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Too soon to harmonize EU Insurance Guarantee Schemes?

Insurance Guarantee Schemes (“IGS“) provide last resort protection to consumers in the event that their insurance company becomes insolvent or simply unable to fulfill their contractual commitments.

This sort of protection networks have been made effective through directives in other sectors, such as banking and securities. Nevertheless, a directive has yet to be implemented for the insurance sector and only a few EU countries have IGS systems in place; Spain being one of them, through the institution known as the Consorcio de Compensación de Seguros

This lack of unity regarding IGS systems has led to various initiatives that advocate for harmonization. For example, the 2010 EU policy paper on IGS, where it was proposed to introduce a directive that granted the existence of IGS systems in every EU country that complied with certain minimum requisites.

One of the most recent voices raised in favor of harmonization came from the European Insurance and Occupational Pensions Authority (EIOPA) when they presented a discussion paper on resolution funding and national IGS on 31 July 2018.

The response given by Insurance Europe, the European (re)insurance federation, on 26 October 2018, was, however, very clearly against this idea of harmonization.

The reasoning behind their negative answer is simple. Insurance Europe (“IE“) considers that crafting EU-level rules concerning IGS when Solvency II has been in force for less than three years is premature. IE believes that “rather than considering new rules for IGS, existing tools and powers should be fully used and resources adequately assigned towards their proper enforcement“. The insurance federation also claims that “in order to satisfy the fundamental principles of proportionality and subsidiarity, the establishment, functioning and funding of IGS have to be left to the discretion of member states.

IE reiterates in their response the mechanisms already contained in Solvency II as policyholder safeguards, such as the Solvency Capital Requirement or the supervisory ladder of intervention and that “adequate protection is at the core of Solvency II“.

It also insists that consumer protection needs in the insurance sector are different to the banking or securities sector and, moreover, that they are different in every country. In its own words: “Insurance Europe believes that national authorities should be allowed significant flexibility to choose the features that best suit their market, to reflect that there are important differences between member states regarding social welfare systems, winding-up process for insurers and insurance product lines.”

However, IE makes a few remarks relating to IGS features if they were to be eventually harmonized. It tends to favor the home-country principle when asked who should pay the final costs of policyholder compensation, in order to be consistent with the EU supervisory framework as contained in article 30 of Solvency II. It also states that if an IGS had to be established, it would be regarding life-insurance policies and exclusively regarding consumers. Decisions on funding arrangements should be left to each member state provided that effective protection of policyholders requirements are met.

In conclusion, IE believes more time is needed before conclusions can be drawn and therefore, “Insurance Europe strongly supports maintaining the status quo” and that “any further work at European level should be outcome oriented and abstain from harmonizing“.

SOURCES:

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/insurance-and-pensions/insurance-guarantee-schemes_en

https://www.insuranceeurope.eu/sites/default/files/attachments/Response%20to%20EIOPA%20discussion%20paper%20on%20resolution%20funding%20and%20national%20IGS.pdf

https://www.insuranceeurope.eu/too-early-harmonise-eu-insurance-guarantee-schemes