This article provides an outline of the investor protection measures in Ireland, for policyholders who invest in a life assurance policy.
Protection of OMII assets
Assets linked to OMII’s policies are segregated from OMII’s business assets, the segregated assets are called the Long Term Business Fund (‘LTBF’). This means that the assets held in the LTBF must only be applied for the purposes of meeting liabilities of the policies issued by OMII. The appointed actuary has a statutory duty to protect the interests of the policyholders generally.
OMII currently writes only unit-linked business, where the policyholder selects the underlying assets of the policy. Therefore, there is always a close link between the value of the company’s assets and the liabilities to its policyholders so that OMII can meet its obligation to pay encashment proceeds from the policy. The nature of the single product type means OMII policyholders cannot be exposed to risks of other business lines. For example, investment guarantees or protection business.
Monitoring and regulation of OMII's business
OMII must produce a set of audited accounts, at least annually to the Central Bank of Ireland (‘the Regulator’) for inspection. It is the responsibility of the actuary to certify on prudent assumptions that the company is able to meet all policyholder claims and has maintained the required level of assets, which is known as the “required solvency margin”.
The EU sets minimum standards of solvency for all life assurance companies. In accordance with these standards OMII is required to maintain the minimum solvency margin set by EU and local regulations of €3.7 million. However, OMII consistently exceeds this minimum requirement by a margin in excess of 200%. Solvency requirements change to a new ‘Solvency II’ regime from 1 January 2016. OMII will continue to exceed the minimum requirement by a significant margin under the new regime.
The Central Bank has authority to intervene if, at anytime, the solvency margin falls below the required solvency margin. OMII is also subject to regular internal and external audit activity and inspection visits by its regulator. This means that the solvency margin is regularly reviewed to ensure that it meets the regulatory requirements in Ireland.
Regulatory requirements and internal Old Mutual Group policies dictate how company capital, including the solvency margin, is invested. These set out very cautious criteria which require significant institutional and geographical diversification of deposits, meaning limited exposure to Irish banks and sovereign risks.
The EU does not currently have any legislation governing investor compensation schemes for European insurers. The Insurers (Reorganisation and Winding Up) Directive 2001 does provide specific guidance around policyholder assets, in the event of an insurer becoming insolvent. Policyholders’ liabilities must be paid ahead of any other creditors of the insurer. Whilst this Directive is not a form of investor protection in the EU, it does give policyholders some comfort in the unlikely event of the insolvency of an insurer occurring, because the policyholder will be treated as a preferential creditor, the only exception being the cost incurred when winding up the company.
Additionally, in July 2010 the EU Commission issued a White Paper on 'Investor Guarantee Schemes'. If, as a result of the White Paper, legislation is enacted it could impose a mandatory requirement on EU countries to put an Investor Guarantee Scheme in place, where there isn’t a scheme already.
Investment risk associated with the underlying asset
Investor protection schemes do not cover the investment risk the policyholder chooses to take in respect of their policy. These risks vary depending on the type of asset selected and can also include, for example, currency fluctuations, counterparty and emerging market risks.
Policyholders can elect to change the underlying assets, within their policy, to reflect their current risk appetite. The value of your policyholder’s investments will fluctuate daily and OMII cannot guarantee the amount the client will receive as a return on the investment.
UK Financial Services Compensation Scheme (‘FSCS’)
OMII Policyholders who were habitually resident in the UK, at the time of applying for a OMII policy; and provided the policy commenced on or after the 1 December 2001 are believed to be covered by the UK FSCS. Currently, 90% of the value of policy, at the time the insurer goes into liquidation, is covered under the Scheme.