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A feasible and affordable insurance guarantee scheme for policyholders


Published: 13 October 2022

Klim zekering

An insurance guarantee scheme (IGS) can be designed such that it offers policyholders affordable additional protection for their insurance. This emerged from a study conducted by De Nederlandsche Bank into the feasibility and affordability of such a scheme in the Netherlands.

The Minister of Finance previously announced that she would start discussions with stakeholders on the desirability and feasibility of an insurance guarantee scheme in the Netherlands. Similar to a deposit guarantee scheme (DGS) which partially guarantees savings, an IGS guarantees the value of insurance policies up to a certain maximum and aims to keep policies intact. It is, in effect, insurance covering an insurance policy. Unlike many neighbouring countries, the Netherlands does not have an IGS.

An IGS may be designed in a variety of ways. Important choices that must be made are which insurance policies are covered, how an IGS provides protection, what guarantee levels apply, and how the scheme is funded. These choices determine feasibility and affordability

Protecting policyholders

It stands to reason that those policies should be covered, at a minimum, under which policyholders would face financial difficulties if their insurer should fail. These are long-term insurance policies that are important to policyholders in terms of pension accrual, or whose pay-outs are essential for their livelihood, such as life insurance (including group pension insurance), income protection insurance, and funeral insurance. For non-life and health insurance, Dutch law provides other solutions that protect policyholders against large losses in case of insurer failure*.

* These are the Motor Traffic Guarantee Fund (Waarborgfonds motorverkeer) for third-party liability insurance, the settlement system operated by the National Health Care Institute (Zorgverzekeringsfonds) for non-contracted care policies, and the statutory priority status of policyholders who are already entitled to pay-out under their non-life insurance policy.

An IGS can ensure value preservation and continuity of insurance policies in three ways:

  • It can provide additional funding to limit curtailment of policyholder’s rights in the event of a sale or open firm bail-in (relaunch) of the failing insurer
  • It can supplement pay-outs to policyholders during the remaining terms of existing policies (run-off)
  • It can compensate policyholders for their losses following liquidation of the bankrupt insurer.

The IGS can be used flexibly and effectively if its funds are made available for these three functions. If an insurer's portfolio is difficult to sell, it can keep its portfolio of insurance policies that subsequently expire over time without selling new policies, which is known as “run-off” in insurance jargon. If the insurer has insufficient funds to make full payments under the remaining policies, the IGS can top these up. In such a case, the IGS pays out smaller amounts over the remaining terms of the expiring policies, rather than a large amount up-front, as is the case in a sale or liquidation in bankruptcy. This makes it easier to guarantee the policies of a large life insurer facing a considerable shortfall, as costs can be spread over longer periods, sometimes even spanning decades (see Figure 1).

Figure 1: Cost (EUR million) of an IGS in case of failure of a large life insurer with a 10% shortfall if the IGS guarantees 95% of the policy value

IGS costs are based on the insurance liabilities of the five largest Dutch life insurers.

Balancing protection and affordability

The level of the guarantee provided determines the degree of protection and is therefore a key cost component. To keep protection affordable, the amount of the guarantee can be capped. For example, a maximum amount can be set, as in the case of the DGS, which guarantees savings up to €100,000. Alternatively, a relative ceiling can be used, based on a percentage of the policy value. A cap of, say, 95% would then leave an excess of 5% of the policy value to policyholders. The German guarantee scheme features such a built-in excess. Using a percentage cap in this way would be prudent, as it is the most effective option to curb costs. After all, policyholders absorb the initial portion of an insurer’s shortfall. The IGS is deployed only in case a shortfall is so large that it has a substantial impact on policyholders. Moreover, policyholders retain an incentive to consider the financial and operational soundness of an insurer when choosing a policy.

The IGS is funded by imposing levies on insurers. Insurers could then consider passing the levies on to policyholders when selling new policies and renegotiating existing group contracts. Pre-funding can contribute to public confidence in the scheme’s functioning, while avoiding recourse to taxpayers' money. Unlike the DGS, an IGS does not require the continuous and immediate availability of substantial amounts. Whereas the DGS must pay out guaranteed deposits within seven business days, the IGS has more time and will only supplement any shortfall.

The target size of required pre-funding could be set at the expected cost of contributing to the sale of two medium-sized life insurers, or the cost of supplementing payments in a run-off by one large life insurer. A €500 million guarantee fund would suffice to cover a 10% shortfall in these insurers' insurance liabilities and a 5% policyholder excess. Building up this fund over ten years would mean raising annual levies worth €50 million from the sector.

Levies could be designed such that insurers that take relatively high risks also pay more. As the supervisory authority for the insurance sector, DNB monitors the risk profile of insurers. Such a risk-based levy system could broaden public support for an IGS.

Final comments

The decision of whether an IGS should be introduced in the Netherlands is up to politicians, and will require research into a wide range of implications. What we have looked into is whether an IGS could be feasible and affordable in the Netherlands. We believe specific designs are conceivable that offer policyholders affordable additional protection.

DNB Analysis - Feasibility and affordability of an insurance guarantee scheme in the Netherlands

Download DNB Analysis - Feasibility and affordability of an insurance guarantee scheme in the Netherlands

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