COVID-19: Next steps in the response of Nordic insurance and banking supervisors to the pandemic

Nordic insurers and banks (firms), and their supervisors, have so far navigated the risks that have arisen during the response to the COVID-19 pandemic, but vigilance remains key. Further changes might be made to supervisory and regulatory priorities if efforts to bring COVID-19 under control progress more slowly than expected or the economic outlook deteriorates further than anticipated. For example, there could be additional delays and/or cancellations of certain non-essential supervisory activities. Supervisors will also think carefully about which regulatory change projects need to continue. Firms need to anticipate what changes might occur, and factor them into their short- and medium-term planning for regulatory projects and strategy setting.

Liquidity, credit risk and operational resilience are key

The situation that has arisen in response to the COVID-19 pandemic has rapidly impacted the workforce, economies and financial markets in the Nordic countries, as it has across the rest of Europe (and the world). At the same time as supporting their customers, insurers and banks – in the same way as all organisations – have faced their own challenges managing the health and wellbeing of their workforces and ensuring continuity of operations.

Nordic insurers and banks were in general well capitalised and entered the crisis in a strong position. The Finnish FSA, for example, stated that whilst “the coronavirus epidemic has cast significant gloom over global economic prospects” the Finnish financial sector at the end of 2019 was sound, and “therefore faces the altered situation from a good foundation”.

Now, as restrictions such as “lockdown” measures are being eased, vigilance remains important. The focus of firms and supervisors responding to the COVID-19 pandemic continues to be on three key outcomes:

• ensuring resilience of operations, and continuity of access to financial services for customers; 
• helping borrowers and insurance policyholders manage through the economic disruption, and managing the credit risk and default implications for lending; and 
• preparing to manage liquidity shocks, increased financial market volatility and the implications of low interest rates.

At the start of the pandemic, liquidity and operational resilience were front-of-mind for all firms and supervisors. Building capacity and readiness to address credit risk concerns and ensuring they can use their internal capital buffers have emerged as supervisors’ top priorities for banks. In the next phase of the pandemic response, credit risk will remain a key concern as it becomes clearer how economies, and the borrowers within each of them, will recover and respond. The risk of liquidity stress also remains, in particular for banks that have or are suspected by investors of having suffered significant credit losses.

For insurers, managing balance sheet risks and the implications of low interest rates are priorities for supervisors. For life and pension insurers, significant volatility in financial markets has created difficulties for asset liability management. The fall in interest rates (from already historically low levels) seen in some Nordic countries may have led to increased capital requirements for traditional business with guarantees. Non-life insurers have also been affected by the volatility and fall in interest rates, though to a lesser extent. They may face increased claims in business lines such as business interruption cover, travel insurance, health insurance, workers compensation.

For both banks and insurers, operational resilience also remains a concern as large numbers of staff, and their suppliers, continue to work remotely, and customers make greater use of digital channels than was the case before the crisis.

Firms need to be ready to make decisions in short order regarding how to manage their exposures and business, and how to prioritise (and then re-prioritise) in-flight and soon-to-start projects. In the medium-term, firms will need to assess the broader implications for their competitive position, strategy and business model. These short and medium term decisions need to take into account what additional actions supervisors could take in response to the pandemic situation. Initially supervisors will build on what has already been done, but there is also the possibility that they have to go further. Firms need to anticipate what further changes in supervisory and regulatory priorities might be made.

The supervisory response so far

The measures taken by Nordic supervisors so far are generally consistent with those that other European supervisors have taken. The measures fall into four broad categories:

1. Alleviation of the operational burden on firms to enable them to prioritise dealing with the current challenges.
2. Reduction in / easing of capital or solvency requirements.
3. Easing of the burden of compliance with existing rules.
4. Ensuring ongoing fair treatment of customers, especially vulnerable customers. 

There are also additional measures that national governments and central banks have introduced to provide credit and stabilise the impact on the broader economy. We do not cover these in this aticle, but further information is available at Deloitte’s COVID-19 Government response portal.

1. Operational burden

• There has been a general reduction of non-essential supervisory activities by Nordic supervisors in order to free up both their own resources and the resources of firms to deal with the crisis and the outcomes mentioned above. This is in addition to delays announced to EU-wide activities and associated information-gathering activities, such as the European Banking Authority’s (EBA) decision to postpone its EU-wide stress testing exercise for banks until 2021, or the European Insurance and Occupational Pensions Authority’s (EIOPA) delay of its holistic impact assessment for the Solvency II review. 
• The Finnish FSA, for example, restricted all inspection activities and information requests not related to the COVID-19 epidemic for insurers. The Swedish FSA decided not to initiate any new supervisory surveys, on-site visits and supervisory meetings. In Norway dialogue between the FSA and banks related to requirements for IRB models has been put on hold until further notice. 
• Not everything has been relaxed, however. Money Laundering and Terrorist Financing (MLTF) was already a priority for Nordic supervisors before the COVID-19 pandemic and the crisis has intensified supervisory focus on this issue as the pandemic has given rise to new opportunities for financial crime. The Finnish FSA, for example, issued preliminary guidance to firms, and further guidance from Nordic supervisors is possible.

2. Financial resilience

• Similar to the broader trend across Europe, there is an understanding amongst Nordic supervisors that firms should be able to draw down internal capital buffers where necessary. The Swedish FSA specifically stated that insurers that hold internal buffers above their Solvency Capital Requirement (SCR), may now need to use the buffer in order to adapt to current market conditions. For banks, all Nordic supervisors have either reduced or maintained the Countercyclical Capital Buffer (CCyB) rate to/at zero, except for the Norwegian FSA, which lowered the CCyB to 1%. 
• All Nordic supervisors issued guidance to firms with regards to the prudent distribution of dividends in order to improve firms’ financial resilience. 
• Following the EBA’s guidelines on criteria for general moratoria, the Swedish FSA announced that it considers the loss of income associated with COVID-19, to qualify as special grounds that allow the bank and borrower to reach an agreement to reduce or suspend amortisation payments for a limited period of time. The Finnish FSA has also indicated that it will comply with the EBA’s guidance in relation to payment moratoria in its supervision. 

3. Compliance with existing rules

• Supervisors across the Nordics welcomed the European Supervisory Authorities’ (ESAs) recommendations with regards to flexibility in reporting. The Danish FSA, for example, indicated that it would seek to relax the regulatory burden for firms by applying flexibility in enforcing administrative rules. Two executive orders were subsequently adopted by the relevant ministries, enabling the Danish FSA to exercise further discretion in waiving certain requirements, including those relating to reporting and registration, upon request.
•  On the other hand, certain ad-hoc regulatory reporting on the effects of the response to COVID-19 on capital has intensified. For example, while EIOPA’s recommendation was that insurers report a new estimation of their Solvency Capital Requirement (SCR) as at the end of Q1 2020 (as opposed to year-end 2019), the Finnish FSA stated that insurers should be able to conduct this recalculation on a monthly basis, and to a significant extent on a weekly basis, given the current market movements.

4. Fair treatment of customers

• There has been a focus throughout the Nordics on the fair treatment of customers during the COVID-19 pandemic. The Finnish FSA, for example, announced that it considers that the granting of grace periods offered by lenders represents a responsible stance towards consumers’ payment difficulties caused by the pandemic. 
• Similarly, the Danish FSA stated it will be considerate of the fact that creditworthiness assessments and other approval procedures may be relaxed in the context of loans to existing and otherwise solvent customers facing liquidity shortage due to the COVID-19 pandemic, whilst still expecting firms’ balance sheets to reflect the appropriate risk exposures and losses. 
• For insurers, the scope of insurance cover, i.e. to what extent certain types of insurance (business interruption insurance in particular) should cover pandemic risk such as COVID-19, has been a key focus for regulators internationally. While there have not been any specific regulatory initiatives related to this in the Nordics, Nordic insurers remain alert to possible local ramifications of changes in other jurisdictions. 
   

Potential further action

If efforts to bring the COVID-19 pandemic under control progress more slowly than was initially expected or the economic outlook deteriorates further than anticipated, supervisors – and regulatory authorities – will consider what additional action they could take.

It is difficult given all of the uncertainties to anticipate what might be required. A framework for assessing what potential further action might be taken could consider what supervisors might be inclined to amend, postpone or discontinue; or what they will be inclined to prioritise or continue. For example:

Inclined to amend, postpone or discontinue

• Measures which exacerbate procyclicality, or impair or impede banks’ lending capacity. 
• Matters which divert firms from dealing with the “here and now” of the crisis. 
• Where there is evidence that aspects of the regulatory reforms put in place following the 2008 financial crisis are having unintended and unforeseen consequence.

Inclined to prioritise or continue

• Measures which maintain capital in the banking and insurance system.
• Focus on issues relevant to current circumstances, including remediation work, and operational resilience; or which facilitate the recovery phase.
• Fair treatment of retail customers and proper standards of wholesale market conduct. 
• Regulations where, without action, the EU is likely to fall further behind the market especially if these activities accelerate because of COVID-19.

There will likely be additional delays and/or cancellations of certain non-essential supervisory activities going forward. Supervisors will think carefully about which regulatory change projects need to continue in order to maintain financial resilience and stability, protect customers and to avoid derailing medium-term initiatives.

It remains to be seen how comfortable firms – and their investors - will be to respond to further reductions in capital buffers, if required, and supervisors may need to take further steps to incentivise this outcome or else allow alternative approaches to help firms absorb losses.

Firms should be ready for and prepared to respond, at short notice, to further ad-hoc requests from supervisors for additional (and in some cases detailed) information. For example, the financial impacts of the COVID-19 pandemic on capital and liquidity, and for banks’ credit exposures to certain sectors, are likely to be areas of focus. This will require enhanced risk management and monitoring, plus quick access to reconcilable and controlled data. Firms should deploy tactical scenario testing and those which have a well-developed set of early warning indicators for operational disruption; customer distress; market events; and contingency planning activation triggers will be well placed to meet the needs of supervisors – and also their full range of stakeholders.