17 Financial services
| (31843)
12360/10
+ ADDs 1-8
COM(10) 370
| Commission White Paper on insurance guarantee schemes
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| Legal base | —
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| Document originated | HM Treasury
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| Basis of consideration | Minister's letter of 16 December 2010
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| Previous Committee Report | HC 428-iii (2010-11), chapter 8 (13 October 2010) and HC 428-viii (2010-11), chapter 6 (17 November 2010)
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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 | Cleared
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Background
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.
Conclusion
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
Introduction
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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