26 September Ref: 11/139. Ms Mamiko Yokoi-Arai OECD 2 rue André-Pascal Paris cedex 16 France. Via

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1 26 September 2011 Ms Mamiko Yokoi-Arai OECD 2 rue André-Pascal Paris cedex 16 France Ref: 11/139 Via mamiko.yokoi-arai@oecd.org Dear Ms Yokio-Arai The International Association of Insurance Supervisors (IAIS) welcomes the opportunity to comment on the OECD s draft paper on Policyholder Protection Schemes: Selected Considerations. The IAIS appreciates the OECD s initiative to carry out stocktaking on this subject. The IAIS has recently been revising its Insurance Core Principles (ICPs), and the revised ICPs are expected to be adopted by IAIS Members on 1 October ICP 12 deals with winding up and exit from the market, and includes the following standard: 12.1 The procedures for the winding-up and exit of an insurer from the market are clearly set out in legislation. A high legal priority is given to the protection of the rights and entitlements of policyholders. The procedures aim at minimising the disruption to the timely provision of benefits to policyholders. This theme will be developed in IAIS work on approaches to policyholder protection schemes, on which we have recently commenced work, as well as on resolution. In this regard we believe that the OECD paper will provide a valuable source of material for further work in this area. At this stage the IAIS does not seek to make specific comments on the design of policyholder protection schemes or on the merits of particular features. However, we should like to take this opportunity of expressing our appreciation of the work of the OECD in this area, and we offer a number of comments on the text, that are attached in Annex I. International Association of Insurance Supervisors c/o Bank for International Settlements, CH-4002 Basel, Switzerland Telephone: Telefax: Website: iais@bis.org

2 Should you require any clarification of further information in respect of the comments provided, please do not hesitate to contact Julien Reid, Chair of the IAIS Market Conduct Subcommittee (tel: ; or Peter Cooke at the IAIS Secretariat (tel: ; Yours faithfully Peter Braumüller Chairman, Executive Committee Monica Mächler Chair, Technical Committee 2

3 Annex I Executive Summary 1. General: The paper draws lessons from the banking and pensions sectors and notes that there are common issues and features. However, to balance this it could be useful to note that there may also be sectoral differences and a need to take into account the specificities of insurance products in considering policyholder protection schemes. 2. First paragraph: The first sentence includes a reference to revocation of licence. We would note that the trigger for policyholder protection schemes would more often be the insolvency of an insurer rather than revocation of a licence. Revocation of a licence does not necessarily mean that an insurer cannot meet its obligations. (Applies also to paragraph 8.) 3. First paragraph: Also in the first sentence we suggest that the reference to particularly those who are economically vulnerable could better be rephrased as particularly in insurance lines or products with a social element. 4. First paragraph: The wording focuses on the objective of guaranteeing payment. We would note that policyholder protection schemes can have a broader role than just guaranteeing payment. These can include: o providing insurance benefits (rather than payment) for insurance products, for example, death benefits and annuities; o guaranteeing payment of investment products (investment-related insurance) offered by life insurers; o minimising losses to policyholders and to beneficiaries. In this context, a scheme may have the power to intervene before an insurer becomes insolvent. 5. Fourth paragraph: The balance of the argument may be improved by noting that the necessity for a scheme should not be based solely upon resolution following the insolvency of an insurer (ie a guarantor of last resort). Policyholder protection schemes can also have a role as an intervention mechanism. (Applies also to paragraph 9.) 6. Fourth paragraph: The third sentence refers to a clear and credible mechanism. We suggest rephrasing this as a mechanism that is sufficiently simple and understandable by all policyholders. 7. Fourth paragraph: We suggest that the last sentence could be split for better separation of the liquidity issues for the banking sector and protection in respect of non-banks, as follows: Non-banks may not have the same immediate liquidity needs as banks and are thus much less prone to runs. Nevertheless, one must assume that insurers will, from time to time, fail, so that there is an interest in ensuring adequate and timely protection for consumers. 8. Fifth paragraph: The first sentence appears to indicate that unlimited coverage may increase moral hazard. However, we believe that the text could be improved for ease of understanding. 9. Fifth paragraph: The fourth sentence ends with and ensure that funding arrangements are counter-cyclical (emphasis added). We do not believe that such a conclusion is necessarily appropriate at this stage, and would suggest a more neutral wording along the lines that counter-cyclical funding arrangements should be considered and that such counter-cyclical contributions are in principle ex-ante. Introduction 10. Paragraph 8: The second sentence includes the following: The guarantee is made effective either by means of an industry or government pool. We would note that International Association of Insurance Supervisors c/o Bank for International Settlements, CH-4002 Basel, Switzerland Telephone: Telefax: Website: iais@bis.org

4 currently, in the event that an insurer becomes insolvent, a system of compensation to policyholders is usually funded by industry and not by the taxpayers (government pool). Protection systems can be either private (established under government control, managed by industry and industry-funded) or public (established and managed by the state, funded by industry). When the system is private, the use of public funds in the case of insufficient funds within the protection scheme and any other participation of the state is generally not expected. In addition, in some jurisdictions, insurers such as mutual insurance companies may not be required to be members of the regime of protection in life insurance. Nevertheless, they might be required to establish and manage a private guarantee fund. Rationale and features 11. Paragraph 12: We would note that the exclusion of protection for large commercial entities is sometimes justified by the capacity of large commercial entities to manage the risk (significant risk management capabilities). 12. Paragraph 19: We suggest an addition to the last sentence as follows: However, should tied or earmarked assets be impaired in adverse market situations, even where requirements regarding diversification and risk mitigation are in place, there may be. 13. Paragraph 22: Regarding the second sentence, we would note that sufficient technical provisions can reduce the need to utilise funds within a policyholder protection scheme but this does not mean that a scheme has no other value. The existence of a policyholder protection scheme can be a very important part of the safety net in the event that an insurer failure occurs and can encourage greater public confidence and stability in the system. 14. Paragraph 25: The comments regarding level playing field could be extended to noninsurance (ie investment-related) products offered by insurers. 15. Paragraph 31: We would note that policyholder protections schemes can play a role in promoting the transfer of a portfolio from an insolvent insurer. Contagion in the insurance sector 16. This section (paragraphs 32-35) could say something about cooperation between different regulators with a view to minimising the effects of contagion within a group or across financial sectors. 17. Paragraph 33: We suggest quoting from a neutral standard-setter or national supervisory authority rather than an industry association. Although not entirely equivalent, we suggest using: Moral hazard 18. Paragraph 38: It may be worth noting that moral hazard is an endemic feature of all mechanisms which involve the sharing (ie limitation) of risk, and that this is therefore a feature of policyholder protection schemes also. 19. Regarding Box 3/Table 2: we wonder whether product features under the Mainly corporate heading should be checked in respect of non-life credit and suretyship. This may be dependent upon particular products in mind in undertaking the analysis. International and cross-border issues 20. Paragraph 92: Please rephrase the last sentence as indicated: The IAIS is [ ] globally active insurers, accounting for the specificities of the insurance business model and allowing among others for both a solvent and an insolvent run-off of the underwritten 4

5 business over time. Predictability of compensation, if an insurer were to fail, would however bring additional certainty and timeliness to a procedure that might otherwise be time consuming and fraught with complexity. 5