Opening statement of Gerry Cross, Director Policy and Risk, at the Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Chairman, Committee members, thank you for the invitation to meet with you today as part of the pre-legislative scrutiny of the Insurance Amendment Bill 2017. I am joined by the Director of Insurance Supervision, Sylvia Cronin. In my opening remarks I will:

• Outline the Central Bank’s current role in relation to the Insurance Compensation Fund.
• Provide a brief overview of the Central Bank’s involvement to date in relation to the revised framework for insurance compensation in Ireland.
• Outline the new envisaged role for the Central Bank as set out in the Bill and our views on this proposed role.

Overall, the Central Bank supports the proposed amendments set out in the general Scheme of the Bill as a welcome development for consumers. The failure of Setanta Insurance and the uncertainty that followed over compensation arrangements had a detrimental impact on Irish policyholders. The Central Bank welcomes the enhanced clarity that this Bill will bring to the insurance compensation framework.

As the Committee knows, the Insurance Compensation Fund (ICF) was established under the Insurance Act 1964. This Act has been amended on several occasions and the most recent amendments were by the Insurance (Amendment) Act 2011. At that time, the ICF levy was reintroduced and a significant policy change was made, as the scheme changed from a home-based to a host-based insurance compensation scheme. Under a home-based scheme, compensation is paid by the insurance compensation scheme of the Member State of the regulator of the insolvent insurance company. Under a host-based scheme, compensation is paid by the Member State in which the risk is located. Ultimately, this means that the scheme is targeted at Irish customers of Irish and EU insurers rather than at the EU and Irish customers of Irish insurers.

The Central Bank's current role in respect of the ICF involves the following functions:

• Carrying out an annual assessment of the financial position of the ICF.
• Determining an appropriate contribution to be paid to the ICF by non-life insurance companies, not to exceed 2% of Gross Written Premium.
• Liaising with Department of Finance in relation to interest rates and repayment terms on any loan advanced by the Exchequer to the ICF.
• Publishing a notice on the Central Bank’s website and delivering a notice to each non-life insurance company specifying the contribution to be paid to the ICF.

In early 2016, the Department of Finance set up a Joint Working Group (comprising representatives from the Department of Finance and the Department of Transport, Tourism and Sport) to review the current insurance compensation framework in Ireland. The focus of the review was primarily on motor insurance. The Central Bank, drawing on expertise across a number of areas within central banking and financial regulation provided technical input and policy views to the Department of Finance during the early stages of its proposals.

The Central Bank is supportive of the extension of compensation for third party motor claims in the case of insurer insolvency from 65% to 100%. This removes an inconsistency and is positive from a consumer perspective.

In relation to the split funding concept for Third Party Motor Liability claims where the insurer is insolvent and in liquidation, whereby the liability for the payment is to be shared 35% and 65% between the MIBI and the ICF respectively, the Central Bank has been concerned to ensure that the practical operation of this arrangement not give rise to undue complexity for affected consumers. Our view is that the proposed approach appears to address this concern.

There do remain some points of complexity in the wider scheme that might be considered as part of this process. In particular, we would like to see some analysis of the current difference of approaches between the situations where a firm is in administration and when it is in liquidation.

Notwithstanding the points above, the main impact on the Central Bank directly is of course that the administration of the ICF will be transferred from the Accountant of the High Court to the Central Bank. In January 2017, the Governor of the Central Bank confirmed to the Minister for Finance that, subject to an appropriate legislative framework and consultation with the ECB, the Central Bank would be willing to take on this function. The Central Bank already administers the Deposit Guarantee Scheme (DGS), which protects depositors in the event of a bank, building society or credit union authorised by the Central Bank being unable to repay deposits. The Central Bank, in administering the ICF, will liaise as necessary with the relevant stakeholders - including the State Claims Agency, relevant liquidators and the Department of Finance - to ensure the proper operation of the fund. In the event of the liquidation of an insurance company resulting in a draw on the ICF, the liquidator will make an application to the High Court to approve payments out of the ICF, on receipt of a verified claim with due diligence completed by the State Claims Agency. On High Court approval, the Central Bank, as administrator of the ICF, will pay the specified amount to the liquidator for distribution to claimants. The Central Bank will also provide an annual Statement of Account for the Fund to the Minister for Finance. This will be in an agreed format, similar to that currently provided to the Minister by the Accountant of the High Court.

One point that is important to note is that the proposed conferral of new tasks on a national central bank in the European System of Central Banks must be assessed against the prohibition on monetary financing. In the context, therefore of the proposals to transfer this new function to the Central Bank, an assessment is required as to whether the task proposed to be undertaken by the Central Bank is a central bank task or a government task.¹ Assuming the latter, the Central Bank must be fully compensated for the work that it will carry out in administering the ICF. The Central Bank cannot provide any monies to the ICF from its own resources nor can the Central Bank have any liability from the ICF. This is provided for in Head 4 of the Bill. The assessment is to be carried out by the ECB. We understand that the Department of Finance will request that the ECB assesses this once the legislation is published.

Let me also briefly mention that work is currently underway at a European level on recovery and resolution in the insurance sector. Currently there is no European harmonised framework of recovery and resolution for the insurance sector. The Central Bank is participating in work being carried out by EIOPA to examine what such a framework might look like. 

In conclusion, the Central Bank is supportive of the proposed amendments to the Insurance Act and its objectives of addressing the lack of clarity in current compensation arrangements for claimants, as was highlighted in the Setanta case. In relation to the Central Bank’s proposed new function envisaged under the Act, we will continue to work with the Department of Finance, the Accountant of the High Court, the State Claims Agency and other relevant stakeholders to ensure the successful transition of this function to the Central Bank in line with the finalised legislation.

Thank you for your attention.

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¹ In the context of a proposed conferral of new tasks on a national central bank (NCB) in the ESCB, it is necessary to assess such conferral against the prohibition on monetary financing under Article 123 of the Treaty. For the purposes of that prohibition, Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 defines ‘other type of credit facility’, inter alia, as ‘any financing of the public sector’s obligations vis-à-vis third parties’.