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:

1. contributions can be collected prior to and independently of any operation of winding-up decision; and
2. 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.

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:

1. 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);
2. a % levy of the total technical provisions (“TPs”) held by the relevant insurance undertaking for the relevant class(es) of business; or
3. 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.