EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.7.2010 
SEC(2010) 841 
  
COMMISSION STAFF WORKING DOCUMENT 
SUMMARY OF THE IMPACT ASSESSMENT  
 
 
Accompanying document to the 
  
WHITE PAPER 
 
on Insurance Guarantee Schemes 
  
{COM(2010) 370 final} 
{SEC(2010) 840}  
 
EN 2   EN Introduction 
Insurance Guarantee Schemes (IGS) provide last-resort protection to consumers when 
insurers are unable to fulfil their contractual commitments. They thus  protect people against 
the risk that their claims w ill not be met if their insurance company becomes insolvent. 
Unlike the banking and securities sectors, the insu rance sector is not covered by any European 
legislation on guarantee schemes.  At present, only 12 Member States have one or more IGS 
covering life and/or non- life insurance policies, and there ar e significant differences between 
the national schemes in terms of their design. 
The Impact Assessment presents an analysis of  losses that can be passed on to policyholders 
(or to taxpayers, if public authorities intervene)  in the event of insurance failures in the EU. 
Notwithstanding existing IGS, this may, in extrem e cases, result in losses being passed on to 
EU policyholders (or taxpayers) up to EUR 41.3 b illion for life insurance and EUR 5.9 billion 
for non-life insurance over a on e-year time horizon. In a cros s-border context, losses not 
absorbed by existing IGS may amount up to EUR 820 million for life insurance and EUR 140 
million for non-life insurance. 
1. Problem definition 
The lack of harmonised IGS arrangements in the EU hinders effective and equal consumer 
protection and may impede the functioning of the internal insurance market by potentially 
distorting cross-border competition. This assessment is heightened by the fact that, despite the 
introduction of a more risk-related EU solvency  regime (Solvency II), insurers can fail, and 
policyholders in general are unable or find it ve ry difficult to fully and correctly process 
important and complex risk-related informa tion. There are two important consequences: 
First, losses made by failing insu rance undertakings and passed onto policyholders (or 
taxpayers) may affect the latter in various wa ys: in a domestic context losses may decrease 
policyholders’ wealth or weaken public fina nces; this may further decrease consumers’ 
confidence in the insurance and financial mark ets, which may ultimately slow down the real 
economy and disturb financial markets. In the specific EU cross-border context, relevant 
losses may also undermine consumer confidence in  the Internal Market and may even trigger 
potential disputes between Member States on the allocation of failed insurers’ losses. 
Second , the mismatch between consumers’ risk pref erences and insurers’ risk of default leads 
to suboptimal allocation of cost s linked to insurance failure, e ither to unaware consumers or 
taxpayers. This also implies the risk of compe titive distortions between insurers in the EU 
Internal Market. 
2. Subsidiarity analysis  
Only EU action can ensure that all policyho lders and beneficiarie s acquiring insurance 
policies in the EU benefit from equal and co mprehensive protection in the event that an 
insurance undertaking defaults. EU action also ensures a level playing field for insurers and 
thereby promotes further integration within the EU Internal Market. In many areas (e.g. 
coverage, geographic scope, and funding), Memb er States alone cannot sufficiently harmonise 
their different IGS design features; this can therefore be better achieved at EU level. 
 
EN 3   EN 3. Objectives  
The overall objectives of EU action on IGSs are, first, to ensure  a high degree of protection of 
policyholders and beneficiaries, which sufficiently  reduces the risk of substantial losses to 
policyholders or taxpayers ar ising from non-payment of claims by insurers. Second, EU 
action should contribute to establishing an even  level of protection for policyholders, who 
may acquire insurance products from  domestic or foreign insurers  within the EU, in order to 
foster the effective functi oning of the Internal Market for insurance services. 
In addition, the relevant action should serve more general objectives such as avoiding 
competitive distortions, reducing adverse incentives, ensuring cost efficiency and ensuring market confidence and stability.  
4. Policy options 
The Impact Assessment Report examines and disc usses a series of policy options for setting 
up a coherent framework for EU action on IGS protection of policyholde rs and beneficiaries 
based on minimum harmonisation. 
Scope of possible EU intervention
 
Doing nothing would mean that Member States continue to take ve ry different national 
approaches to IGSs, including a total absenc e of IGSs in some Member States. These 
differences generate uneven and insufficient levels of policyhol der protection in a number of 
Member States. 
While strengthening prudential supervision, par tly by introducing more risk-based solvency 
requirements and a robust system of governance, should enable insurers to manage their risks 
correctly and profession ally, these mechanisms cannot guara ntee a zero-failure environment. 
Ensuring that policyholders are better informed (a bout the existence of an IGS and the level of 
protection it provides) might, in  principle, help policyholders to choose between insurers. 
They would be able to compare not only the prices of the policie s offered by different 
companies but their quality (in terms of th e risk of the company becoming insolvent). 
However, the adoption of a caveat emptor  approach is likely to be mostly ineffective due to 
policyholders’ unawareness of and the difficu lty of correctly processing important but 
complex risk-related information. Although enhan ced transparency measures at EU level 
might foster trust-based rela tionships between policyholders and insurers, it is nonetheless 
very unlikely that the great majority of policyholders would fully understand and 
appropriately process the complex risk -related information they receive.  
Giving consumers legal priority during liquidation procedures runs the risk that assets will be 
insufficient to protect policyholders, giving rise  to uncertainty about whether they will be 
compensated or not. In addition, winding-up proce dures tend to be lengthy and expensive. 
Implicit or explicit guarantees issued by public authorities ha ve the obvious drawback of 
using taxpayers’ money and ther eby affecting public finances.  
For statistical reasons, a high le vel of security for consumers can normally be best achieved 
by combining relatively low solvency requirements with a guarantee scheme rather than having relatively high solvency requirement s without a guarantee scheme. A guarantee 
 
EN 4   EN scheme can in fact ‘centralise’ coverage of  losses that exceed a company’s solvency ( tail risk ) 
thereby reducing the variability of these losse s (and as a consequence the funding needed to 
absorb them) if a large number of insurers take part in the scheme. Furthermore, a guarantee 
scheme may spread the funding needed to pr ovide protection against these excess losses 
among a higher number of consumers and therefore provide the same leve l of protection at a 
lower cost.  
Size of the guarantee (IGS funding needs)  
The target fund of an IGS is influenced by many parameters, among which two appear to be 
the most important: the probability of default for insurers and the level of targeted security for 
policyholders. Evidence suggests that the probab ility of default for in surers, in general, 
oscillates between 0.1  % and 0.5  % depending on market conditions. Besides the probability 
of default by insurers, IGS needs for funding or  financial endowments ar e mostly influenced 
by the level of security provided to consumers: the higher the security provided by an IGS, the 
higher its financial endowment or funding needs.  A key decision is therefore the level of 
security that an IGS is expected to provide to policyholders. According to the Commission’s 
preliminary conclusions, the preferred option would ensure a high level of protection under 
normal market conditions while equally ensuring a sufficiently high level of protection in 
times of market stress. 
Nature and legal instrument of possible EU action on IGS  
Remedying current shortcomings by means of ‘soft law’ instruments such as 
recommendations, communications, guidelines a nd codes of conduct could be a flexible 
alternative to immediate legal commitments. Howe ver, because these lack binding legal force, 
they would depend on a voluntary commitment from Member States. Even if Member States 
were willing to abide by the proposed guideli nes, the process of na tional convergence risks 
being a time-consuming one, potentially  producing uncoordinated outcomes.  
The introduction of a legally bi nding EU-wide approach to IGSs , instead, is more likely to 
ensure the introduction of a coherent and harmoni sed set of rules to pr otect policyholders and 
beneficiaries in the EU. Due to the complexity of  the issue, an EU Directive is preferable to 
an EU Regulation, as it gives more  flexibility to Member States. 
Scope of harmonisation  
There are many ways in which an IGS can be de signed. Given the lack of any EU legislation 
so far and the existing, very fragmented landscape of IGS protection in the Union, the 
Commission supports an EU appr oach based on minimum harm onisation. In other words, a 
minimum set of features needs to be orga nised within a coherent EU framework: 
Level of centralisation : should an IGS be created at na tional or at European level? 
Role: should an IGS operates as a last-resort protection mechanism or have a wider role? 
Geographic scope : should an IGS operate on the home or host state principle (or on a 
combination of the two)? 
Policies covered : which classes of insurance (life, non- life, etc.) should be covered by the 
IGS? 
Eligible claimants : which claimants (natural persons, lega l persons, etc.) should benefit from 
an IGS? 
 
EN 5   EN Timing of funding : should the IGS be funded ex-ante  or ex-post  (in advance or after the event, 
or a combination of the two)? 
Nature of scheme intervention : should the IGS reimburse claims, or should it also be designed 
to secure the continuity of policies? 
On the basis of the preliminary analyses of  this Impact Assessment, the Commission’s 
tentative preferences  for EU action on IGS protecti on include the following options: 
Level of centralisation : an IGS in all Member States appear s to be the most preferable option, 
due in particular to its consistency with th e existing national micro-prudential supervisory 
framework; 
Role: the role of an IGS should be that of a last-resort protection mechanism; 
Geographic scope : the ‘home state principle’ appears to be the preferable policy option, 
because of its consistency with th e existing supervisory framework; 
Policies covered : covering life and non-life policies would ensure comprehensive protection 
of policyholders and beneficiaries. Ther e might be good arguments for limiting IGS 
protection to specific classes of non-life insurance policies only; however, for reasons of 
practicability and fairness it might be difficu lt to split IGS coverage into too many sub-
regimes. 
Eligible claimants : covering natural persons and selected  legal persons (including SMEs) is 
likely to strike the best balance between the objectives of comprehensive consumer protection 
and cost-effectiveness.  
Timing of funding : as a general rule, IGSs should be financed ex-ante  in order to have funds 
readily available and to avoid moral hazard issues . Moreover, this is more likely to avoid the 
pro-cyclicality associated with ex-post  funded schemes. In case of  necessity funds may be 
complemented by ex-post  contributions. 
Nature of scheme intervention : The Commission strongly encourag es portfolio transfer where 
it is reasonably practicabl e to do so and justified in terms of  costs and benefits. However, last-
resort consumer protection in the event of in surance failure must be  ensured. If all other 
means have been exhausted, IGS should at leas t compensate policyholders and beneficiaries 
for their losses.  
The main options identified as preferable by the Commission will be subject to consultation 
of all interested parties including Member States . These will be invited to submit comments to 
allow the Commission to reassess and possibly upda te its initial findings on the various policy 
options. A further impact assessment will accompany the resulting proposals, analyse in more detail the various options for IGS design features, and finally select the optimal combination 
for a coherent policy framewor k for EU-wide IGS protection. 
5. Expected impacts  
Policyholders
 
Action taken at EU level can be expected to benefit policyholders by increasing their 
protection in the ev ent that insurers are una ble to fulfil their commit ments. On the other hand, 
introducing IGSs throughout  the EU will also have a cost for policyholders, as  insurers will 
pass on part of their contributions to consumers, which will increase premiums. 
 
EN 6   EN To illustrate this point: if, for example (compared to a situation where no IGS existed), IGSs 
are set up in each Member State, based on th e home state principle and covering life and non-
life policies, (up to the 99th percentile and based on a scenario of PD=0.1  %), this would 
require EU policyholders to contribute  to the creation of  funds worth EUR  13 billion. This 
currently corresponds to 1.24  % of annual gross written premiu ms. Applying this target level 
over, for instance, a 10-year horizon would tr anslate into an annual contribution of 0.124  % of 
gross written premiums by each c ontributing company/policyholder. 
These funds should be considered additional pr emiums which policyholders pay to insure 
themselves against the insolvency of their insurer. The payments made by each policyholder 
can be considered to be roughly equivalent to  the expected value of  the losses they would 
avoid in the event that their insurer defaulted.  
The financial cost to policyholders of payi ng these amounts in advance can be computed 
assuming a cost of capital of 6  % (in line with Solvency II quantitative impact studies). For an 
IGS with a funding endowment of 1.24  % of annual premiums this would translate into 
financial costs of 0.08  % of annual gross written premiums. 
Insurance companies  
EU action on IGSs will affect insurers in different ways, depending on whether they operate 
in Member States that already have an IGS or not. In countries where no IGS has yet been set 
up, introducing such a scheme would require insure rs themselves to pay for the contributions, 
if they were not able to pass on these extra costs to consumers.  
For insurers, unlike policyholders, th ese contributions constitute a financial cost in themselves 
(and not an early payment), as lo sses hitting insurers in the ev ent of default only depend on 
capital, not on premiums paid. 
Taxpayers  
The introduction of IGSs in all Member Stat es can be expected to benefit taxpayers by 
reducing the need to use their money in the even t that insurers default. Based on the practical 
example set out above this would save taxpayers up to EUR  13 billion in the period stated. EU 
action on IGSs will affect taxpaye rs in different ways, dependi ng on whether they are resident 
in a Member State that al ready has an IGS or not.  
Existing IGS schemes  
EU action will affect existing IGSs to the extent  that the framework set up at EU level will 
differ from the national IGS framework already in place. 
Most existing IGSs would be affected in terms of the size of funds and some of them would 
also have to introduce ex-ante  funding elements. A few schemes would need to modify their 
geographical scope and start opera ting on the basis of the home state principle. A few existing 
IGSs would be requested to enlarge the scope of their protection to life insurance or to expand 
their definition of eligible claimants.  
Small and medium-sized enterprises (SMEs)  
Action taken at EU level can be expected to  benefit small busine sses by increasing their 
protection in the ev ent that insurers are una ble to fulfil their commit ments. On the other hand, 
 
EN 7   EN introducing IGS protection for SMEs throughout the EU will have an impact on SMEs, as 
insurers will pass part of thei r contributions on to SMEs, wh ich will increase their premiums. 
The payments provided by each SME can be consid ered roughly equivalent to the expected 
value of the losses they would avoid if their in surer defaulted. Moreover the impact on SMEs 
will depend to whether they are already protec ted by any existing IGS in the various national 
frameworks. 
Supervisory authorities  
Supervisory authorities in Member States th at do not have an IGS in place yet may get 
involved in their set-up and possibly also star t managing them, while t hose authorities that 
already manage an IGS would have to ensure th at their scheme is compliant with the proposed 
design features. A more detailed analysis of the impact on supervisory authorities will be considered in the impact assessment accompanying the follow-up to the White Paper. 
International impact
 
The impact on third country insurers can be expe cted to be the same as for EU-EEA insurers. 
Environment  
The environmental impacts are expected to be marginal. 
The economy  
The proposed policy options are expected to ge nerate two main advantages for the economy. 
First, they will ensure a level playing fiel d that avoids competitive distortions between 
domestic and non-domestic insurers. Second, they will reduce the risk of allocating losses to 
policyholders and taxpayers in a sub-optimal fashion.  
Social Welfare  
The policy options proposed will im prove social welfare through: 
– increased protection of policyholders; 
– less use of taxpayers’ money; 
– improved redistribution of insurance default losses. 
6. Follow-up measures  
The Impact Assessment clearly supports a lega lly binding EU solution for IGS protection 
based on minimum harmonisation. 
It identifies the Commission’s preferred choices , which will be clearly set out in the White 
Paper on Insurance Guarantee Schemes. The Co mmission will call upon all interested parties 
to provide their views on these options. The Co mmission will carefully evaluate the feedback 
received and take it into account when comi ng forward with the legislative proposal. The 
legislative proposal will be accompan ied by another impact assessment. 
Specific monitoring actions will be identified at that stage.