8 Financial services
| (31843)
12360/10
+ADDs 1-8
COM(10) 370
| Commission White Paper on insurance guarantee schemes
|
| Legal base | —
|
| Document originated | 12 July 2010
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| Deposited in Parliament | 22 July 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 3 September 2010
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| Previous Committee Report | None
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| Discussion in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
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.
Conclusion
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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