European Scrutiny Committee Contents

8 Financial services



+ADDs 1-8

COM(10) 370

Commission White Paper on insurance guarantee schemes

Legal base
Document originated12 July 2010
Deposited in Parliament22 July 2010
DepartmentHM Treasury
Basis of considerationEM of 3 September 2010
Previous Committee ReportNone
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


8.1 Insurance guarantee schemes (IGSs) provide last-resort protection to consumers when insurance undertakings are unable to fulfil their contractual commitments, so protecting people against the risk that claims will not be met if their insurance company becomes insolvent. Increasing cross-border insurance activity and the impact of the financial crisis on perceptions of the risk of cross-border firm failures has highlighted differences in the protection afforded to insurance policyholders across the EU and prompted calls for a standardised EU IGS. The concept of an EU-wide IGS has been mooted since 2000. However, Member States have been unable to agree on the scope of such a scheme, especially since some, unlike the UK, have no schemes at all for the insurance sector

8.2 In response to the financial crisis the Commission concluded, in its Communication Driving European Recovery of March 2009,[24] that additional measures would be needed to reinforce depositor, investor and insurance policyholder protection. It therefore undertook a review to determine the adequacy of existing financial services guarantee schemes.

8.3 In the UK, the Financial Services Compensation Scheme (FSCS), funded by a levy on scheme participants, acts as the UK's compensation fund for customers of financial services firms (which include credit institutions and insurers) participating in the scheme. This means that the FSCS will protect consumers (including policyholders) if a participating firm is unable, or is likely to be unable, to pay claims against it.

The document

8.4 In this White Paper the Commission proposes introduction, through a Directive, of an EU framework for IGSs. The Commission's key proposals include:

  • adopting a minimum harmonising Directive, with a home State principle,[25] that covers both life and non-life insurance policies and natural persons and certain legal persons (such as small and medium businesses);
  • establishing a pre-funding model for domestic insurance guarantee schemes, with a target funding level of 1.2% of gross written premiums, to be applied over a 10-year horizon — in the event of low funds, should an insurer fail, the pre-fund could also be supplemented by post funding arrangements; and
  • ensuring, at the very least, that policyholders and beneficiaries should be compensated for losses where an insurer becomes insolvent.

8.5 The Commission says that it may, in the future, also consider compensation limits and other reductions of benefits, as well as setting a pre-defined time limit for compensation payments.

8.6 The White Paper is accompanied by an impact assessment, which, however, does not include a specific estimate of what any legislative proposals would cost industry.

8.7 The Commission calls for the views of interested parties by 30 November 2010.

The Government's view

8.8 The Financial Secretary to the Treasury (Mr Mark Hoban) tells us that the Government supports the principle of establishing an EU framework for IGSs as it would:

  • provide a key tool complementing resolution arrangements for cross-border insurance groups within the wider EU crisis management packages;
  • ensure that at least minimum insurance guarantee standards (which include compensation and continuity of protection and payment of liabilities) are adopted across all Member States, such that policyholders would be adequately protected whether taking out a domestic or cross-border policy; and
  • develop a coherent framework to clarify if and when home or host State IGSs would be triggered, leading to increased clarity of the potential liability exposures to domestic schemes (such as the FSCS in the UK).

8.9 The Minister adds that it will, however, be important to ensure that any EU framework:

  • does not weaken the current UK policyholder protection afforded by the FSCS; and
  • is proportionate to the risks within the insurance sector.

8.10 The Minister says that the Government is engaging with the insurance sector to inform its assessment of the proposals and the associated costs and benefits and that, should an IGS legislative proposal be adopted by the Commission, it will consult publicly on this. On the possibility of legislative proposals he adds that, depending on the responses to the White Paper, the Commission may discuss such proposals at a working group in the Spring of 2011.


8.11 We note the Government's support, albeit with caveats, for the principle of establishing an EU framework for insurance guarantee schemes and the possibility of future legislative proposals. However, although the Minister does not say so, we presume the Government will be responding to the Commission's call for comments on the White Paper. So before considering this matter further we should like to see that response. Meanwhile the document remains under scrutiny.

24   (30474) 7084/09 + ADD 1: see HC 19-xii (2008-09), chapter 1 (25 March 2009) and Gen Co Debs, European Committee, 29 June 2009, cols 3-24. Back

25   A home State principle would involve covering policies not only issued by domestic insurers but those sold by branches of domestic insurers established in other Member State, as in contrast to a host country principle involving coverage of policies issued by branches of incoming insurers.  Back

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