Solvency rules have minimised insurance company failures - KPMG

Insurance company failures in the UK and the European Union are rare, policyholders have almost always been paid, and European solvency rules have effectively reduced the number and size of failures since the Solvency I capital adequacy regime was introduced in 2004, according to a new study produced by KPMG for a cross-market group of London associations.

The study, which reviewed non-life insurance company failures in the seven most important EU insurance markets during the past 30 years, found that the bulk of failures occurred in the early 1990s as a result of the rapid increase in asbestos, pollution, and health hazard claims. A marked decrease in the number and size of insolvencies followed the introduction of the Individual Capital Adequacy Standards regime in 2004, which raised insurers’ base capital requirements.

In completed insolvencies since 2004, all insurance creditors have been paid in full. In almost all cases, the companies which failed were small, unrated insurers operating in specialist niche markets.

The report supports the commissioning associations’ view that current proposed changes to the Basel III rules for calculating banks’ capital requirements do not reflect the very strong capital position of insurers which underwrite credit insurance, and therefore banks’ exposure to insurer default through credit insurance products. This position is further strengthened by insured banks’ privileged position as credit insurance policyholders relative other direct creditors, in place across the markets studied since the prioritisation of policyholders as creditors in 2004.

David Powell, head of non-marine Underwriting at the Lloyd’s Market Association, said: “This study shows the genuinely robust nature of non-life insurance companies in the UK and the EU, and the positive contribution of EU solvency regulations to further strengthening that position. Today it is very rare for an insurer to fail, and when they do, they have the resources to meet their commitments to policyholders in full. Only small, unrated companies have failed in the past 16 years, because more stringent capital requirements have dramatically reduced the frequency and severity of insurer insolvencies.”

Joe Shaw, legal and market services executive at the IUA, said: “We are pleased that this study provides the tangible evidence required to support the case we have been making to the European Commission, and hope this will further the conversation on the treatment of trade credit insurance products under the Basel III framework.”