Various Documents considered by the Committee - European Scrutiny Committee Contents

6 Financial services



+ADDs 1-8

COM(10) 370

Commission White Paper on insurance guarantee schemes

Legal base
DepartmentHM Treasury
Basis of considerationMinister's letter of 1 November 2010
Previous Committee ReportHC 428-iii (2010-11), chapter 8 (13 October 2010)
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


6.1 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.

6.2 In this White Paper, published in July 2010, 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,[16] 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.

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

6.3 When we considered this document, in October 2010, we noted 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. We presumed the Government would be responding to the Commission's call for comments on the White Paper and asked to see that response. Meanwhile the document remained under scrutiny.[17]

The Minister's letter

6.4 The Financial Secretary to the Treasury (Mr Mark Hoban) now confirms that the Government will be responding to the Commission, by its deadline of 30 November 2010, saying that the Treasury, the Financial Services Authority and the Financial Services Compensation Scheme are currently preparing this response. The Minister tells us it will:

  • follow the principles outlined to us previously;
  • seek to ensure that any EU framework does not weaken the current UK policyholder protection afforded by the Financial Services Compensation Scheme; and
  • seek to ensure that any such framework is proportionate to the risks within the insurance sector.

6.5 The Minister also comments that, as he said in the European Committee debate on 21 October 2010 regarding the draft Investor Compensation Schemes Directive, although the Government does not share our views on the application of the principle of subsidiarity, it is, like us, opposed to mutual borrowing provisions for guarantee schemes.[18] He continues that he will ensure that any response to the White Paper, which he will send us, highlights that the Government is not supportive of any form of compulsory borrowing between schemes.


6.6 We are grateful to the Minister for this update. We look forward to seeing, in due course, the response to the White Paper. Meanwhile the document remains under scrutiny.

16   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 States, as in contrast to a host country principle involving coverage of policies issued by branches of incoming insurers.  Back

17   See headnote. Back

18   (31836) 12346/10 + ADDs 1-2: see HC 428-iii (2010-11), chapter 7 (13 October 2010) and Gen Co Debs, European Committee B, 21 October 2010, cols 3-18. Back

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