Tuesday, 10 June 2014

Questions (155)

Noel Grealish

Question:

155. Deputy Noel Grealish asked the Minister for Finance further to Parliamentary Question No. 103 of 27 May 2014, regarding Setanta Insurance, the way he would envisage brokers having what he called a more active role in advising customers when brokers do not have access to the level of financial information to advise if a particular company is solvent; the way he would envisage brokers being able to provide a type of prudential service when regulators are in place for that purpose; if he will expand on his statement that caveat emptor should apply to the purchase of a financial services product when it is the regulatory framework which is supposed to protect consumers; and if he will make a statement on the matter. [24204/14]

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Written answers (Question to Finance)

At the outset, I would like to say that both I, as Minister for Finance, and the Government are concerned over the situation that arose with regard to the Irish policyholders of Setanta Insurance Company Limited (Setanta).  My Department and the Central Bank will be reviewing the circumstances relating to Setanta and will be reporting to me on what lessons can be learnt and how the framework can be strengthened. The European Commission has indicated that it will also review whether any issues raised relating to the regulatory framework require action.

Setanta is a Maltese incorporated company which was both authorised and prudentially supervised by the Malta Financial Services Authority (MFSA). Setanta was regulated at EU regulatory level in accordance with a directive known as Solvency I which currently places requirements on the amount of regulatory capital European insurance companies must hold against unforeseen events. I understand that Setanta met its EU regulatory obligations and under EU law was, therefore, entitled to trade across EU borders.

Under EU legislation the Central Bank of Ireland is not responsible for the prudential supervision of Irish branches of credit institutions authorised in other EEA Member States and operating under a passporting arrangement in to Ireland.  The Central Bank does however have responsibility for the supervision of such entities in the following areas: in co-operation with the home state regulator, assessment of their compliance with liquidity requirements; secondly, consumer protection issues; and thirdly, compliance with Anti-Money Laundering regulations.

The current legal and regulatory framework for the provision of insurance in the EEA, and the supervision of that activity, is prescribed by European Union Law in the Life and Non-Life Insurance Directives. The provision of insurance throughout the EEA on a freedom of services basis and a freedom of establishment basis (i.e. a branch) within this framework is predicated upon the absence of internal market frontiers and the mutual recognition of the authorisation of insurance undertakings by Member States.

The Insurance Directives specify particular roles for both the home Member State supervisory authority (i.e. the supervisory authority that grants an authorisation) and the host Member State supervisory authority (i.e. the supervisory authority of a Member State where an insurance undertaking conducts business of a freedom of services or freedom of establishment basis) of an insurance undertaking. Insurance undertakings authorised under the Insurance Directives are subject to solvency and financial reserving requirements, the supervision of these requirements is the sole responsibility of the home Member State supervisory authority. The primary objective of these requirements is to ensure that claims made in respect of policies issued will be adequately provided for by an insurance undertaking.

Under EU law which governs non-life insurance, an insurer is required to inform the regulator in its home Member State (its home regulator) that it intends to pursue business in another Member State. The home regulator must then provide the host regulator with a certificate attesting that the insurer covers the EU Solvency Capital Requirement, as well as the nature of the business which the insurer intends to undertake. The insurer may start to pursue business from the date that the certificate is communicated to the host regulator, in this case the Central Bank of Ireland.

Under Article 20 of the Third Non-Life Directive the Home Regulator is also required to notify the Host Regulator if the solvency margin of an undertaking falls below the statutory requirement. In such instances the Home Regulator should inform the Host Regulator of the measures it has taken to address the solvency deficit.

Following negotiations that were completed at European level in November, 2013, a new regime known as Solvency II will commence on 1 January 2016, which will further strengthen the EU regulatory framework. The Solvency II EU Directive sets out new, stronger EU-wide requirements on capital adequacy and risk management for insurers with the key aim of increasing policyholder protection.  The new regime will also ensure greater cooperation between supervisors.

In relation to my comments on Parliamentary Question No 103 of 27 May, I made these comments in the context of a standard consumer transaction with a supplier.  The directives I mentioned set out the prudential protections already in existence and also those currently being introduced at EU level. These measures will offer both brokers and consumers additional protections. I am aware that as intermediaries it is not expected that brokers would investigate the solvency or other financial data on an insurer it was dealing with.

The point I was making was that as professional advisors, brokers can provide additional guidance and reassurance that consumers with very limited knowledge of the industry can avail of.  I think it is reasonable that brokers should explain the differences between the price and terms and conditions of each insurance policy they are proposing. I am sure most if not all are doing that.  It is not unreasonable therefore to expect that they would also give guidance on the relative financial strength of insurance companies based on public available information.  For example, the insurance companies may have received public rating agency confirmation of their financial strength and brokers may be able to advise clients of the differences between the ratings of different insurance providers being proposed and remind clients that price is not the only criterion in the purchase of insurance products.