Documents considered by the Committee on 19 January 2011 - European Scrutiny Committee Contents

17 Financial services



+ ADDs 1-8

COM(10) 370

Commission White Paper on insurance guarantee schemes

Legal base
Document originatedHM Treasury
Basis of considerationMinister's letter of 16 December 2010
Previous Committee ReportHC 428-iii (2010-11), chapter 8 (13 October 2010) and HC 428-viii (2010-11), chapter 6 (17 November 2010)
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionCleared


17.1 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.

17.2 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,[68] 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.

17.3 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. In November 2010 it was confirmed to us that the Government would be responding to the Commission and that the response would:

  • 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.

We asked to see the response in due course and meanwhile the document remained under scrutiny.[69]

The Minister's letter

17.4 The Financial Secretary to the Treasury (Mr Mark Hoban) has now sent us the response submitted by the Treasury and the Financial Services Authority. The response, which will be published on line by the Commission and the introductory paragraphs of which we annexe, does follow the principles outlined to us previously, seeking to ensure that:

  • any EU framework does not weaken the current UK policyholder protection afforded by the Financial Services Compensation Scheme; and
  • any such framework is proportionate to the risks within the insurance sector.


17.5 We are grateful to the Minister for sending us the response to the White Paper and now clear the document.

Annex: Commission White Paper on Insurance Guarantee Schemes — a UK response from HM Treasury and the Financial Services Authority


1  The UK supports the approach taken by the Commission in introducing a directive which sets out a framework for Insurance Guarantee Schemes (IGSs) across the EU. We consider that it is important that all Member States have a guarantee scheme for policyholders with contracts of life and general insurance.

2  The UK fully supports the development of Solvency II and believes that when implemented this will reduce the number of insurance failures. However, Solvency II is not a zero failure regime, and there are a growing number of insurers of a substantial size effecting cross-border business. It is therefore important to have credible and robust compensation arrangements in place to ensure that policyholders are protected, in the event of an insurance company failing- and no longer being able to meet claims against it. Without an EU-wide approach to guarantee schemes, there is a risk that EU crisis management arrangements will be less effective and that the development of a single market might be hindered.

3  In developing an EU IGS framework, the UK wants to ensure that:

  • policyholders are equally and adequately protected regardless of the home Member State of the insurer; and

  • the UK's current level of policyholder protection provided by our existing IGS, the Financial Services Compensation Scheme is maintained.

68   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

69   See headnote. Back

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