The PRA has published a consultation paper proposing changes to rules for insurance policyholder protection. The proposals aim to align compensation rules more closely with the PRA’s statutory objective to contribute to securing an appropriate degree of protection for those who are, or may become, policyholders. The consultation is divided between proposals for compensation limits, operational changes for the Financial Services Compensation Scheme (FSCS) and funding rules.

The PRA is proposing changes to the FSCS insurance limits to ensure that policyholders are protected in the event of an insurer’s failure. Compensation is currently set at 100 per cent for liabilities subject to certain compulsory insurance, such as third party motor and employers’ liability, and 90 per cent for all other general insurance. The PRA proposes extending the 100 per cent compensation limit to:

  • professional indemnity insurance claims;
  • claims arising from death or incapacity due to injury, sickness or infirmity of the policyholder; or
  • benefits falling due are payable in the form of income or other regular payment.

Long-term insurance

For long-term insurance, the PRA proposes an increase to 100 per cent for annuities in payment and other benefits in the form of regular income. The long-term locked-in nature of annuities means that policyholders have a lower capacity to protect themselves or seek alternative cover and, therefore, justifies an increase from the current limit of 90 per cent.

The PRA proposes to maintain the 90 per cent cover for both pension life savings and investment life savings. Policyholders are not yet receiving income while these products are in the accumulation phase and are not locked in to their policies to the same degree annuitants. The PRA therefore considers such policyholders are less vulnerable to a sudden reduction in income.

Claims arising from death or incapacity (pure protection long-term insurance products), under the PRA’s proposals, will increase to 100 per cent cover. For policyholders that have savings products with both a saving and protection element, the PRA proposes to maintain 90 per cent cover for the saving element but increase cover to 100 per cent for the pure protection element. This aims to ensure that mixed policies are treated the same regardless of whether the policy is pure protection or a combined savings and protection product.

General insurance

The PRA will maintain full coverage for certain liabilities relating to compulsory insurance. The proposals extend 100 per cent protection to general insurance claims arising from the death or incapacity of the policyholder under, for example, creditor, accident, sickness and unemployment insurance. Professional indemnity insurance (PII) cover will remain at 100 per cent given the consequences could be significant should PII holders have their cover withdrawn.

For all other general insurance products, which are usually short term in nature, the PRA proposes maintaining 90 per cent cover.

Operational changes for the FSCS

The consultation also includes recommendations that aim to address operational issues facing the FSCS. The PRA proposes giving the FSCS the power to provide that the payment of compensation by the FSCS shall have the effect of automatically subrogating the FSCS to the claimant’s rights against the insurer, a successor and/or against any third parties as an alternative to assignment. The PRA notes that by expanding the range of options available to the FSCS to secure a right of recovery against insurers when making payments of compensation, the PRA is seeking to give the FSCS flexibility to pursue the most operationally effective strategy given the circumstances.

The PRA recognises, however, that concepts such as ‘subrogation’ and ‘assignment’ are technical in nature and the Financial Services and Markets Act 2000 does not expressly require the PRA to adopt these terms in making rules for the FSCS. Respondents’ views are sought on whether simpler language, for example ‘transfer’, would be desirable in the PRA’s rules.

The PRA proposes extending the scope of the FSCS power to require information from insurers in situations where the firm is in financial difficulty or where the FSCS is seeking to secure continuity of cover, for example, through a transfer of business or issue of policies by another firm.

The consultation closes on January 6, 2015, with a policy statement and final rules expected to be published in the first half of 2015.

For further information:
CP21/14 Policyholder Protection