Insurance Guarantee Schemes
1. In this joint paper, the Danish, Estonian, Finnish, Norwegian and Swedish National Associations would like to outline our initial views on the Commission´s White Paper on insurance guarantee schemes (IGS). The paper is in line with the position of the CEA – Insurers of Europe, of which we are all members – but further highlights some topics relating to the possible impact of the Commission proposal on small and concentrated markets in particular.
2. Our Associations oppose the introduction of a Directive on IGS. For reasons explained below, we find that the costs of and risks deriving from IGS generally will exceed the benefits.
What are the objectives behind IGS and are they valid?
3. The Commission puts forward three objectives behind possible legislation on IGS: consumer protection, competition issues and financial stability. We firmly believe that the only valid objective could be that of consumer protection and that the level of protection is sufficient, especially in view of the coming new frameworks.
4. Solvency II and the new supervisory framework will enhance consumer protection. The White Paper is based on past experiences under the Solvency I regime and does not take due note of the new risk-based rules, which will focus on all risks in each undertaking. The new frequent reporting system includes also an “early warning mechanism” which allows the supervisory authority to intervene at the earliest possible moment. This extends the variety of measures designed to save the undertaking. These rules will need to come into play before we consider yet another layer of protection.
5. It is also important to explore alternatives to ensure consumer protection. National winding-up systems are designed to give policyholders priority over other creditors in the winding-up process. We feel that a proper analysis of the impact on national winding-up systems, including the possibilities of portfolio transfers, is needed before any EU rules on IGS are considered.
6. On competition, minimum harmonization on IGS would hardly create a level playing field given the much more important differences between Member States as regards e.g. product lines, tax systems and winding-up rules.
7. On financial stability, it is important to have in mind that insurance core activities did not cause the financial crisis. The insurance sector operates under a distinctly different business model compared to the banking sector.
8. On the contrary, IGS could actually bring about an element of systemic risk within a Member State, since IGS would increase the interdependence between insurers, especially in small, concentrated markets such as the Nordic and Baltic ones. This could increase the risk of contagion and result in destabilization of these markets.
Ex-ante funding should be avoided
9. Ex-ante funding could lead to problems for small and concentrated markets like the Nordic and Baltic ones. In such markets, the costs of IGS cannot be spread across a large number of insurers and policy holders. In order to achieve the same protection throughout the EU, insurance undertakings in smaller markets may become subject to significantly higher contributions, thus distorting the competition between smaller and larger markets.
10. In contrast to the banking industry and the deposit guarantee schemes, an IGS would not be a vehicle to prevent massive withdrawals during a short period of time in response to financial distress. In the insurance sector, claims are only paid out in the occurrence of the event insured. The need to have funds ready available in case of a possible bankruptcy is therefore limited.
11. It is also important to point out that there is always the possibility that the funds collected ex-ante will prove insufficient in the event of a major insurance crash, especially in small and concentrated markets. In fact, figures show that even with higher contributions to an IGS than 1.2 percent, as proposed by the Commission, the funds could not cover the deficits of bigger life insurance companies.
12. Ex-ante funding may thus create a false feeling of protection. The policy holders would not be fully protected, nor would tax payers be shielded from covering the gaps through government intervention.
13. The Commission should refrain from adding to the financial burden for insurance undertakings at this point. In light of the incoming Solvency II, the first priority for the insurance undertakings will be to accumulate the funds they need to comply with the new solvency rules, which will in many cases lead to higher capital requirements.
The scope of IGS is unclear
14. The Commission advocates that IGS should cover all insurance policies. Our Associations believe that there are good reasons for limiting IGS protection to certain types of insurance policies. When elaborating the scope of IGS it is important to take into account the diversity of products offered in different Member States and the specificities of national markets in general.
15. A first observation is that life and non-life insurance are completely different lines of business, with fundamentally different objectives. But the diversity is great also within each business line, depending on for example the existence of built-in guarantees, tax treatment, social security systems, labour markets and salary systems.
16. A practical example is statutory insurance. For those Member States that already have an IGS in place for statutory insurance policies, the introduction of national IGS based on the home country principle may actually lead to lower consumer protection in these Member States. This would be problematic in Member States like Denmark and Finland, where statutory insurance form an important part of the social security system.
17. Another example is occupational pension insurance, where there is often a strong link to arrangements on the labour markets, such as collective agreements in Member States like Denmark and Sweden. There also has to be a level playing field between occupational pensions safeguarded by insurance companies and such pensions safeguarded by pension funds (i.e. IORPs).
Policy recommendations
18. Solvency II and the new supervisory framework will enhance consumer protection. These rules will need to come into play before we consider yet another layer of protection.
19. National winding-up systems are designed to give policyholders priority over other creditors in the winding-up process. It is important to explore and analyze other alternatives to ensure consumer protection more in-depth.
20. The Commission should refrain from introducing rules on IGS that may have adverse effects on financial stability. Moreover, the Commission should avoid introducing rules that would result in unequal treatment of policyholders in different markets.
The Danish Insurance Association
Estonian Insurance Association
Federation of Finnish Financial Services
Finance Norway
The Swedish Insurance Federation
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