CP21/14 Policyholder Protection

On 6 October 2014 the PRA published Consultation Paper 21/14: Policyholder Protection. The proposals in this consultation aim to enhance compensation rules for insurance policyholders by increasing the amount of compensation payable under the Financial Services Compensation Scheme (FSCS).

Changes to the FSCS

One of the PRA’s objectives is securing an appropriate degree of policyholder protection. Compensation under the FSCS is currently set at 100% cover for liabilities subject to certain compulsory insurance (such as private motor and employers’ liability) and 90% cover for all other insurance. The consultation paper proposes increasing the cover to 100% for retirement income in payment, protection products, professional indemnity and general insurance claims arising from death or incapacity of the policyholder.

The PRA has estimated the expected increase in compensation costs to be approximately £7m p.a., which will come from insurance companies via FSCS levies. There are no anticipated additional costs to companies or the PRA in terms of organisation or compliance.

The new rules will take effect in July 2015.

Barnett Waddingham commentary

The increase in protections will of course be welcome to policyholders, although according to the PRA’s projections it may result in a relatively large increase in levies: about £7m on total levies of £600m-£1000m, about 20-30% of which typically related to insurance. It is not yet clear from the proposals how this will be apportioned but we would expect firms with larger annuity books to be affected more.

In particular, pension schemes looking to buy out will now note that the increased protection for pensions in payment makes compensation payable by the FSCS more generous than would be paid by the Pension Protection Fund (PPF). This should reassure trustees who in the past might have been worried that a buyout could risk swapping PPF protection for the FSCS.