Topic proposed by: Royanne Doi, Corporate Chief Ethics Officer, Prudential Holdings of Japan Inc

The International Association of Insurance Supervisors and the Organisation for Economic Cooperation and Development have both recognised the role that policyholder protection funds can play in maintaining consumer confidence in the insurance sector – something which has assumed even greater importance post-financial crisis. Experiences from countries where such schemes have already been tested can help to inform initiatives to strengthen policyholder protection elsewhere.

Does your country have a policy protection fund (PPF) system?

Finland has a collective guarantee system in respect of the following types of statutory insurance, which are part of or related to the social security system:

  • occupational pension insurance, based on the Employee Pensions Act;
  • statutory accident insurance (workers' compensation insurance), based on the Employment Accidents Insurance Act;
  • motor vehicle liability insurance, based on the Motor Liability Insurance Act; and
  • patient insurance, based on the Patient Injuries Act.

In occupational pension insurance the collective guarantee system has been in force since 1962. Pursuant to the Employee Pensions Act if a pension or any benefit remains fully or partially unsecured due to the bankruptcy of a pension provider, pension providers are jointly liable for these benefits in proportion to the earnings insured with the relevant pension provider.

The collective guarantee system for statutory non-life insurance (eg, statutory accident, motor vehicle liability and patient insurance) was established in 1997. The system is based on the common liability of insurers and further liability of policyholders insofar as far as the bankruptcy estate cannot pay insurance compensation. In case of an insurer's insolvency or bankruptcy, policyholders (except consumers) are obliged to pay an additional premium in certain circumstances. Thereafter, insurers carrying on the business in question are obliged to pay an annual common guarantee payment. When the system was created, it was found to be important to reserve possible future liabilities as a balance-sheet item beforehand regarding statutory accident compensation and motor vehicle liability. This was known as a 'common guarantee portion'. However, contrary to the occupational pension system, it was found insufficient that insurers had only a joint liability, as they may have had no financial standing to pay the common guarantee payment when needed. The collective guarantee system was financed through higher premiums.

In 2010 the system was found to be impractical as regards its common guarantee portion. Insurers which had begun business concerning statutory accident insurance or motor vehicle liability insurance after 1997 had no full advantage of the common guarantee portion. Further, according to the law, the common guarantee portion could not be used for any purpose other than that for which it had been originally created. The common guarantee portion was not applicable to foreign insurers domiciled in a European Economic Area (EEA) country and could not be transferred from Finland in case of a transfer of the insurance portfolio. Finally, Solvency II includes no similar items and the system was therefore abolished on December 31 2010.

However, the collective guarantee system remained. The existing Federation of Accident Insurance Institutions pays accident compensation in case of an insurer's insolvency or bankruptcy when the insurance portfolio and equivalent assets have been transferred to the federation. As regards a foreign EEA insurer domiciled in an EAA country, the federation pays compensation from the date ruled by the ministry. The insured's right to compensation from the estate is transferred to the federation.

The Motor Insurers' Centre pays accident compensation in case of an insurer's insolvency or bankruptcy when the insurance portfolio and equivalent assets have been transferred to the centre. For a foreign insurer domiciled in an EAA country, the centre pays compensation from the date ruled by the Financial Supervisory Authority. The insured's right to compensation from the estate is transferred to the centre.

The Patient Insurance Centre pays accident compensation in case of an insurer's insolvency or bankruptcy when the insurance portfolio and equivalent assets have been transferred to the centre. For a foreign insurer domiciled in an EAA country, the centre pays the compensation from the date ruled by the ministry. The insured's right to compensation from the estate is transferred to the centre.

In general, specific insurance legislation and supervision of insurers have been found to guarantee that insurers do not become insolvent and, if they do, that policyholders and insureds still get their benefits. Hence, it has been thought that only policyholders, or more often insureds, of statutory insurance need extra protection, as insureds are usually unable to choose the insurer and further the purpose of the insurance to cover personal injuries. This right to compensation must be guaranteed completely.

What alternative arrangements are in place for the protection of policyholders?

Pursuant to the Insurance Companies Act, a liquidator is obliged to implement an insurance portfolio transfer plan with the insurer as soon as possible. Additionally, insurance claims have priority on payments from the bankruptcy estate.

Policyholders are obliged to pay an additional premium in case of insolvency. Subject to the articles of association, the policyholders of mutual insurance companies are obliged to pay an additional premium in case of insolvency.

In 1998 the Federation of Finnish Insurance Companies recommended that its members participate in the rescue of a Finnish insurer if it were to become insolvent. The recommendation entered into operation when life insurance company Apollo became insolvent in 1993.

What have been the practical experiences of those arrangements to date?

They have worked quite well.

What role does the insurance regulator play in this framework? Can the regulator be held liable for failing to protect insureds in the event of an insurer being declared insolvent?

Pursuant to the Act on the Financial Supervisory Authority, the object of the Financial Supervisory Authority is to ensure financial stability and the necessary smooth operation of credit, insurance and pension institutions and other supervised entities, so as to safeguard the interests of the insured and maintain confidence in the financial markets.

Pursuant to Section 69 of the act, the Bank of Finland is liable for any damages arising from an error or omission of the authority, as provided in the Tort Liability Act. Pursuant to Section 3:2 of the Tort Act, a public corporation is liable for damages for injury or harm caused by error or negligence in the exercise of public authority only if the performance of the activity or task, in view of its nature and purpose, has not met the reasonable requirements set.

Thus, in theory, the authority can be held liable for failing to protect insureds. However, the standard of proof is high in practice.

For further information on this topic please contact Matti Komonen at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 2207) or email (matti.komonen@hpplaw.fi). The Hammarström Puhakka Partners, Attorneys Ltd website can be accessed at www.hpplaw.fi.

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