertainty in the economic outlook has “reduced somewhat” since then and that it’s had the opportunity to review insurers’ financial projections and stress testing results.
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Insurers should also “maintain caution” in planning capital distributions and continue to take a measured approach to dividends, taking into account the ongoing uncertainty in the outlook.
For 2020, APRA says it expects insurers will moderate dividend payout ratios, including using dividend payout ratios (DPRs) and other capital management initiatives to “at least partially offset the diminution in capital” from distributions.