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}
Date: 2010-07-12
Institutions: European Commission
Subjects: approximation of laws, consumer protection, domestic market, exchange of information, insurance company, insurance indemnity, public insurance

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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} 

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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 will not be met if their insurance company becomes insolvent. 

Unlike the banking and securities sectors, the insurance 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 are 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 extreme cases, result in losses being passed on to 
EU policyholders (or taxpayers) up to EUR 41.3 billion for life insurance and EUR 5.9 billion 
for  non-life  insurance  over  a  one-year  time  horizon.  In  a  cross-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  very  difficult  to  fully  and  correctly  process 
important and complex risk-related information. There are two important consequences: 

First,  losses  made  by  failing  insurance  undertakings  and  passed  onto  policyholders  (or 
taxpayers)  may  affect  the  latter  in  various  ways:  in  a  domestic  context  losses  may  decrease 
policyholders’  wealth  or  weaken  public  finances;  this  may  further  decrease  consumers’ 
confidence in the insurance and financial markets, 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 preferences and insurers’ risk of default leads 
to suboptimal allocation of costs linked to insurance failure, either to unaware consumers or 
taxpayers.  This  also  implies  the  risk  of  competitive  distortions  between  insurers  in  the  EU 
Internal Market. 

2. Subsidiarity analysis 

Only  EU  action  can  ensure  that  all  policyholders  and  beneficiaries  acquiring  insurance 
policies  in  the  EU  benefit  from  equal  and  comprehensive  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), Member States alone cannot sufficiently harmonise 
their different IGS design features; this can therefore be better achieved at EU level. 

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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  arising  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 functioning 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 discusses a series of policy options for setting 
up a coherent framework for EU action on IGS protection of policyholders and beneficiaries 
based on minimum harmonisation. 

Scope of possible EU intervention 

Doing  nothing  would  mean  that  Member  States  continue  to  take  very  different  national 
approaches  to  IGSs,  including  a  total  absence  of  IGSs  in  some  Member  States.  These 
differences generate uneven and insufficient levels of policyholder protection in a number of 
Member States. 

While  strengthening  prudential  supervision,  partly  by  introducing  more  risk-based  solvency 
requirements and a robust system of governance, should enable insurers to manage their risks 
correctly and professionally, these mechanisms cannot guarantee a zero-failure environment. 

Ensuring that policyholders are better informed (about 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  policies  offered  by  different 
companies  but  their  quality  (in  terms  of  the  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  difficulty  of  correctly  processing  important  but 
complex  risk-related  information.  Although  enhanced  transparency  measures  at  EU  level 
might  foster  trust-based  relationships  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 procedures tend to be lengthy and expensive. 

Implicit  or  explicit  guarantees  issued  by  public  authorities  have  the  obvious  drawback  of 
using taxpayers’ money and thereby affecting public finances.  

For statistical reasons, a high level 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  requirements  without  a  guarantee  scheme.  A  guarantee 

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scheme can in fact ‘centralise’ coverage of losses that exceed a company’s solvency (tail risk) 
thereby reducing the variability of these losses (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  provide  protection  against  these  excess  losses 
among a higher number of consumers and therefore provide the same level 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  probability  of  default  for  insurers,  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 are 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 

instruments  such  as 
Remedying  current  shortcomings  by  means  of 
recommendations,  communications,  guidelines  and  codes  of  conduct  could  be  a  flexible 
alternative to immediate legal commitments. However, 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  guidelines,  the  process  of  national  convergence  risks 
being a time-consuming one, potentially producing uncoordinated outcomes.  

‘soft 

law’ 

The  introduction  of  a  legally  binding  EU-wide  approach  to  IGSs,  instead,  is  more  likely  to 
ensure the introduction of a coherent and harmonised set of rules to protect 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 designed. 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  approach  based  on  minimum  harmonisation.  In  other  words,  a 
minimum set of features needs to be organised within a coherent EU framework: 

Level of centralisation: should an IGS be created at national 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, legal persons, etc.) should benefit from 
an IGS? 

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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 protection include the following options: 

Level of centralisation: an IGS in all Member States appears to be the most preferable option, 
due  in  particular  to  its  consistency  with  the  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 the existing supervisory framework; 

Policies covered: covering life and non-life policies would ensure comprehensive protection 
of  policyholders  and  beneficiaries.  There  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  difficult  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 encourages portfolio transfer where 
it is reasonably practicable to do so and justified in terms of costs and benefits. However, last-
resort  consumer  protection  in  the  event  of  insurance  failure  must  be  ensured.  If  all  other 
means have been exhausted, IGS should at least 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 update 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 framework 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 event that insurers are unable to fulfil their commitments. 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. 

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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 the 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 premiums. Applying this target level 
over, for instance, a 10-year horizon would translate into an annual contribution of 0.124 % of 
gross written premiums by each contributing company/policyholder. 

These  funds  should  be  considered  additional  premiums  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  paying  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 insurers themselves to pay for the contributions, 
if they were not able to pass on these extra costs to consumers.  

For insurers, unlike policyholders, these contributions constitute a financial cost in themselves 
(and not an early payment), as losses hitting insurers in the event of default only depend on 
capital, not on premiums paid. 

Taxpayers 

The  introduction  of  IGSs  in  all  Member  States  can  be  expected  to  benefit  taxpayers  by 
reducing the need to use their money in the event 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 taxpayers in different ways, depending on whether they are resident 
in a Member State that already 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 operating 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  businesses  by  increasing  their 
protection in the event that insurers are unable to fulfil their commitments. On the other hand, 

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introducing  IGS  protection  for  SMEs  throughout  the  EU  will  have  an  impact  on  SMEs,  as 
insurers will pass part of their contributions on to SMEs, which will increase their premiums. 
The payments provided by each SME can be considered roughly equivalent to the expected 
value of the losses they would avoid if their insurer defaulted. Moreover the impact on SMEs 
will depend to whether they are already protected by any existing IGS in the various national 
frameworks. 

Supervisory authorities 

Supervisory  authorities  in  Member  States  that  do  not  have  an  IGS  in  place  yet  may  get 
involved  in  their  set-up  and  possibly  also  start  managing  them,  while  those  authorities  that 
already manage an IGS would have to ensure that 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 expected 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 generate two main advantages for the economy. 
First,  they  will  ensure  a  level  playing  field  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 improve 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  legally  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 Commission will call upon all interested parties 
to provide their views on these options. The Commission will carefully evaluate the feedback 
received  and  take  it  into  account  when  coming  forward  with  the  legislative  proposal.  The 
legislative proposal will be accompanied by another impact assessment. 

Specific monitoring actions will be identified at that stage.  

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