The PRA is consulting on proposed changes to the FSCS regime for policyholder protection. This is a domestic initiative. This area is not subject to EU harmonisation; the European Commission’s plan for an Insurance Guarantee Scheme Directive (IGS) to protect consumers has not yet materialised.
The changes impact UK authorised insurers and EEA insurers conducting UK business and are of broader interest to policyholders.
100% compensation to be provided on more types of insurance
FSCS compensation for insurance is not subject to any cap (unlike FSCS depositor protection which is limited to £85,000). For most types of insurance, compensation is set at 90% (i.e. the insured only receives 90% of their entitlement), but full compensation (i.e. 100%) applies to some kinds of insurance policies (certain types of insurance that are ‘compulsory’, such as third party motor). The PRA proposes to extend 100% compensation to certain other categories of insurance, namely –
- Claims under professional indemnity insurance;
- Claims for death or incapacity due to injury, sickness or infirmity i.e. certain long term pure protection policies, such as critical illness, and certain general insurance policies such as creditor, accident, sickness and unemployment insurance; and
- Benefits payable in the form of income or other regular benefits such as annuities (in the ‘decumulation phase’), because these policyholders are dependent on the income provided. Pensions (in the accumulation phase) and wrapper products such as investment life savings would remain subject to 90% compensation, because the policyholder is not yet dependent on income. Mixed policies, for both savings and protection, would be subject to different compensation for the two elements (90% and 100%).
Operational changes, successor firms and funding
FSCS protection will apply to claims against ‘successor firms’ (which assumed the liabilities of another insurer) where (i) it is a protected claim, in relation to the original insurer, and that claim arose (whether reported or not at that time) prior to the transfer to the successor firm or (ii) the successor is itself PRA authorised/within the scope of FSCS protection.
The PRA is also proposing changes to the rules that deal with the mechanics of FSCS operations after an insurer has been declared in default. The changes relate to:
- Extending the FSCS’s powers for automatically subrogating the FSCS to the rights that claimants have or, as an alternative, for automatic assignment of policyholders’ rights to the FSCS and for power to take assignments by electronic means (i.e. by email or on-line, in addition to existing powers relating to written assignments);
- Greater flexibility for the FSCS on verification of eligibility and validity of claims;
- Clarification where policies are held on trust and the trustees are located overseas or where there are joint policyholders in different countries; and
- Enhanced FSCS powers to require information.
There are certain changes to FSCS funding, but further changes will be required as part of Solvency II implementation.
You can read the PRA’s full proposals and draft rules and Statement of Policy here. CP 21/14 is one of four consultations launched on 6th October, which the PRA grouped together under the heading ‘resolution and resilience’.