WARNING – Technical blog post up ahead!
Crikey, my life insurer has gone to the wall. What happens now?
The above is a very unlikely situation – insurance companies are regulated more strictly than the banks that went bust in 2008/2009.
Is it likely? No.
Let’s look at how the various Irish life insurers work.
When you pay a premium to your life insurer, you are now owed something in return by the life insurance company, e.g. a death benefit if you die.
Life companies regulated by the Central Bank are required to hold four different layers of reserves to meet their liabilities to policyholders. It would not be unusual for life companies in Ireland to seek to maintain surplus assets over liabilities of around 200%.
The life company itself must hold the assets required, and cannot rely on having resources available through a parent company. The solvency of each life company is determined on a stand-alone basis and must be met at all times without recourse to external resources.
Life companies established in the State must submit reports setting out details of their solvency position to the Central Bank on a quarterly basis, with very detailed returns on an annual basis.
Life companies operate very differently to banks. As we have seen, each time a life company receives a premium it receives an asset, i.e. the premium, but then has a policyholder liability in respect of that premium.
Typically banks will lend more than they have on deposit, so they will seek external funding to allow them to do this, and they will need to pay interest on that external funding.
The idea of a “run on the banks” whereby depositors fear that banks will not have enough assets to cover the deposits and will seek to withdraw their cash (unless a government can step in with a deposit guarantee scheme) should not arise in the case of a life company.
Every life company liability must have specific and suitable assets set aside to meet that liability. Each time a life company experiences a ‘withdrawal’, i.e. a policy encashment or claim payment, its policyholder liabilities reduces accordingly.
Not in the modern era. Some small insolvent life companies merged together in the 1930’s to become what is now today Irish Life.
Legislation governing the winding-up of life companies in Ireland means that none of the life company’s creditors can be paid from the assets that have been set aside to meet liabilities to policyholders. Some of the ring-fenced assets can be used to meet the liquidator costs, but otherwise no amount will be paid to any creditor until the liabilities
to policyholders have been fully met first.
Hopefully that puts your mind at ease.
Click to read the full article on policy holder protection.
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