Insurance Protection Funds in the European Union—Quo Vadis?

• Published date: 01 March 2012
• DOI: http://doi.org/10.1111/j.1540-6296.2011.01211.x
• Date: 01 March 2012

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2012, Vol.15, No. 1, 89-106

DOI: 10.1111/j.1540-6296.2011.01211.x

PERSPECTIVES ARTICLES

INSURANCE PROTECTION FUNDS IN THE EUROPEAN

UNION—QUO VADIS?

Marek Monkiewicz

ABSTRACT

Contrary to the development in other major insurance markets in the world only

13 out of 27 EU member states have introduced until now some type of insur-

ance protection funds (IPF). As a result around a third of the market is without

any collective protection. Thereis also a continuous debate since 2001 among the

member states on the need for such a system at the community level. The expe-

riences of the latest financial crisis have raised new arguments for reorganizing

the existing system to avoid regulatory arbitrage and to strengthen consumer

security. Even the prospective implementation of provisions strengthening su-

pervisory bodies, and the new solvency directive (so-called Solvency II) are not

fail-safe solutions. This article is an attempt to review the current situation as

regards IPF in the EU and to discuss possible development scenarios.

INTRODUCTION

For many years there has been a continuous debate among the member states of the

European Union (EU) as to the improvement of the existing system for protecting pol-

icyholders by means of a special type of guarantee fund when an insurer becomes

insolvent. European reluctance to act collectively in this regard is particularly inter-

esting as such institutions have long been established in most other major insurance

markets (e.g., United States, Japan, Canada, China, and Australia). Additionally, such

safety net arrangements have existed since 1994 in the EU banking sector and since

1997 in the EU securities market. In insurance, however, the EU regulatory regime has

not required that member states create guarantee funds to protect policyholders from

insurer insolvency, leaving that matter up to each home jurisdiction. The result is that

out of 27 member states, protection schemes are in place in only 13 of them. In the

absence of common regulation, they differ from each other in many respects, presenting

a patchwork of solutions and offering a degree of regulatory arbitrage. The danger of

such arbitrage increases with the growth of cross-border penetration of insurance trade

in the EU.

Marek Monkiewicz is at the Department of Management, Warsaw University; e-mail:

marekmonkiewicz@o2.pl. The author expresses his gratitude to two anonymous referees for

their valuable comments on previous drafts of his article. He is particularly grateful to Professor

David Cummins for his penetrating observations. This article was subject to double-blind peer

review.

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90 RISK MANAGEMENT AND INSURANCE REVIEW

This situation is important as a large number of insurer insolvencies have been registered

in member states in recent years. In 1996–2000, altogether 85 undertakings became

insolvent, and in 2001–2004 another 48 failed (i.e., 31 nonlife, 14 life, and 3 composite

carriers).1In 2007–2010 official data indicate that at least another 18 insolvencies were

registered.2Thesituation in the EU still compares favorably to the number of insolvencies

in the United States. Over the same period at least 320 insurance companies failed—two

and one-half times more.3

Even the directive on the reorganization and winding-up of insurance undertakings

(2001/17/EC of March 19, 2001)—so important for the insolvency issue—does not raise

the issue of the protection of consumers (i.e., the insurance buyers, the insured persons,

the beneficiaries) in individual EU member states, including the issue of the degree of

protection offered by guarantee institutions.4Admittedly, the directive does contribute

to the improvement of the creditor’s situation in case of bankruptcy or liquidation of an

insurance company (and it clarifies which country’s state law applies over the liquidation

procedure). Nevertheless, if the company does not have sufficient technical provisions

and insurance reserves or if privileged claims occur (e.g., social security insurance, taxes,

etc.), then there may be not enough money to pay off all the claimants.

The experiences of the latest financial crisis have raised new arguments for reorganiz-

ing the existing system in order to strengthen consumer safety and to avoid regulatory

arbitrage, both cross-sectorally and cross-border. Some large European insurers were

seriously affected in the crisis (e.g., Fortis, Aegon, KBC, ING), requiring public assis-

tance or entering bankruptcy. The largest failure was registered in Greece with nearly

800,000 policyholders affected.5So the issue of how to improve the protection of policy-

holders by strengthening the reliability of insurance cover became again pertinent.

This article is an attempt to review the current situation as regards insurance protection

funds (IPF) in the EU and discuss possible scenarios for their development. The remain-

ing sections are organized as follows. The “Rationale for the Establishment of Insurance

Protection Funds” section reviews briefly general arguments for the desirability of IPF.

The “Insurance Protection Funds in the EU Member States—General Overview,”“Mem-

bership Principles,” “Coverage and Payout Limits,” and “Funding Principles” sections

provide some information on various aspects of existing national frameworks in this

regard, revealing a large degree of differentiation across jurisdictions. The “Insurance

Protection Funds in the EU—What Next” section attempts to look into likely future

developments.

1White Paper on Insurance Guarantee Schemes, Brussels, COM(2010)370, p. 10. In contrast to

United States, there is no centralized database on insurer insolvencies in the EU.

2Figures derived from the Official Journal of the European Union 2007, 2008, 2009, 2010, which

delivers respective information coming from member states.

3Based on figures presented by D. J. Cummins, M. A. Weiss,“Systemic Risk and the U.S. Insur-

ance Sector,” Department of Risk, Insurance, and Healthcare Management, Temple University,

September 14, 2010, Appendix, Table 7.

4Directive 2001/17/EC of the European Parliament and the Council of March 19, 2001 on the

reorganization and winding up of insurance undertakings.

5S. Schich, “Insurance Companies and Financial Crisis,” Financial Markets Trends, OECD, 2008,

pp. 1–31.