On 7 January 2008 the European Commission made public a report it had commissioned on Insurance Guarantee Schemes (IGS) in the European Union. IGSs provide last-resort protection for policyholders in situations where insurers are unable to provide cover, usually due to their insolvency. They are commonly financed from levies on the insurance industry. While a number of European countries already operate some form of IGS (including the UK, Spain and France) the paper considers whether EU legislation should be implemented to require all member states to implement IGSs. Two main options are discussed, either to maintain the status quo or to implement an EU wide IGS system. Maintaining the status quo would mean that it would be left to each member state whether to introduce an IGS and on what terms. An EU wide approach would entail requiring all member states to introduce IGSs, which the report recommends should be on a home state basis (ie each member state would have to put in place an IGS that would provide cover for policyholders of insurers domiciled in that member state). This approach would be similar to that taken in the banking and investment sectors. The report states that a single centralised EU-wide IGS would be impractical and politically undesirable.
The report, which is over 300 pages long, accepts that both options have their advantages and disadvantages. Maintaining the status quo would have the potential to perpetuate unequal levels of consumer protection across the EU and distort competition between insurers in different member states as a result of differing levies being made in different member states.
Nevertheless, it is accepted that the status quo would have the advantage of allowing each member state to decide whether or not to implement an IGS based on its own policy preferences and country-specific economic considerations. By contrast, an EU-wide approach would have the advantage of providing equal consumer protection and a level playing field for all EU insurers. It notes that disadvantages of such an approach would include it potentially being bureaucratic, anti-competitive (levies could be seen as a barrier to entry for start-up insurers) and having an adverse effect on the behaviour of insurers covered by the scheme, including issues of moral hazard. Ultimately, however, the report states that the decision to implement an EU-wide IGS of some form involves a difficult cost/benefit analysis of consumer protection as against distributional preferences (ie who ought to pay for the insolvency of an insurer) and potential market distortion. It points out, without coming to a firm conclusion, that the balancing of these interests is a matter of policy for both the EU and the individual member states.
It remains to be seen how the European Commission will react to this paper, although it appears likely that there will be considerable industry consultation before any changes are made in this area. These developments should be monitored carefully by insurers operating in the EU and this blog will report on such further developments as and when they occur.