Insurance Guarantee Schemes (White Paper)

The 2008 financial crisis demonstrated the fragility of the financial sector and particularly insurance in the European Union (EU). As an initial step towards overcoming these difficulties, the European Commission has put in place the “Solvency II” Directive which requires insurance and reinsurance undertakings to hold sufficient capital to cover their obligations for one year. The Commission now intends to increase consumer safety by introducing a harmonised system of Insurance Guarantee Schemes.

ACT

White Paper on Insurance Guarantee Schemes [COM(2010) 370 final - Not published in the Official Journal].

SUMMARY

This White Paper presents a number of proposals aimed at introducing a legally binding regime in the field of Insurance Guarantee Schemes (IGSs).

IGSs enable consumers to be compensated if an insurance undertaking becomes insolvent – i.e. when it is no longer able to honour its contractual commitments.

Objectives of a harmonised IGS

The measures recommended by this White Paper are aimed at:

• ensuring comprehensive and even protection for policyholders and beneficiaries;
• avoiding distortions of competition between different undertakings;
• reducing adverse incentives;
• ensuring cost efficiency;
• enhancing market confidence and furthering the stability of markets.

Types of undertakings concerned

This White Paper applies to all life and non-life insurance undertakings. It does not apply to pension funds or reinsurance.

Types of products covered by IGSs

The Commission recommends that IGSs should cover life and non-life insurance policies. More specifically, life insurance policies shall include traditional risk-protection products as well as savings and investment products.

When IGSs should intervene

According to the Commission, an IGS should intervene when other protection mechanisms have failed to prevent or mitigate an insurer’s collapse. The IGS should be considered as a last-resort mechanism.

The ‘home country’ principle

According to the home country principle, home country monitoring authorities are responsible for prudential regulation and the initiation of winding-up proceedings. This principle presents advantages insofar as it is compatible with the deposit guarantee system in the banking sector and with the investor protection system in the securities sector.

The Commission strongly recommends the application of the home country principle for IGSs.

Funding arrangements for IGSs

Funds for IGSs should be raised on an ex ante basis. This funding arrangement may be supplemented, if necessary, by other funds at a later date, calculated according to each contributor’s risk profile.

If the insurer becomes insolvent, IGSs shall compensate policyholders and beneficiaries for losses suffered for a pre-defined period of time.

Context

The insurance sector suffered severely from the 2008 global financial crisis. Some large European insurance undertakings suffered heavy losses and had to be refinanced. In order to ensure that this situation does not occur again, in its Final Report the De Larosière Group recommended the introduction of IGSs that are harmonised at EU level, in line with the announcement made in the Communication of 9 March 2009 “Driving European Recovery”.

Last updated: 06.09.2010