WRITTEN QUESTION E-3245/00

by Neil MacCormick (Verts/ALE) to the Commission

(20 October 2000)

Subject: Orphan funds held by life assurance companies

Has the Commission studied the problem of orphan funds held by life assurance companies? Does the Commission consider that the possible abuse of such funds would be inconsistent with the rights of the consumers of financial services products throughout the Union?

If so, what action does the Commission propose to take to ensure there is no misappropriation of orphan funds for the benefit of company shareholders and at the expense of policyholders?

Answer given by Mr Bolkestein on behalf of the Commission

(4 December 2000)

The so-called orphan funds refer to the amount of assets in a life fund in excess of what an insurance undertaking must set up in order to ensure its contractual commitments. This amount is calculated on prudent assumptions in order to meet the reasonable expectations of policyholders. National insurance supervisory authorities monitor the financial soundness of insurance undertakings, in particular whether the contractual commitments of the insurer are covered by adequate and sufficient technical provisions. Such technical provisions are represented by investments of the insurer in specific categories of assets.

Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directive 79/267/EEC and

90/619/EEC (third life assurance Directive)(1) lays down co-ordinated rules for the calculation of the minimum amount of technical provisions, including mathematical provisions that an insurance undertaking must set up to meet its contractual obligations. Directive 92/96/EEC also sets out the list of eligible assets from among which Member States allow insurance undertakings to invest in order to cover their technical provisions. From a legal viewpoint, the assets representing technical provisions are owned by the insurance undertaking.

The Honourable Member refers to the distribution by a life assurance undertaking of the assets covering the technical provisions which are in excess of the amount which must be set up according to the rules used to calculate such provisions. It falls to the insurance undertaking, under the supervision of its national supervisory authority, to determine the amount of such excess as well as the criteria for distribution.

According to information held by the Commission, the British insurance supervisor (Financial Services Authority) has always considered that any distribution of such assets should be made in such a way that policyholders would be entitled to obtain 90 % of the assets to be distributed and the remaining 10 % would be left for shareholders. Some insurance undertakings recently made special offers to policyholders regarding the distribution of a portion of such orphan assets. National courts are being called upon to analyse such offers and an important test case is to be heard by the High Court in December 2000. This will clarify the situation.

The Commission has no evidence of misuse of orphan funds held by insurance undertakings. The Commission considers that it falls to national authorities to verify whether the distribution of assets held by insurance undertakings in excess of investments covering the minimum required level of technical provisions complies with the terms of insurance contracts concluded by the insurance undertakings and other legislative measures or prudential standards set up in the Member States. Should evidence of specific commercial practices emerge that conflicted with national requirements, the national authorities would be required to take appropriate measures.

(1) OJ L 360, 9.12.1992.