Far from the existence of a universal solution, the countries with policyholder protection schemes in situations of insurer insolvency –and not all countries have them, not even in the European context– address this issue with a heterogeneous range of solutions. This article describes the principal characteristics of these solutions and classifies them according to their public or private nature, whether membership is compulsory or voluntary, their scope within the financial sector and the extension of their cover, as well as in terms of their funding mechanisms and whether they play a role in the winding-up of insurers or not.
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| Tied Assets (claims payment, bridge institution function) |
Preferred Claims (claims payment function) |
Others (e.g. segregated funds, collateral - function depending on instrument) |
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| Outside the supervisory framework | ||||||
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Nevertheless, within and outside of the OECD countries, the policyholder protection schemes (referred to hereinafter generically as PPSs and IGSs), where they exist, adopt a variety of formulas, with different scopes, coverage, sources of financing and lines of protection. These schemes, depending on the Jurisdictions, may or may not play a differentiated role in the stages of recovery and resolution of the companies. Thus, on some occasions, they participate in these processes directly while, on others, they are mechanisms external to the resolution.
The comparison between States and Jurisdictions of the policyholder protection schemes in situations of insolvency calls for an examination of aspects associated with their governance and organisation, such as:
In 2013, the OECD published a document based on data obtained in 2007 entitled Policyholder Protection Schemes: Selected Considerations (5) which constitutes a reference in the identification of the elements to be considered for classifying each of the modalities of mechanisms for the protection of policyholders in situations of insurer insolvency.
Membership in the policyholder protection schemes, either by a legal requirement or voluntary, marks the difference between the Jurisdictions with IGSs.
The OECD stated in 2013 that in the majority of the Member States of that Organisation, participation in the PPSs by insurance companies, whose business is protected by the scheme, is compulsory.
Nevertheless, there are voluntary schemes, such as the Canadian scheme for life and health insurance. ASSURIS is the PPS for these branches. Membership in the association is voluntary for the life insurance companies, with the dual component of an institution of rehabilitation and of guarantee. PACICC, on the other hand, has been set up as a protection plan for general insurance (10). Membership in PACICC by the authorised insurance companies in the branches protected constitutes a necessary requirement for being able to operate, unless the coverage is obtained through another approved plan.
An example of compulsory scheme membership can be found in the United States, in the Guarantee Fund formula for each State, associated through two supra-State organisations: specifically for life and health, the National Association of Life and Health Guaranty Associations (NOLHGA) and, for general insurance, the National Conference of Insurance Guaranty Funds (NCIGF). NOLHGA groups together the associations established in the 50 States, Puerto Rico and the District of Columbia, set up for policyholder protection in cases of insolvency. With limited exceptions, all of the insurance companies authorised in life and health in a State must be members of the association of that State. For the general insurance guarantee funds, NCIGF is a not-for-profit association created in 1989, which groups together the guarantee funds of the 50 States of North America and of the District of Columbia. Membership in the funds by the industry is compulsory, as it is a requirement for access to the insurance business.
Membership in Protektor Lebensversicherungs-AG is mandatory for all companies and branches operating in life insurance in the Federal Republic of Germany, with the sole exception of the branch offices of companies authorised in another Member State of the European Union or of the European Economic Area, as well as of the compensation pension funds. A private initiative, the scheme was founded in 2002 as a recovery pool entity, whose shareholders are the life insurance companies, and is subject to the legal and financial supervision of the German Insurance Association, to which the portfolio of policies from failed companies was transferred for the purpose of rehabilitating them, of managing their insurance operations and of transferring them afterwards, completely or partially, to another company (11).
The element of membership in the scheme, in the case of the Spanish PPS, calls for special consideration. Since the Consorcio is a public business entity, the resources tied to the winding-up activity lack the consideration either of capital or of a social fund and, therefore, there is no scope for referring to members attached or belonging to the scheme.
Nevertheless, the entire Spanish insurance market benefits from this guarantee scheme and, pursuant to article 23.4 of the Consorcio’s Articles of Association, contributes to its support in the form of a specific surcharge on all of the policies taken out on risks located in Spain, other than the life insurance and export credit insurance issued by or with the support of the State. With the nature of a tax applied to insurance transactions, the surcharge is paid by the insurance companies, as taxpayers, although the companies pass these amounts on to the policyholders, as legally required.
In the group of States and Jurisdictions with protection schemes for the policyholders of insolvent companies, a distinction can also be made between those with specific mechanisms for the insurance market and those which have global formulas in place for the protection of the clients of financial products.
The purchase of credits with winding-up proceeds of the Spanish system is a special scheme specific to the insurance sector, regardless of the branch or line of insurance concerned. Supplementary social benefit schemes in the form of pension plans and funds are excluded, while the Deposit Guarantee Fund of Credit Institutions exists for the banking sector (12).
As a general rule, States have specific formulas for the insurance sector. This is what occurs with Protektor Lebensversicherungs-AG, for the German life insurance business, and with Medicator AG, for health; with ASSURIS, for the Canadian life branch and PACCIC, in certain categories of non-life insurance, and with the associated guarantee funds in NOLHGA and in NCIGF in the United States. All of these are circumscribed, including by business line, to the insurance sector and, therefore, respond to a principle of speciality in attention to the market.
In the context of the global coverage of financial clients, the FSCS in the United Kingdom, covers the commercial activities carried out by companies authorised by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) and is able to provide cover to companies authorised in another Member State but with commercial operations in the country. The scheme protects the deposits, insurance policies, insurance brokerage, investment transactions and household financing transactions.
In the same way, the Australian Financial Claims Scheme (FCS) extends to the global financial sector and protects the depositors of banks, building societies and credit unions, as well as the policyholders of general insurance companies.
The extension of the coverage provided to policyholders, in terms of protected business lines, or of compulsory membership in the PPS, or of the scope of the protection given, also constitutes a differentiating element between the IGSs.
The mechanism of the purchase of credits by the CCS with the proceeds from the winding-up process, constituting the Spanish PPS, can be described as of maximum scope in terms of its extension. Available, even for the winding-up processes in situations of solvency entrusted to the Consorcio (13), its cover extends to all of the branches and business lines (14), including life transactions, insured pension plans and the export credit insurance issued by or with the support of the State, regardless of the nature and public or private legal personality of the policyholder. And this extends even to credits of a different nature, according to the scheme described in article 186 of the LOSSEAR.
Thus, beyond the protection given to insureds, policyholders, beneficiaries and injured third parties, its guarantee extends also to the credits of workers derived from salaries and severance pay and to the rest of creditors, as provision has been made for the possibility of the purchase by the Consorcio –charged to its resources and taking over the position of the creditors by subrogation, and at real value– of all kinds of credits against the entities involved in the winding-up procedures. Including, indirectly, a special scheme that has been designed for the expenses necessary for the winding-up process in cases of insolvency –article 188.9 of the LOSSEAR–, which are advanced by the Consorcio, while their recovery is conditioned to the payment in full of the rest of the creditors and, consequently, such expenses lose the status of credits against the estate.
The sources of funding of the PPSs are considered to be another essential element in their configuration and, as noted in the OECD study, can affect the moral hazard of the insurers.
In the framework of the European Union and of the European Economic Area, the figures published through the “Discussion Paper on Potential Harmonisation of Recovery and Resolution Frameworks for Insurers, EIOPA-CP-16/009, 2 December 2016”, show that, of the twenty-three States with PPSs, thirteen describe the source of funding of their schemes as ex ante; four, as ex post, and the rest are classified as mixed formulas or others. The predominance of the systems of funding prior to the disposition of the funds or, mixed, is the general rule, not only in Europe but worldwide (16).
In terms of the assets regime of the Consorcio, pursuant to article 23 of its Articles of Association, its winding-up activity is funded, in practice, through the surcharge on premiums earmarked for this purpose, the proceeds and revenues from the assets accumulated and attached to the activity and, in accordance with current legislation, the amounts recovered in the exercise of the rights pertaining to the Consorcio in the subrogation of the credits acquired and the winding-up expenses advanced in the implementation of the Winding-Up Plan, according to article 186 of the LOSSEAR.
At 31 December 2016, the fund accumulated for the winding-up activity totalled 1.96 billion euro (2.07 billion USD). The surcharge created for funding the winding-up activity, as an ex ante source of funding (17), is –article 23.4 of the Articles of Association– a tax which accrues at the time of payment of the insurance premium, whereby the amount of the premium forms the tax base without including any other surcharges applicable to the insurance policy affected, with a fixed rate of 1.5 per thousand. The funding derived from the recovery through subrogation of the amounts advanced by the Consorcio for the purchase of credits and the taking over of the winding-up expenses constitute ex post sources of funding.
Protektor Lebensversicherungs-AG, in Germany, for life insurance policies, is funded by an ex ante system consisting of the collection of annual quotas from its members. In the majority of cases, these are 0.2 per thousand of the net technical provisions of the German life insurance companies up to 1 per thousand. The funding system for the other German protection scheme, Medicator AG, in the scope of health insurance, operates ex post in the form of a percentage on the net reserves.
ASSURIS, in Canada, has a mixed funding system. By Law it must maintain a liquid fund ex ante of at least 100 million USD, totalling 114 million at the present time, even though the final cost of the winding-up is collected ex post among the members. In addition, all of the members are charged an estimate of the administrative expenses that are not associated with a specific insolvency, the distribution and participation of which require the approval of its Management Committee and are performed on the basis of the size of the company.
In France, the funding of the FGAO for insolvencies in compulsory non-life covers (auto, hunter civil liability, construction, professional, among others) is provided by the insurers through an ex ante mechanism (one percent of the costs of the guarantee funds in respect of insolvent entities) and additional contributions. For the life insurance business, the FGAP is also funded through an ex ante system consisting of 0.05 percent of the mathematical provisions of the participating life insurance companies, 50 % of which is transferred to the Fund with the other 50 % remaining in the Entity’s balance.
In the United Kingdom, the FSCS is funded through ex post tax collection. The charge affects the companies authorised by the Prudential Regulation Authority (PAR) and the Financial Conduct Authority (FCA). For the funding of the compensation costs, the revenues collected by the FSCS are divided into eight major categories: deposits, life and pensions, general insurance, general insurance brokerage, life insurance and pension brokerage, investment brokerage, investments and household finance (consumption) (18). With respect to management expenses, the amount is subject to annual limits, after consulting the industry.
Ireland’s Insurance Compensation Fund is included among the ex post funding systems on the European level. The fund is financed through the contributions received from the non-life insurance companies with respect to the business underwritten on risks in Ireland up to a limit of 2 % of the gross premiums, with exclusion of the unprotected risks. These contributions are collected through the Revenue Commissioners, appointed for this purpose through an order issued on 7 October 2011, and must be sent to the Fund through the Accountant of the Supreme Court. The Irish Central Bank performs the annual valuation of the fund, the determination of the contribution to be made by the non-life insurers and establishes, together with the Department of Finance, the interest rates and the payments of the credits advanced by the Public Treasury to the Fund.
In the United States, both for the funds belonging to NOLGHA, as well as those associated with NCIGF, the sources of funding are ex post, through the subrogation of the policyholders’ rights by the funds, to which a tax is added (19).
Schemes can also be characterised according to the role of the PPS in the resolution processes of insurers or the absence of their participation in them.
In this regard, EIOPA issued a document in 2012, EIOPA-TFIGS-12/007 Report on the Role of Insurance Guarantee Schemes in the Winding-Up Procedures of Insolvent Insurance Undertakings in the EU/EAA, which determined the role of the IGSs before and after the declaration of insurer insolvency. The document describes the interaction, communication and advance notices (in most cases on an informal basis) that exist prior to the declaration of insolvency between the scheme and the resolution or supervisory authority (20), as well as during the winding-up procedure.
In some jurisdictions the sole function of the schemes is that of payment or continuation of the insurance policies. This is the case with the FSCS in the United Kingdom, the Austrian scheme of assets tied to winding-up –Deckungsstock– and the Polish UFG, among others.
Many schemes are recovery mechanisms that address the transfer of the portfolio of a company in a winding-up process as a formula of protection for the purpose of giving continuity to the coverage. This is the case with ASSURIS in Canada for the life insurance portfolio, or Protektor Lebensversicherungs-AG and Medicator AG in Germany. In this context, Protektor Lebensversicherungs-AG has been guaranteeing the continuity of the policies of companies being wound up and is authorised for this purpose in the branch (21).
The participation of the policyholder protection schemes has greater relevance in resolution processes in the case of Ireland and, most especially, in the case of Spain.
In the case of the winding-up or receivership of a non-life insurer in Ireland, the Supreme Court has recourse to the Insurance Compensation Fund which can become operational only upon approval by its Chief Justice, acting through its Accountant.
The Spanish case in this sense is a prime example, to the extent that the Consorcio only has the policyholder protection mechanism available to it (the purchase of credits with winding-up proceeds), once the administrative winding-up of an insurance company has been entrusted to it or it has been appointed as the receiver. It is the resolution procedure itself which, through the winding-up of the entity, is what is entrusted to the Consorcio in the terms contained in Section 3, Chapter II of Title VII of the LOSSEAR and Section 2 of Chapter III of the Regulation.
The treatment accorded in the policyholder protection schemes to cases of risks underwritten by insurers operating in a Jurisdiction or a State, but domiciled in another Member State or Third Country, constitutes not only a differentiating element among the schemes, but also an argument in favour of the possible harmonisation of the IGSs in Europe.
In June 2011, EIOPA published a document (EIOPA-TFIGS-11/007 Report on the cross-border cooperation mechanisms between Insurance Guarantee Schemes in the EU (22)) on the content of a future Directive on Policyholder Protection Schemes in cases of insolvency in cross-border relations. In that document it was stated that, of the seventeen States that had IGSs other than the guarantee fund for compulsory third-party automobile insurance, six operated under the country of origin principle, seven under the host country principle and four under both, host and origin.
The PPSs operating under the country of origin principle protect all of the policyholders, regardless of whether the insurance policy concerns risks located or commitments accepted in that country or in the host country, provided that the policies have been underwritten through a branch or the headquarters of the company domiciled in the country. In these cases, the PPS of the country of origin does not protect the policyholders of the host country with respect to commitments or risks accepted in it through branches or headquarters of companies whose domicile is in another State. They may possibly be protected in that other State, provided that a protection mechanism exists and operates likewise under the country of origin or a mixed principle.
The Spanish scheme operates under the country of origin principle with respect to the coverage of policyholders in the event of insolvency. The very nature of the scheme in its purchase of policyholder credits with proceeds from the winding-up procedure requires that the CCS must be previously entrusted with the winding-up of the company domiciled in Spain (article 14 of its Articles of Association and article 27.1 of the LOSSEAR).
The country of origin principle also operates in the protection schemes of France, Denmark and Germany.
In the schemes of Norway, Belgium, Estonia, Finland, Greece, Italy, Japan, Korea and Poland, the coverage of the PPSs, under the host country principle, is circumscribed to the risks located and the commitments accepted in that country.
In this context, the case of the British FSCS and of the Irish Insurance Compensation Fund, with their limitations and in the terms indicated, offer global protection, not only with respect to policies issued by companies established in their respective countries, but also with respect to the clients of companies established in other Member States.
In addition, the legislators in Spain have incorporated a number of the recommendations of the IAIS, the OECD and the Financial Stability Board (FSB) (23) on the treatment of protection and the performance of winding-up processes with a supranational or cross-border scope.
With the entry into force of the Transposition of the Solvency II Directive through the LOSSEAR, a catalogue of new competencies of the Consorcio was introduced for situations where the winding-up of insurance companies domiciled in another Member State of the European Union or of the European Economic Area takes place, although with the express exclusion of the exercise of winding-up functions over such entities and of the activation of the mechanism for the purchase of credits with winding-up proceeds, preventing alternative protection formulas, such as the making of payments on the basis of the policy, or advances of such payments.
Nevertheless, in the medium term, it appears that the debate on the establishment of a harmonised minimum guarantee fund which would solve, at least, the cross-border protection of policyholders in situations of insolvency, as well as the recovery and resolution regimes, will be on our agendas and, as a logical consequence, the catalogue of functions of CCS as an institution at the service of clients and the insurance industry will be expanded and improved to an even greater degree. All of which will contribute in turn to expanding and improving the policyholder protection scheme.