The European Commission White Paper on Insurance Guarantee Schemes (the “White Paper”), published on 12 July 2010, advocates the establishment of an Insurance Guarantee Scheme (an “IGS”) in each Member State so that a mechanism of last resort exists to protect consumers in the event that their insurer becomes insolvent.  

While some Member States have an IGS in place, it is felt that the lack of a European wide harmonised IGS “hinders” effective and equal consumer protection. One third of the entire EU-EEA insurance market is not IGS protected, thereby leaving 26% of all life policies and 56% of all non-life policies unprotected.

The White Paper purports to set out a coherent framework for action by Member States to protect policyholders which will “guard against” recourse to the taxpayer. The objectives of the proposed IGS Directive, which should apply to life and non-life insurers (excluding pension funds and reinsurance), are to:

• ensure comprehensive and even protection for policyholders and beneficiaries;
• avoid distortion of competition;
• reduce adverse incentives;
• ensure cost efficiency; and
• enhance market confidence and stability. 

The Commission further recommends the use of the “home country” principle to harmonise the geographical scope of IGS’s covering policies issued by the domestic insurer and its branches in other Member States. It further proposes that an IGS should only cover natural persons and selected legal persons, for example micro and small undertakings, to reduce the financial burden and that IGSs should be funded by ex-ante, pre-event contributions raised by levies on the industry which should be calculated on the individual risk profiles of the contributors but subject to a limitation. Concerns have been raised by the CEA over imposing this funding mechanism. 

Finally, where an insurer does become insolvent, the Commission recommends policies be continued by portfolio transfer where possible and, where this is not possible, the timely compensation of policyholders should be facilitated by an IGS.

The consultation on the White Paper runs until 30 November 2010.

For further information, please contact John Larkin or Grant Murtagh.