Public consultation on the exercise of Ministerial powers under Section 26 of the Motor Insurance Insolvency Compensation Act 2024
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1. Introduction
The Department of Finance invites interested parties to make submissions in relation to the exercise of Ministerial powers under section 26 of the Motor Insurance Insolvency Compensation Act (the "Act").
The Motor Insurance Directive
Directive 2009/103/EC, as amended (the “Motor Insurance Directive” or “MID”) ensures that vehicles can freely circulate in the EU while using a minimum harmonised level of insurance cover. It means that when accidents occur, injured parties are protected through effective reciprocal insurance cover arrangements across Member States.
Directive (EU) 2021/2118 (the “Sixth Motor Insurance Directive”) amends the MID by, inter alia, inserting Articles 10a and 25a to the MID. These Articles provide for a pan-EU motor insurance framework and require all Member States to have a compensation regime for motor insurance policyholders of insolvent insurance companies.
Prior to the Sixth Motor Insurance Directive, the Insurance Compensation Fund (“ICF”) framework in Ireland operated under a host-based system, meaning compensation in the context of insolvent insurers is paid from the Member State in which the insured risk is located. However, Articles 10a and 25a of the MID require that the compensation framework for motor insurance must be funded on a home-based system, meaning that the home country of the insurer (where the insolvent insurer is authorised) bears the cost of claims in the event of insolvency.
The Motor Insurance Insolvency Compensation Act 2024
The Act transposes Articles 10a and 25a of the MID and enhances Ireland’s existing domestic legal framework relating to the ICF for motor insurance insolvency so that potential Irish claimants can deal directly and efficiently with the national compensation body appointed pursuant to section 5 of the Act.
Section 26 of the Act amends the Insurance Act 1964, as amended, (the “1964 Act”) by the insertion of section 2A after section 2 of the 1964 Act. Section 2A authorises the Minister for Finance to prescribe, by way of regulations (the “Proposed Regulations”), “requirements for insurers (domestic) which carry on motor third party liability insurance in other Member States as regards contributions to the Fund for the purposes of providing eligible compensation”.
Section 2A of the 1964 Act also sets out, inter alia, that such Proposed Regulations may provide for:
- the Central Bank of Ireland (the “Central Bank”) to establish a sub-fund of the Insurance Compensation Fund, into which financial contributions collected under the Proposed Regulations (each a “Contribution) shall be paid;
- the Minister for Finance to prescribe the appropriate Contribution amount, together with the terms of payment of such contribution, after consultation with the Central Bank;
- operational and governance requirements as regards such Contributions; and
- such incidental, supplementary and consequential provisions as appear to the Minister to be necessary or expedient for the purposes of the Proposed Regulations.
Purpose of this Consultation Paper
The purpose of this Consultation Paper is to consult with relevant stakeholders and obtain submissions regarding (i) the scope of the Proposed Regulations; (ii) the form of the Contribution; and (iii) the target level of funding, as outlined in further detail below. Feedback to this consultation will assist in the consideration of the way forward. While no decisions have been taken, potential next steps could include, amongst other things, a legislative proposal for the Proposed Regulations.
How to respond to this consultation paper
If you wish to respond to this consultation paper you may do so either electronically (as set out below) or in writing by 24 December 2024, as set out below:
Electronically at |
By Post to |
https://consult.finance.gov.ie/. |
Insurance Unit, Financial Services Division, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2, D02R583, Ireland. |
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If responding by post please complete the Annex and submit a printed copy of this Annex along with your response to the consultation. |
Any submissions received after 24 December 2024 may not be considered.
The Department requests that you provide reasons and explanations for the responses you provide to this consultation paper as this will aid consideration of the issues. Where possible, please also provide material, or references to material, that support or evidence the points you make in your responses.
The information requested in the About You section (Annex) must be completed by all respondents to the public consultation.
Save for these questions in the Annex, you may choose to respond to all or some of the questions in the remaining sections of the consultation paper i.e. you may answer as many or as few questions as you wish.
Notices
Responses to this consultation are subject to the provisions of the Freedom of Information Act 2014 (FOI), Access to Information on the Environment Regulations 2007-2018 (AIE) and the Data Protection Act 2018.
The Department may also invite key stakeholders to meet with it and the Central Bank of Ireland as appropriate, including representative bodies and other interested groups or individuals.
We intend to publish the contents of all submissions received in response to our consultation on the Department’s website. We will redact personal data prior to publication. In responding to this consultation paper, parties should clearly indicate where their responses contain personal information, commercially sensitive information or confidential information which they would not wish to be released under FOI, AIE or otherwise published.
We would like to draw your attention to the Data Privacy Notice on the Department’s website which explains how and when we collect personal data, why we do so and how we treat this information. It also explains your rights in relation to the collection of personal information and how you can exercise those rights.
Nothing in this consultation document constitutes legal advice or any other form of advice, nor should it be construed as such. Please note that neither the Department nor the Minister for Finance assume any liability for the accuracy or completeness of the information contained in this consultation document.
The views expressed in this consultation process will be considered by the Minister and his officials in the context of the Proposed Regulations and, to the extent required, any changes that may be required to other domestic legislation.
2. Scope of the Regulations
Introduction
As noted above, section 2A of the 1964 Act provides that the Proposed Regulations may “prescribe requirements for insurers (domestic) which carry on motor third party liability insurance in other Member States”.
The term “insurer (domestic)” is defined under section 2 of the Act:
“(a) subject to paragraph (b), means an insurance undertaking (other than an insurer authorised in another Member State) that—
(i) is authorised, under the Regulations of 2015, to carry on the business of non-life insurance within the meaning of those Regulations, and
(ii) writes insurance contracts covering risks falling within class 10 in Part 1 of Schedule 1 to the Regulations of 2015,
and
(b) includes an insurance undertaking referred to in paragraph (a) the authorisation of which referred to in that paragraph has been revoked by the Bank;”
Accordingly, it is intended that the Proposed Regulations will apply to “insurers (domestic)”, as such term is defined under section 2 of the Act, which carry on motor third party liability insurance in other EU/EEA Member States.
The Proposed Regulations will not apply to “insurers (domestic)”, as such term is defined under section 2 of the Act, which only carry on motor third party liability insurance in Ireland.
Captive insurance undertakings
The Act introduces a new definition “insurer (domestic)”, which includes captive insurance undertakings. The Act therefore provides for compensation for motor third party liability claimants from the moment that the insurer is subject to a winding up decision, irrespective of whether the insolvent insurer is a captive or not. The Department of Finance is therefore considering whether captive insurance undertakings writing Class 10 Motor Third-Party Liability (MTPL) insurance should be required to pay a financial contribution for the purposes of paying eligible compensation under the Act, where the rights of a claimant to claim such compensation could be realised due to the winding up of a captive insurance undertaking.
Observations on the scope of the RegulationsThe Department of Finance welcomes observations on the proposed imposition of a Contribution requirement on non-life insurers (including captive insurance undertakings) (i) authorised by the Central Bank; and (ii) writing MTPL insurance on a cross border basis. |
3. Form of Financial Contribution
Background – Existing financial contribution requirements
The Insurance Compensation Fund (ICF) was established under the 1964 Act, as amended. The ICF is primarily designed to facilitate payments to policyholders and third party claimants in relation to risks in the State where an Irish authorised non-life insurer or a non-life insurer authorised in another Member State goes into liquidation.
Section 6 of the 1964 Act provides for the ICF to be financed through ex-post contributions received from non-life insurance companies up to a maximum of 2% of the aggregate of the gross premiums paid to that insurer or insurer authorised in another Member State in respect of policies issued in respect of risks in the State.
Separately, the Motor Insurers Insolvency Compensation Fund (MIICF) is an ex-ante fund established to collect contributions from motor insurers with respect to policies where the risk is within the State in order to fund the increase in compensation for third party motor claims from 65% to 100% in cases where an insurer is insolvent. This change was introduced by the Insurance (Amendment) Act 2018 (the “2018 Act”) and came into operation on 1 December 2018.
The 1964 Act (as amended) requires motor insurers to contribute an amount equal to 2% of gross written motor insurance premiums (“GWP”) annually to the MIICF until it builds up to €150 million, and then 1% of GWP until the MIICF reaches €200 million. The contribution rate is subject to annual review by the Minister for Finance, and can be set between 0% and 3%, depending on factors such as the amount in the MIICF, or the likelihood of a call being made on it[1].
Further financial contribution requirements apply to some insurance policies. This includes 1% stamp duty charged on life insurance premiums and a separate 3% stamp duty charged on certain non-life premiums. There is also a stamp duty of €1 per non-life insurance policy. This is payable to the Revenue Commissioners and forms part of the normal Exchequer receipts.
Ex-ante vs. Ex-post Contribution Requirement
When considering the form of the proposed contribution under the Proposed Regulations, it is necessary to consider whether contributions should be collected from industry (i) prior to and independently of any operation of any specific winding-up decision (i.e. on an ex-ante basis); or (ii) following the occurrence of a specific winding-up decision (i.e. on an ex-post basis).
The Department of Finance considers that if contributions are collected from the industry on an ex-ante basis:
- contributions can be collected prior to and independently of any operation of winding-up decision; and
- funds are immediately available for the purposes of providing compensation under the Act, relating to motor third party liability insurance carried on by “insurers (domestic)” in other EU/EEA Member States.
Were prior funding to be insufficient to cover the losses or costs incurred by the use of the financing arrangements, additional contributions should be collected to bear the additional cost or loss.
It is considered prudent that the ex-ante available financial means amount at least to a certain minimum target level, which is considered in further detail below.
The 1964 Act provides that if there is a call on the ICF as a result of a decision to wind-up an insurer (domestic) which provides motor third party liability cover, ex-ante contributions accumulated in the sub-fund may be supplemented with access to the broader Insurance Compensation Fund to cover exposure where (i) the sub-fund has not been established; or (ii) there is insufficient funding in the sub-fund.
Observations on timing of financial contributionThe Department of Finance welcomes observations on the ex-ante nature of the proposed contribution. |
Basis for the Financial Contribution
When considering the form of the contribution under the Proposed Regulations, it is necessary to consider how such contributions should be calculated.
There are a number of ways in which the financial contribution can be determined, including:
- a % levy on gross written premium of the relevant class(es) of cross-border business (such as per the ICF and MIICF financial contribution requirements described above);
- a % levy of the total technical provisions (“TPs”) held by the relevant insurance undertaking for the relevant class(es) of business; or
- a charge per policy (such as the stamp duty of €1 per non-life insurance policy, described above).
The Department of Finance considers that the financing mechanism of using GWP as a basis for calculating the relevant contribution would ensure (i) an objective basis for levying purposes; and (ii) a metric that is consistent with the existing financial contribution requirements for the ICF and MIICF, as outlined in further detail above.
Alternatively, the Department of Finance also considers that the financing mechanism of using TPs as a basis for the calculation of the relevant contribution would ensure that the requirement to contribute will continue to apply to insurers in case of a run-off, i.e. where no insurance business is being underwritten in the applicable time period.
In determining the percentage rate (or such other charge) to be applied in respect of the proposed contribution, the Minister for Finance will have regard to a number of factors (including the factors set out under section 2A(3) of the 1964 Act). Certain key factors for consideration include inter alia (i) the ultimate target, if any (i.e. what should an ex-ante levy cover and how much will be needed for this); and (ii) how quickly it is intended to reach any target level of funding. This is considered in further detail below.
Observations on the Basis for the financial contributionThe Department of Finance welcomes observations on the use of (i) a % levy on Gross Written Premium and/or Technical Provisions; or (ii) a specific charge per policy, as a basis for determining the financial contribution to the sub-fund. |
4. Target level of the Funding
When considering the proposed contribution under the Proposed Regulations, it is necessary to consider (i) whether any funds collected on an ex-ante basis should accrue until the amount reaches a specified target level; and (ii) if so, what that target level should be.
Basis for setting a target level of funding
Where an ex-ante financial contribution requirement is established, the Department takes the view that a target level of funding should be set for such a financial contribution requirement so that sufficient funds are specifically available for the purposes of providing compensation under the Act, relating to motor third party liability insurance carried on by “insurers (domestic)” in other EU/EEA Member States.
In determining the target level of funding required to cover cross-border MTPL risks under the Proposed Regulations, the Minister for Finance will have regard to a number of factors (including those set out under section 2A(3) of the 1964 Act). Certain key considerations include (i) the potential exposure of the sub-fund in the event of an insolvency or failure of an insurer (domestic) carrying on MTPL business on a cross-border basis; and (ii) previous experience in documented cases of insurance failures.
Accordingly, although TPs are not an estimate of the likely call on external funds, such as the ICF and the proposed sub-fund, but rather a measure of the current size of a company’s exposure to risk, the Department takes the view that TPs provide an reasonable objective basis on which to base any target level of funding under the Proposed Regulations.[2]
Ongoing review
The “home-based” regime under the Act is no longer confined to Irish risk business (and includes business carried on by Irish-authorised insurers on a cross-border basis). Accordingly, the Department is currently considering a mechanism to facilitate an annual review of the levy and target to accommodate any potential variation of the risk exposure from year to year, subject to an overall minimum target funding level. This reflects the open and dynamic nature of the internationally-traded insurance sector.
Observations on the target level of the fundingThe Department of Finance welcomes observations on the target level of the proposed funding to cover cross-border risks. |
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[1] Given the current strong financial position of the MIICF, the annual contribution rate was reduced from 2% of GWP and now stands at 0% of GWP pursuant to the Insurance Act 1964 (Adjustment of Percentage Rate) Order 2023 and the Insurance Act 1964 (Adjustment of Percentage Rate) Order 2024.
[2] While the actual shortfall (if any) will vary from one failure to the next, previous analysis by EIOPA (EIOPA-BoS-21/394, pg. 23) with regard to the amount of external funds that were used (or not used) for the documented cases of insurance failures could be interpreted as indicating that the most common injection of funds into a failing insurance company represented around 1% to 20% of the total assets of the insurer.