Insurance compensation scheme becomes mandatory

Similar to the existing protection scheme for bank deposits of up to 100.000 EUR, Belgian law provides for a protection scheme for life insurance contracts with a guaranteed return. Life insurers had to optin to benefit from this scheme – they will now be obliged to participate.

As a rule, in case of insolvency of a life insurance company, policyholders and beneficiaries have to present their claim to the appointed trustee and hope for possible payment after long proceedings. As from 2008, life insurers have the faculty to participate, upon request, to an insurance compensation scheme to the benefit of their clients.

Pursuant to the royal decree dated 14 November 2008 on the financial stability, the Belgian compensation scheme applies only to life insurance contracts with a guaranteed return (with the exception of insurance products in second pillar pension plans) governed by Belgian law. Compensation is only available (i) if the insurance company (licensed as insurer of life insurance with guaranteed return coming under “class 21”) has requested to participate in the compensation scheme and has paid the entry fee (0,25% of the inventory reserves of the protected contracts) and annual contribution (0,50% of the inventory reserves of the protected contracts), and (ii) within a limit of 100.000 EUR.

Contrary to the protection scheme for bank deposits (which scope is basically limited to Belgian credit institutions), the insurance protection scheme is applicable to both Belgian and foreign life insurers carrying on activities in Belgium, provided that the insurance contracts are governed by Belgian law (this is compulsory when “the risk is located in Belgium”, i.e. when the policyholder is resident in Belgium).

Participation to this scheme is thus not mandatory and there is therefore no automatic coverage. At our knowledge, only Ethias decided to participate to this compensation scheme up to now.

Starting from 1 January 2011, the participation to the protection scheme will become mandatory for insurance companies which fulfill the above mentioned criteria, as a result of article 166 of the law dated 23 December 2009. The annual contribution of the life insurers shall be reduced to 0,15% of the inventory reserves of the protected contracts.

This should therefore have a significant impact on the results of life insurers even though it can be anticipated that they will pass these additional costs on the consumers… In the meantime, the Belgian State will benefit from extra cash flow, where policyholders could, as far as necessary, have their trust reinforced in the life insurance investments.