Investor protection – how does it actually work?

February 26, 2015 / Knowledge Centre

The Isle of Man and Guernsey policyholder protection law states that an individual policyholder receives up to (Isle of Man) or at least (Guernsey) 90% of the value of the policy should the insurance company that issued the policy not be able to meet its liabilities to the policyholder. This rule applies to all policyholders regardless of their nationality or residence.

Bank deposit vs. insurance policy

The level of policy holder protection on the Isle of Man and Guernsey is often called the best in the world. The main reason for this is that there is no upper limit, unlike bank deposit systems, and that the policy holder protection scheme is a separate protection scheme applicable exclusively to insurance based products.

In Europe the bank deposit protection system is limited to the first €100.000, in the United Kingdom £85.000, Isle of Man and Guernsey to £50.000 and in the United States the deposit protection is capped at $250.000. All these figures are per person per bank. Any deposits over this amount are most likely lost in the event of a default of the bank. In any case the depositor would have to wait for the liquidation of the bank to complete before any additional capital is returned, if at all.

How it works:

On the Isle of Man the protection is achieved via a special fund into which all the life insurance companies on the Isle of Man contribute. Should one of the contributing life insurance companies get into difficulties this fund will compensate the policyholders. Should the fund not hold enough money to compensate all policyholders of the company that is experiencing troubles a levy of maximum 2% can be charged on all other life insurance companies’ client assets. The maximum amount of compensation equals no more than 90% of the market value of policyholder’s policy value.

Guernsey operates in a slightly different way. In Guernsey at least 90% of policyholder’s assets are held outside of the life insurance company’s balance sheet with a third party trustee for the benefit of the policyholder. Effectively this means that at any time at least 90% of the assets representing the policyholder’s portfolio will be protected.

In both locations the protection system is designed never to be used as the regulators have put in place very strict solvency and liquidity requirements for life insurance companies. Inspections and regulatory checks are carried out on a quarterly basis by the local financial services authority preventing situations from getting out of control in the first place.

The protection system is designed to protect the value of the overall client portfolio in case the life insurance company cannot meet its liabilities to the client. This means that it does not protect the client’s underlying assets inside the portfolio from market fluctuations as some unscrupulous advisors claim the policyholder protection system does.