Extra financial security of Life Companies
Life assurance companies like Irish Life are low risk organisations that have layers of protection to give financial security to policyholders. There's also additional protection from the oversight and regulation of life companies. The range of safeguards to protect policyholders includes the following:
Unit linked funds
Policyholder funds are usually invested by the life company in unit-linked funds. A customer buys units in a fund. If you wish to withdraw your investment the life company sell your units and pays the value at that time.
Assets to match policyholder liabilities
A life company is required to hold all the assets underlying its unit linked policies at all times (plus an additional amount for solvency margin which is described below). 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.
Ring Fenced Assets
Life companies must be self sufficient - their assets must be separate from any parent company. The assets and liabilities of Irish Life cannot be transferred to other parts of the business, such as security for a loan to acquire assets or to fund the business.
Capital Reserves – Solvency Margin
Under EU regulations, 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 (capital) a life company must hold under EU regulations, the Central Bank of Ireland requires companies to hold a further 50% of reserves. So a life company must have: Assets to fully match policyholder liabilities PLUS EU solvency reserves. PLUS 50% extra reserves for the Central Bank of Ireland