What is the aim of the White Paper?
The aim of the White Paper is to make appropriate legislative proposals which provide:
(i) a cost effective, yet fair and thorough level of consumer protection in the EU,
(ii) a level playing field between insurers operating in the same markets,
(iii) safeguards against the need for taxpayers to intervene where an insurance company becomes insolvent,
(iv) enhances the stability of the EU internal insurance market.
What is the preferred approach?
The White Paper for consultation sets out the Commission’s preferred approach which is to introduce a Directive to ensure all Member States have an IGS that comply with a minimum set of requirements.
IGS can protect policyholders when an insurer becomes insolvent by either paying compensation to them or by ensuring that their policy continues through the guarantee scheme or via transfer to another insurer.
What are the reasons for adopting this approach?
The proposals seek to end the existing fragmented approach whereby the level of protection offered by IGS between member states varies considerably - most member states do not offer an IGS for life insurance polices whilst the offerings from other member states differ in relation to the level of protection offered, eligibility to the scheme, when the scheme will intervene and how the scheme will be funded.
The Commission has stated in the Paper that “The lack of harmonisation in this area may hinder effective and equal consumer protection. This may lead to a loss of consumer confidence in the relevant markets and may ultimately put at risk market stability. It may also impede the functioning of the internal insurance market by distorting cross-border competition."
What are the key elements of the proposed approach?
The key elements of the proposed approach include:
IGS as a last resort mechanism - The other options listed in what other options have been considered? below provide some protection against insolvency. IGS will provide additional protection when the other options fail.
'Home country' harmonisation - To cover policies issued by domestic insurers and those sold by branches of domestic insurers established in other EU Member States. It is also aligns with the 'home country control principle' where home country supervisors are responsible for prudential regulation.
Apply to life and non-life insurance policies - To include risk-protection policies, and also savings and investment insurance products (which would include unit linked policies).
Cover natural persons and selected legal persons - The eligibility for legal persons is yet to be determined but is likely to be restricted to small undertakings to help keep the costs of the scheme down.
Funding should be set at an appropriate level, predominately made by ex-ante contributions (made in anticipation of future bankruptcies) by insurers based upon their risk profile in anticipation of future insolvency, with ex-post funding (made when an insurer actually becomes insolvent) only added when there are insufficient funds - To ensure that insurers who become insolvent have contributed to the scheme and also help ensure that insurers are not excessively affected during difficult times such as economic downturns when the scheme is most likely to be needed.
Compensation limits and other reductions in benefits may also be introduced - To help reduce the funding level required and also ensure policyholders bear a share of any loss.
In respect of portfolio transfer and/or compensation of claims there is recognition that the needs of life insurance policyholders differ from general insurance policyholders in that continuation of cover would be more important for them, as it would be more difficult for them to obtain similar cover. IGS should at the very least compensate policyholders for losses within a pre-determined time when an insurer becomes insolvent.
What are the main concerns with the proposals?
Whilst the suggestions have merit in ensuring all individual policyholders in Europe would have some protection, as a minimum harmonisation approach is being proposed, member states could provide higher levels of protection if they wish. In theory, this could discourage policyholders from effecting policies with cross border insurers (who might in fact be much stronger financially) unless the legislation ensures that the existence of schemes cannot be used for competitive advantage.
What other options have been considered?
Prudential regulation and risk management - The main concern with this approach is that it would be too costly to set solvency requirements high enough to cater for all unforeseen losses.
Current preferential treatment of policyholders in winding-up proceedings - The main concern with this approach is that the proceedings are often complicated and take a long time to resolve.
Case-by-case government intervention - The main concern with this approach is that such ad hoc intervention may lead to unfair decisions which provide big companies with an advantage.
Additional information and enhanced transparency - The main concern with this approach is that policyholders may be unable to understand the information.
How does the IGS that is being proposed interact with Solvency II?
It is anticipated that the incidences of failures of insurance companies will reduce when Solvency II becomes operational on 31 December 2012. However, neither the current nor a future solvency regime will create a zero-failure environment in the insurance sector. Therefore, the lack of an IGS could still result in financial hardship for consumers and an unlevel playing field for insurance companies.
What companies will the proposals apply to?
The proposals will apply to all life and non-life insurance companies (including those which offer both types of product). It does not apply to pension funds as defined by Directive 2003/41/EC (occupational pensions) or to reinsurance.
When will the consultation process end?
Contributions to the consultation process must be sent to the Commission by 30 November 2010.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.