METHODOLOGICAL APPROACHES TO ESTABLISHING A LIFE ASSURANCE GUARANTEE SCHEME IN UKRAINE
Keywords:life assurance, protection mechanisms, insurance guarantee scheme, insurer insolvency, policyholder protection
AbstractThe article investigates the features of creation, implementation and functioning of life assurance guarantee schemes. Based on the analysis of Ukrainian experience with insurers’ failure during 2011—2019, as well as other mechanisms of policyholders’ protection (internal risk-management, reinsurance, risk-based prudential supervision, early interventions, policyholders’ priority in winding-up process), the article proves the necessity of insurance guarantee scheme (IGS) as the last-resort protection, especially in case of long term life assurance in Ukraine.The expected guarantee costs for Ukrainian insurance market are calculated in compliance with Solvency II capital requirements. The expected losses of the system in the event of failure as a proportion of remaining insurers’ gross premiums for various asset shortfalls are estimated. Considering high concentration in life insurance market of Ukraine, it is revealed that possible losses due to the insolvency of the first four life insurers in Ukraine (from Top-10) are crucial for both the market and the guarantee scheme, despite the fact that the total expected costs of IGS appear relatively small, making up 0.35—0.45% of life assurance gross premiums (in 2019). This is typical for small and concentrated insurance markets, especially if more than 96% premiums are collected by top ten insurers, which make up only half of the market.
When established, policyholder protection funds should be designed carefully to minimise any drawbacks, particularly the moral hazard problem and the burden on soundly managed member companies. The key features of an effective IGS for Ukraine are offered. It has been proven that any IGS initiatives should be delayed in Ukraine until proportional regulation that reduce the risks of insurance companies is introduced and prudential supervisory regime Solvency II implemented.
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