WHITE PAPER On Insurance Guarantee Schemes
Date: 2010-07-12
Institutions: European Commission
Subjects: consumer protection, insurance, insurance company, management audit

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EUROPEAN COMMISSION 

Brussels, 12.7.2010 
COM(2010)370 final 

WHITE PAPER 

On Insurance Guarantee Schemes 

{SEC(2010) 840} 
{SEC(2010) 841} 

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WHITE PAPER 

On Insurance Guarantee Schemes 

1. 

INTRODUCTION 

Insurance  Guarantee  Schemes  (IGSs)  provide  last-resort  protection  to  consumers  when 
insurance undertakings are unable to fulfil their contractual commitments. They thus protect 
people  against  the  risk  that  claims  will  not  be  met  if  their  insurance  company  becomes 
insolvent. 

Guarantee  schemes  operate  in  other  sectors  of  the  financial  services  industry.  In  particular, 
deposit  guarantee  and  investor  compensation  arrangements  are  in  place  in  all  EU  Member 
States,  and  minimum  protection  standards  have  been  harmonised  at  EU  level  with  the 
implementation  of  the  1994  Deposit  Guarantee  Scheme  (DGS)  Directive  and  of  the  1997 
Investor  Compensation  Scheme  (ICS)  Directive1.  However,  there  is  no  such  common 
European framework in the insurance sector. 

Of  the  30  EU-EEA  countries,  only  12  operate  one  or  more  general  insurance  guarantee 
schemes.  This  means  that,  measured  in  terms  of  gross  written  premiums,  one  third  of  the 
entire  EU-EEA  insurance  market  is  not  covered  by  any  IGS  in  the  event  of  an  insurance 
company  going  bankrupt.  Some  26 %  of  all  life  insurance  policies  and  56 %  of  all  non-life 
insurance policies are unprotected. 

Where IGSs are in place, they differ frequently in coverage, which results in heterogeneous 
levels  of  policyholder  protection  between  Member  States.  There  are  also  significant 
differences in other aspects of IGS design that affect the scope of the protection provided, and 
in operational procedures and funding arrangements. 

The  lack  of  harmonised  IGS  arrangements  in  the  EU  hinders  effective  and  equal  consumer 
protection. This may lead to a loss of consumer confidence in the relevant markets and may 
ultimately  put  at  risk  market  stability.  It  may  also  impede  the  functioning  of  the  internal 
insurance  market  by  distorting  cross-border  competition.  In  light  of  the  lessons  drawn  from 
the recent crisis the development of harmonised insurance guarantee schemes could contribute 
to remedy the existing deficiencies.  

This  White  Paper  sets  out  a  coherent  framework  for  EU  action  on  IGS  protection  for 
policyholders and beneficiaries, in order to guard against the need for taxpayer involvement. 
In particular, it proposes introducing a Directive to ensure that all Member States have an IGS 
that complies with a minimum set of design requirements. Evidence suggests that a coherent 
approach  at  EU  level  is  the  best  way  to  provide  an  adequate  remedy  for  the  existing 
shortcomings and inequalities in policyholder protection. This White Paper does not intend to 

1 

Directive  1994/19/EC  as  amended  by  Directive  2009/14/EC  of  the  European  Parliament  and  of  the 
Council of 30 May 1994 on Deposit Guarantee Schemes (OJ L135, 31.5.1994, pp. 5-14); and Directive 
1997/9/EC of the European Parliament and of the Council of 3 March 1997 on Investor-Compensation 
Schemes (OJ L 84, 26.3.1997, pp. 22-38). 

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propose  harmonising  insurance  products.  Nor  does  it  intend  to  disadvantage  insurance 
products that are sold only on the domestic market. 

The  main  options  the  Commission  has  identified  as  preferable  are  summarised  and 
highlighted by text boxes at various points throughout Sections 3 and 4. All interested parties 
including the Member States are invited to submit comments and to provide further input on 
the identified options by 30 November 2010. 

The  White  Paper  is  accompanied  by  an  Impact  Assessment  which  is  supported  by  a 
comprehensive Methodological Report and other Annexes. 

2. 

PURPOSE AND SCOPE OF THE WHITE PAPER 

2.1.  Why is action needed on Insurance Guarantee Schemes?  

2.1.1.  Lessons from the crisis 

The  recent  financial  turmoil  has  made  people  far more  aware  of  the  existence  and  limits  of 
consumer protection/guarantee schemes in all financial sectors. Although not at the root of the 
crisis  the  insurance  sector  has  proved  far  from  being  immune.  Some  important  European 
insurers have reported particularly severe losses and have been forced to important injections 
of  new  capital2.  In  order  to  remedy  the  existing  regulatory  loopholes  and  inconsistencies 
caused by the fragmented IGS landscape in Europe, the Final Report (Recommendation 5) of 
the de Larosière Group recommended setting up harmonised IGSs throughout the EU3. 

The  same  recommendation  is  included  in  the  Preamble  to  the  recently-adopted  Solvency  II 
Framework Directive4.  

Furthermore,  the  Commission  announced  in  its  Communication  of  4  March  2009  ‘Driving 
European  recovery’  that  it  would  review  the  adequacy  of  existing  guarantee  schemes  in  the 
insurance sector by the end of 2009 and make appropriate legislative proposals5.  

On 23 September 2009, the Commission adopted proposals for three Regulations establishing 
the  European  System  of  Financial  Supervisors,  including  the  creation  of  three  European 
Supervisory Authorities. The Commission has been closely following the ongoing discussion 
between  the  co-legislators  on  the  role  of  the  new  European  Insurance  and  Occupational 
Pension Authority (EIOPA)6, which has also touched on the introduction of an IGS at national 
and/or EU level. 

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For further details see Impact Assessment Report Section 2.2. 
See http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf. . 
Directive  2009/138/EC  of  the  European  Parliament  and  of  the  Council  of  25  November  2009  on  the 
taking-up and pursuit of the business of Insurance and Reinsurance (recast) (henceforward Solvency II) 
(OJ L 335, 17.12.2009, pp. 1-155); see particularly Recital 141 second subparagraph. 
Communication  for  the  Spring  European  Council,  'Driving  European  Recovery'  -  COM(2009)  114, 
4.3.2009. 
Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  establishing  a  European 
Insurance and Occupational Pensions Authority (COM(2009)0502-C7-0168/2009-2009/0143(COD)). 

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2.1.2. 

Solvency II will not create a zero-failure environment 

Neither the current (Solvency I) nor the future (Solvency II) EU solvency regimes create, or 
can create, a zero-failure environment for insurance companies. The Solvency II Framework 
Directive,  which  will  become  applicable  by  31  December  2012,  provides  for  a  risk-based, 
economic  approach  to  solvency.  It  requires  insurance  and  reinsurance  companies  to  hold 
sufficient capital to cover their obligations for one year, subject to a 99.5 % VaR confidence 
level7. This should ensure that no more than one insurer in 200 goes bankrupt in any one year. 
For  the  purposes  of  this  White  Paper,  historical  data  and  model  estimations  show  that  the 
probability  of  default  of  insurance  companies  generally  ranges  from  0.1 %  under  normal 
economic conditions to 0.5 % under exceptional conditions such as a financial crisis or where 
insurers face particular difficulties in a specific EU country8. Notwithstanding existing IGSs, 
this may result in losses being passed on to EU policyholders (or taxpayers). In extreme cases 
these losses may amount to as much as €
 46.5 billion for both life and non-life policies over a 
one-year time horizon. This is equivalent to around 4.4 % of the total gross written premiums 
in the EU in one year. To illustrate this point, between 1996 and 2004 more than 130 insurers 
got  insolvent  in  the  EU  and  the  2009  failure  of  a  Greek  insurance  group  affected  around 
800,000 policyholders. 

2.1.3.  Cross-border insurance activity in the EU likely to increase 

Cross-border  insurance  activity  —  providing  insurance  services  in  other  countries  either 
directly  or  by  setting  up  branches  —  represents,  on  average,  4.10 %  of  total  gross  written 
 42.8 billion in 2007. The 
premiums in the EU, amounting to a financial premium volume of €
volume  of  activity  is  expected  to  grow  further  in  the  future.  For  instance,  some  major 
insurance groups are considering turning their subsidiaries into branches.  

Even  in  Member  States  which  have  IGSs,  these  schemes  do  not  always  cover  cross-border 
activity.  Around  62 %  of  cross-border  life-insurance  business  and  roughly  23 %  of  cross-
border non-life insurance activity in the European Union lacks any kind of IGS protection. 

2.1.4.  Policyholders and beneficiaries are insufficiently and/or unevenly protected 

The differences between national IGSs across the EU (including the total absence of any such 
schemes  in  some  Member  States)  create  insufficient  and  uneven  levels  of  protection  for 
insurance  policyholders.  Where  national  IGSs  exist,  they  often  differ  significantly  in  their 
structure.  Similarly,  the  lack  of  harmonised  arrangements  may  raise  particular  consumer 
protection  concerns  when  it  comes  to  cross-border  insurance  business  within  the  EU.  If  an 
insurance  company  with  cross-border  operations  goes  to  the  wall,  some  policyholders  may 
find they are covered by an IGS, whereas other policyholders with an identical contract may 
not, or may have only a lower level of protection9.  

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In  financial  mathematics  and  risk  management,  Value  at  Risk  (VaR)  is  the  most  commonly  used 
quantitative measure of the risk of loss on a specific portfolio of assets. 
For more detailed analysis see section 2.2 of the impact assessment and in particular table 22. 
For a more in-depth analysis of the possible consequences for policyholders and taxpayers, see Section 
3.1 of the Impact Assessment. 

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Examples:  

A policyholder residing in a Member State without IGS protection may nevertheless 
be  protected  if  his  insurer  is  based  in  another  EU  country  where  the  IGS  offers 
protection on a 'home country' basis10. 
A policyholder residing in a Member State with an IGS based on the 'home country' 
principle might not be covered if her insurer is based in another EU country where 
the IGS offers protection on a 'host-country' basis. She will, however, be protected if 
her policy was issued by a domestic insurance company. 
If the Member State in which the policyholder resides has an IGS based on the host 
country principle, it does not matter whether the policy was issued by a domestic or a 
foreign  ('incoming')  insurer,  as  long  as  the  IGSs  in  both  countries  offer  equivalent 
protection.  The  level  of  protection  may  differ  where  one  or  both  Member  States 
concerned have limited the amount of compensation that will be paid. 

2.1.5.  The  current  IGS  landscape  creates  an  uneven  playing  field  for  EU  insurance 

undertakings 

The coexistence of different IGS systems (and the fact that some Member States have no IGS 
at  all)  also  raises  concerns  about  the  lack  of  a  level  playing  field  between  domestic  and 
incoming  insurance  companies  operating  in  the  same  market.  These  concerns  may  become 
particularly  acute  if  some  insurers  operating  in  the  same  market  are  participating  in  an  IGS 
and others are not, since the scope of geographical coverage of IGSs (where they exist) may 
differ between the home or host countries concerned.  

Examples: 

Distortions  of  competition  may  arise  if  consumers  prefer  to  buy  policies  which  are 
covered by an IGS (or similar products covered e.g. by deposit guarantee or investor 
compensation  schemes),  to  the  detriment  of  insurers  which  offer  unprotected 
insurance products.  
IGSs entail additional costs which might ultimately be borne by the policyholders. If 
consumers prefer lower-priced insurance products, competition might be distorted to 
the  detriment  of  insurers  which  offer  protected  (and  therefore  probably  more 
expensive) insurance products. 

2.1.6.  The current IGS landscape affects market stability 

Insurance bankruptcies and resulting losses to policyholders and beneficiaries may affect the 
real economy by altering consumers’ behaviour (e.g. they buy fewer insurance products) or by 
making  the  economy  less  able  to  manage  the  risk.  Furthermore,  despite  the  heavy  penalties 
usually  imposed  on  policyholders  for  early  termination,  policyholders  may  react  to  real  or 
expected  losses  by  surrendering  their  policies  —  thereby  potentially  aggravating  a  financial 
crisis situation. 

2.1.7.  Are there viable alternatives to specific EU action on IGSs? 

The importance of introducing an IGS depends on the risk that insurance companies 
will go bankrupt, and the potential impact of such bankruptcies on consumers. This 

10 

For a more detailed analysis of the home-country principle and the host-country principle, see Section 
4.2. 

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raises  the  question  as  to  what  alternative  protection  mechanisms  are  available  at 
national  or  at  European  level  to  mitigate  that  risk  or  to  reduce  the  losses  for 
policyholders. 

Prudential regulation and risk management 

Effective 
risk  management  and  comprehensive  governance  structures  are 
cornerstones  of  the  future  solvency  system,  in  addition  to  capital  requirements  and 
appropriate supervisory powers. However, it is widely acknowledged that it would be 
too costly to set solvency requirements at a level sufficient to absorb all unexpected 
losses11. 

Preferential treatment of policyholders in winding-up proceedings 

Should an insurance company become insolvent, current EU winding-up legislation 
offers  Member  States  a  choice  between  two  alternatives  in  national  law  for  giving 
policyholders priority over other creditors of the insurer in liquidation12. However, a 
cash-strapped  policyholder  may  not  find  it  practical  to  rely  on  the  winding-up 
proceedings.  These  are  often  complex  and  time-consuming,  and  waiting  for  their 
completion may create serious liquidity shortages for policyholders with outstanding 
claims. 

Case-by-case government intervention 

Case-by-case  solutions  such  as  ex-post  government  intervention,  while  flexible  by 
nature,  also  have  serious  drawbacks.  Unless  they  are  even-handed  they  may  raise 
concerns  regarding  fairness  and  transparency,  as  decisions  are  made  on  an  ad  hoc 
basis  rather  than  according  to  a  set  of  pre-designed  rules.  In  addition,  case-by-case 
intervention  may  be  seen  as  conferring  an  unfair  advantage  on  big  companies, 
thereby  creating  ‘moral  hazard’:  allowing  them  to  take  risks  with  less  fear  of  the 
consequences because others will pay to provide a safety net.  

Additional information and enhanced transparency 

An alternative approach is to require that more information be given to policyholders 
so  that  they  can  choose  the  most  appropriate  insurance  product  for  themselves. 
However,  this  assumes  that  policyholders  will  understand  the  information  and  be 
able  to  use  it  in  their  decision-making.  In  reality  it  is  highly  unlikely  that 
policyholders will be able to understand and use all the information, particularly with 
regard 
insurance  business.  Moreover,  providing  additional 
information  does  not  address  the  issue  of  an  uneven  level  playing  field  between 
insurance companies operating on the same markets.  

to  cross-border 

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See also Section 2.1.2 of this White Paper. 
See  Article  10  of  Directive  2001/17/EC  of  the  European  Parliament  and  of  the  Council  of  19  March 
2001 on the reorganisation and winding-up of insurance undertakings (OJ L 110, 20.4.2001, pp. 28-39). 

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2.2. 

Scope, background and objectives of the White Paper 

2.2.1. 

Scope and definition 

This White Paper applies to all life and non-life insurance companies, including those which 
offer  both  types  of  product.  It  does  not,  however,  extend  to  pension  funds  as  defined  by 
Directive 2003/41/EC13 or to reinsurance.  

For  the  purpose  of  this  White  Paper,  minimum  harmonisation  means  that  Member  States 
may,  if  they  so  desire,  provide  greater  protection  than  is  provided  for  in  the  relevant  EU 
legislation.  

2.2.2.  Background 

This White Paper has been drafted on the basis of work undertaken by the Commission since 
2001  and  following  extensive  consultation  and  debate  with  policyholders,  industry 
practitioners  and  policymakers  over  the  last  two  years.  It  also  builds  on  a  report  on  IGSs 
produced for the Commission by Oxera14 (and finalised at the end of November 2007) and on 
a report produced for the Commission by insurance supervisors (CEIOPS)15. Furthermore, it 
responds to repeated concerns raised by the European Parliament16. The steps proposed in this 
White Paper have been analysed in detail in the impact assessment which accompanies it. 

2.2.3.  Objectives 

In particular the White Paper recommends action to: 

Ensure comprehensive and even protection for policyholders and beneficiaries 

Ensuring  adequate  coverage  for  policyholders  and  beneficiaries  if  an  insurance  company 
collapses is a key objective of the future EU framework on IGSs. It is closely linked to the 
aim of guaranteeing equitable treatment of all policyholders and beneficiaries irrespective of 
the  Member  State  in  which  they  reside  or  whether  they  purchase  policies  from  domestic  or 
incoming EU insurers.  

Avoid distortions of competition 

A  harmonised  framework  on  IGS  protection  at  EU  level  also  aims  to  create  a  level  playing 
field between insurance companies and to ensure that domestic companies and incoming EU 
insurers  who  operate  under  the  freedom  to  provide  services,  or  who  provide  insurance  via 
branches, can compete on equal terms. 

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Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities 
and supervision of institutions for occupational retirement provision (OJ L 235, 23.9.2003, pp. 10-21). 
For the report see http://ec.europa.eu/internal_market/insurance/docs/guarantee_schemes_en.pdf. 
CEIOPS  is  the  Committee  of  European  Insurance  and  Occupational  Pensions  Supervisors.  See 
http://www.ceiops.eu/media/files/publications/submissionstotheec/CEIOPS-DOC-18-
09%20_Input_to_EC_work_on_IGS-approved_clean_.pdf. 
See  Article  242  of  the  Solvency  II  Directive.  See  also  European  Parliament  recommendation  No  25 
arising out of the Equitable Life Committee of Inquiry, calling on the Commission to rapidly proceed 
with legislation on IGSs: http://www.europarl.europa.eu/comparl/tempcom/equi/default_en.htm.  

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Reduce adverse incentives 

A harmonised framework on IGS should prevent tax-payers from ultimately bearing the costs 
of an insurance company's mismanagement. It would do so by introducing a legal framework 
which is financed by the undertakings themselves and that does not incentivise excessive risk-
taking (moral hazard). This objective includes appropriate measures to ensure that the funds 
involved  are  used  exclusively  for  the  defined  purposes  of  the  IGS.  In  the  context  of  IGS 
protection, there is little evidence that the introduction of protection schemes distorts market 
operations by providing the wrong incentive. Furthermore, moral hazard concerns are reduced 
through  other  protection  mechanisms,  such  as  a  modern  solvency  regime  and  the  action  of 
prudential supervisors.  

Ensure cost efficiency 

It is important that the IGS be cost-efficient. This means, in particular, that EU action on IGSs 
must  strike  the  right  balance  between  the  benefits  to  policyholders  and  the  costs  of  the 
protection  offered.  In  the  end,  an  IGS  that  is  not  cost-efficient  will  lead  to  higher  costs  for 
policyholders.  In  that  context  particular  attention  must  be  paid  to  Value  Added  Tax  (VAT) 
aspects; it should be prevented that the cost efficiency of the IGS is adversely affected by a 
high  amount  of  sticking  VAT  or  by  an  obligatory  management  of  administrative  tax 
procedures which are disproportionate to the scope of activities of the IGS. 

Enhance market confidence and stability 

EU action on IGSs also aims at enhancing market confidence and at furthering the stability of 
the EU internal insurance market. 

3. 

ELEMENTS OF THE PROPOSED APPROACH 

3.1. 

Nature of possible EU action 

EU 'soft law' instruments such as recommendations, communications, guidelines or codes of 
conduct might influence the practice of Member States in the longer term. However, they are 
unlikely  to  fully  correct  the  current  shortcomings.  Since  such  instruments  are  not  legally 
binding,  Member  States  would  be  asked  to  act  on  a  voluntary  basis  only  —  and  the 
shortcomings of the current fragmented IGS landscape in the EU are too significant to await 
the convergence of national approaches over time. Therefore, it will be necessary to adopt a 
legal measure with binding legal force. 

The best legal instrument for introducing a binding requirement is a directive. Under Article 
288  TFEU,  a  directive  has  individual  application,  meaning  that  it  is  binding  upon  those  to 
whom  it  is  addressed.  It  requires  Member  States  to  achieve  a  certain  result  but,  unlike  a 
regulation, leaves them free to choose their own forms and methods. This might prove useful 
given the complexity of the IGS issue, arising from the differences in the design and scope of 
the various national schemes. 

The Commission proposes to establish at EU level a coherent and legally binding framework 
on IGS protection, applicable to all policyholders and beneficiaries, by means of a directive as 
defined in Article 288 TFEU. 

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3.2. 

Level of centralisation and role of the IGS 

The creation of an IGS in each Member State is consistent with the existing national micro-
prudential supervisory framework and would therefore help prevent regulatory moral hazard. 
A mutual borrowing facility could also be introduced as a means of mutual support between 
national  IGSs.  Such  a  system  would  require  each  national  scheme  to  financially  support  an 
IGS in another Member State which lacks sufficient funds to meet its claims. To ensure that 
the potential costs for the contributing IGSs are transparent and predictable, there would have 
to be agreement on a fund-raising mechanism, clearly stating how much each IGS is required 
to contribute and under which circumstances. Finally,  most  of  the  problems  stemming  from 
the existence of different national legal frameworks could be resolved by setting up a single 
EU-wide  IGS  covering  all  life  and  non-life  policies  written  and  purchased  within  the 
European Union. At present, however, there does not seem to be sufficient political support 
for this idea. It may be considered at a later stage.  

As a last-resort protection mechanism, an IGS can enhance confidence in the financial sector, 
and thus have a  positive impact on the  rest  of  the  economy.  An  IGS  with  the  wider  role  of 
preventing  insurance  insolvencies  would  be  able  to  guide  a  troubled  insurer  through  its 
financial difficulties, enabling it to stay in business. As set out under 2.1.7 there is a range of 
mechanisms in place to prevent insurance insolvencies and evidence suggests that these have, 
in general, been effective. It follows that IGS may step in when other protection mechanism 
have failed in order to prevent or mitigate the impact of an insurer's collapse.  

The  Commission  advocates  the  establishment  of  an  IGS  as  a  last-resort  mechanism  in  each 
Member State.  

3.3. 

Geographical scope 

Harmonising the geographical scope of IGS protection is crucial to ensure comprehensive and 
even  policyholder  protection  in  a  cross-border  context.  IGSs  based  on  the  ‘home  country 
principle’ cover not only policies issued by domestic insurers but those sold by branches of 
domestic  insurers  established  in  other  EU  Member  States.  By  contrast,  IGSs  based  on  the 
‘host country principle’  cover  policies  issued by branches of incoming insurers. In practice, 
some national IGS regimes combine elements of both principles. 

The main advantage of the home country principle is its consistency with the ‘home country 
control  principle’  which  makes  it  easier  to  handle  insurance  default  cases.  Home  country 
supervisors are responsible for prudential regulation, including solvency requirements, and for 
starting the winding-up process. Moreover, the home country principle is also in line with the 
deposit guarantee scheme in the banking sector and with the investor protection scheme in the 
securities sector. 

A structure based upon the host country principle ensures that there is no uneven policyholder 
protection  within  Member  States,  thereby  also  preventing  possible  competitive  distortions 
among  insurers  operating  in  the  same  Member  State.  However,  adopting  a  host  country 
structure  has  important  drawbacks.  First,  it  duplicates  administrative  costs  as  it  requires 
insurers  with  cross-border  business  to  participate  in  two  or  more  IGSs.  Second,  action  on 
IGSs might be difficult in practice, as the authorities that operate the scheme would not be the 

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ones  that  conduct  and  supervise  the  winding-up  proceedings.  Third,  if  coverage  is  not 
harmonised,  the  host  country  structure  can  create  uneven  policyholder  protection  between 
different Member States. 

The Commission advocates harmonising the geographical scope of IGSs on the basis of the 
‘home country’ principle.  

3.4. 

Policies covered 

The collapse of a life insurer can result in considerable financial hardship for policyholders, 
especially  for  people  who  have  bought  life  policies  to  provide  for  their  retirement.  Even  if 
policyholders are able to recover part of their savings, they may not succeed in finding similar 
coverage  because  their  personal  situation,  according  to  which  premiums  are  calculated,  has 
changed (e.g. in terms of age and health). Due to the long-term commitments inherent in life 
insurance  products,  policyholders  are  generally  unable  to  predict  how  financially  sound  the 
insurance company will be when the policy reaches maturity.  

For the purpose of this White Paper, life insurance policies include traditional risk-protection 
products together with savings and investment products (e.g. unit-linked insurance policies).  

If a non-life insurer goes bankrupt, the average loss to policyholders is in general smaller and 
is usually limited to prepaid premiums. The contracts are short-term and most policyholders 
can easily buy replacement cover from another company. However, those policyholders and 
beneficiaries  with  outstanding  claims  at  the  time  of  insolvency  may  well  incur  more 
significant losses, which might exceed those of a typical life insurance product. There might 
be good arguments for limiting IGS protection to certain specific types of non-life insurance 
policy;  however,  for  reasons  of  practicability  and  fairness,  it  might  be  difficult  to  split  IGS 
coverage into too many sub-regimes. 

The Commission advocates that IGSs should cover both life and non-life insurance policies. 

3.5. 

Eligible claimants 

Covering  all  natural  and  legal  persons  might  be  excessively  costly.  In  order  to  reduce  this 
financial  burden,  eligibility  should  perhaps  be  restricted  to  claimants  who  satisfy  certain 
criteria,  such  as  e.g.  micro  and  small  undertakings.  Defining  these  criteria  would  require 
careful attention.  

The Commission advocates that IGSs should cover natural persons and selected legal persons. 

3.6. 

Funding 

For  an  IGS  to  work  effectively,  appropriate  fund-raising  mechanisms  are  crucial.  The 
structure of funding not only determines the level of protection but can also have important 
implications for the cost to the industry, bearing in mind that the levies imposed on insurers 
will  probably  translate  into  costs  for  policyholders.  The  following  points  therefore  need 
careful consideration: 

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3.6.1.  Timing of the funding 

In an ex-ante-funded scheme, the funds are raised in anticipation of possible bankruptcies, 
and the resources are transferred to, and managed by, the IGS via a system of levies on the 
industry.  The  main  advantage,  therefore,  is  the  ready  availability  of  funds  to  compensate 
claimants  should  a  crash  occur.  Moreover,  ex-ante-funding  is  less  subject  to  moral  hazard 
problems, because insurers that become insolvent will already have contributed to the IGS. In 
addition, ex-ante funding is more likely to avoid the pro-cyclical effects associated with ex-
post  funded  schemes.  This  positive  feature  can  be  reinforced  by  introducing  ex-ante  levies 
that  are  weighted  according  to  the  contributing  company's  risk  of  bankruptcy  (see  Section 
4.6.3).  

Clearly,  set-up  and  operational  costs  tend  to  be  higher  than  for  ex-post  funding,  bearing  in 
mind that an ex-ante-funded IGS has to employ investment professionals to manage the fund 
and  to  define  and  implement  an  investment  strategy  that  strikes  an  appropriate  balance 
between  risk  and  return.  In  addition,  there  is  always  the  possibility  that  the  funds  collected 
will prove insufficient in the event of a major insurance crash. 

In an ex-post-funded scheme levies are not raised until an insurer fails and costs arise for the 
IGS. It follows that set-up and operational costs tend to be limited and funds can be tailored to 
actual default costs. Fairness and proportionality arguments may plead in favour of an ex-post 
system.  Ex-post  funding  tends,  however,  to  be  more  subject  to  moral  hazard,  as  failed 
institutions  never  contribute  to  the  IGS.  Moreover,  it  may  hinder  prompt  pay-out  to 
policyholders. Ex-post-funded schemes may also increase pro-cyclicality, as insurers are more 
likely to fail when economic conditions are difficult. 

3.6.2.  Target level 

Concerns about the potentially unlimited size of contributions to an IGS might be allayed by 
introducing caps or overriding limits on annual contributions to a scheme. In practice, these 
limits  can  be  expressed  as  a  percentage  of  the contributing member’s  premiums  or  reserves 
(the ‘target level’), subject to an appropriate transition period.  

To  select  an  appropriate  level  of  protection,  Commission  staff  assessed  various  options, 
including the coverage level of existing IGSs. They arrived at a target level of 1.2 % of gross 
written premiums, in the first instance. Applying this target level over, for instance, a 10-year 
horizon would translate into an annual contribution of 0.12 % of gross written premiums from 
each contributing member of the scheme17. 

To alleviate the risk of funding shortfalls should a large insurer fail, complementary ex-post 
funding  arrangements  or  other  sources  of  funding,  such  as  external  credit  facilities  or 
reinsurance, could be considered. 

3.6.3.  Contributions 

To determine the total amount of funds to be raised from contributors to the IGS, there has to 
be an allocation mechanism. In practice, insurance companies contribute to existing IGSs in 
the EU in proportion to the size of their business. This avoids competitive distortions between 

17 

See particularly table 51 of the Impact Assessment report. The figures obtained refer to levels identified 
for the PD=0.1%, 99% confidence scenario.  

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small  and  large  insurers  and  new  market  entrants.  In  general,  three  factors  are  used:  (i)  the 
size of the premium (gross or net), (ii) the size of technical provisions or reserves, and (iii) the 
number of policies. The different factors have different effects on the size of the contribution 
to be paid by individual companies. 

Risk  weighting  means  calculating  contributions  according  to  the  risks  of  the  insurer,  or  its 
expected costs to the scheme. Risk-based contributions are calculated using several indicators 
reflecting  the  insurer’s  risk  profile.  The  proposed  indicators  cover  key  risk  classes  used  to 
evaluate the insurer’s financial soundness, e.g. portfolio of insured risks, solvency, and asset 
quality.  The  data  needed  to  compute  these  indicators  are  available  under  existing  reporting 
obligations.  

Compensation  limits  and  other  reductions  in  benefits  might  also  be  introduced.  This 
means the IGS would require claimants to bear a share of any loss, so as to reduce funding 
needs for the scheme and avoid moral hazard on the part of policyholders. Methods include 
caps or limits on compensation, percentage reductions in claims or deductibles and minimum 
floors on the amount claimed. Any harmonisation at EU level would have to strike the right 
balance  between  ensuring  equal  minimum  cover  for  all  policyholders  in  all  Member  States 
and avoiding unnecessary intervention in national discretion on compensation limits and other 
reductions in benefits.  

The Commission advocates that IGSs should be funded on the basis of ex-ante contributions 
by insurers, possibly complemented by ex-post funding arrangements in case of lack of funds, 
which  should  be  calculated  according  to  the  individual  risk  profiles  of  the  contributors.  An 
appropriate  target  level  for  funding  should  be  set,  with  a  suitable  transition  period.  The 
Commission  is  ready  to  consider  harmonised  compensation  limits  and  other  reductions  in 
benefits, provided that appropriate coverage of policyholders and beneficiaries is guaranteed 
for all relevant classes of insurance and in all Member States. 

3.7. 

Portfolio transfer and/or compensation of claims 

An  IGS  can  act  in  two  ways  if  an  insurer  becomes  insolvent.  It  can  secure  continuity  of 
insurance  policies,  by  having  them  transferred  to  a  solvent  insurer  or  by  taking  them  over 
directly  (portfolio  transfer).  This  may  apply  particularly  to  life  insurance  products,  which, 
because  they  are  long-term,  are  difficult  to  substitute  under  the  same  conditions. 
Alternatively,  an  IGS  may  only  compensate  policyholders  or  beneficiaries  for  their  losses 
(compensation of claims). 

The  Commission  strongly  encourages  portfolio  transfer  where  reasonably  practicable  and 
justified  in  terms  of  costs  and  benefits.  However,  in  the  last  resort,  consumers  must  be 
protected  in  the  event  of  an  insurance  failure.  When  all  other  means  are  exhausted,  IGS 
should  at  least  and  within  a  pre-defined  period  of  time,  compensate  policyholders  and 
beneficiaries for their losses. 

The Commission advocates that IGS should at least and within a pre-defined period of time 
compensate policyholders and beneficiaries for losses when an insurer becomes insolvent. 

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4. 

NEXT STEPS 

This White Paper raises a number of issues in relation to the introduction of a legally binding 
EU solution for IGS. The Commission’s preferred options are clearly set out in text boxes in 
Sections 3 and 4. The Commission calls 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 a legislative proposal.  

Contributions to this consultation process should be sent to the Commission at the following 
address, MARKT-H2@ec.europa.eu, by 30 November 2010. 

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