Life assurance companies are low risk organisations that have layers of protection to give financial security to their policyholders. There is also additional protection from the oversight and regulation of life companies. This range of safeguards to protect policyholders includes the following:
Policyholder funds are usually invested by the life company in unit-linked funds.
When a customer makes an investment they buy units in a fund. When they wish to withdraw their investment, the life company sells the units and pays the value at that time to the policyholder.
A life company is required to hold all the assets underlying its unit linked policies at all times.
A key difference between a life company and a bank, from a regulatory standpoint, is that a bank is not required to hold the full amount of its deposits as liquid assets. As a result, there is no equivalent concept to a ‘run on a bank’ for a life company, since insurance companies hold matching assets at all times.
Life companies must be self-sufficient, which means their assets must be separate and ring fenced from any parent company.
Their assets and liabilities cannot be transferred to other parts of the business, such as security for a loan to acquire assets or to fund the business.
Under EU regulations Insurance companies must comply with Capital Reserves and Solvency Margin requirements.
In addition to having to hold all the assets (units) underlying its policies, life companies must hold additional reserves on top of this. This is known as ‘solvency margin’ and it gives an additional layer of safety.
On top of the amount of the reserves of capital a life company must hold under EU regulations, the Central Bank of Ireland requires companies to hold a further 50% of reserves.
So life companies in Ireland must have assets to fully match policyholder liabilities PLUS EU solvency reserves, PLUS 50% extra reserves for the Central Bank of Ireland.
That is the principal reason why Life Insurance companies have weathered the economic storms of recent years so well.