Proposed European rules to deal with failing insurance companies have been criticised for potentially exposing policyholders to losses, with one EU consumer group branding it “an extreme step”.
Brussels last month unveiled a bloc-wide resolution framework for the sector, similar to banking rules that came into force in 2015. Designed to avoid a disorderly failure of insurers and reinsurers, it also aims to protect those companies and individuals insured by struggling firms.
The proposals include requiring pre-emptive recovery plans from companies, granting authorities the power to intervene when things are going wrong and the use of resolution tools such as forcing losses on shareholders and general creditors.
The overall objective is to transfer the insurance portfolios safely to a viable insurer. But the powers include, as a last resort, an option to “convert to equity or reduce the principal amount of claims, including insurance claims”.
Consumer groups have raised concerns. Better Finance, which represents financial services customers, said it was “very difficult to understand how and what would justify such an extreme step” such as reducing insurance claims on individual, non-professional insurance clients.
“This is all the more outrageous given that insurance policyholders continuously pay to ensure the guarantee that their insured event is covered at any time,” said a spokesperson.
Before insurance claims could be hit, the tool seeks to ensure that “shareholders and creditors of a failing insurance or reinsurance undertaking suffer losses first and bear an appropriate part of the costs arising from the failure of the insurance or reinsurance undertaking as soon as a resolution power is used”.
Finance Watch, another EU consumer group, said it accepted the principle that policyholders could share losses in extreme cases. “[But] there should be a calibration of the amount of losses shareholders and creditors take, such that the likelihood that policyholders are touched is very low,” said Thierry Philipponnat, the group’s head of research and advocacy, who also sits on the sanctions committee at the French prudential regulator. “The mattress should be thick enough.”
A commission spokesperson declined to comment. In its proposal, the commission said the conversion tool would give “shareholders and creditors . . . and, to a certain extent, policyholders, a stronger incentive to monitor the health of an insurance or reinsurance undertaking during normal circumstances”.
The commission’s announcement highlighted a key safeguard of the reform, a “no creditor worse off” principle. That means no creditors — including policyholders — should be worse off in a resolution than they would be in an insolvency. The proposal also points out that states can offer guarantee schemes to offset any hit to policyholders.
Some member states have national resolution mechanisms, but these would be the first rules in force across the bloc, with details to be hammered out between the European parliament and member states.
Replying last week to the proposals, regulator Eiopa said it “deeply regrets” that the plans do not also include a harmonisation of the patchwork of state guarantee schemes on offer in different EU countries.
Policyholders whose insurers fall over receive different levels of protection, depending where the policy originates, Eiopa said, adding: “This issue needs to be tackled as it may seriously undermine the functioning of and trust in the European single market.”