DP2/23 – FSCS general insurance limit

The Prudential Regulation Authority (PRA) has issued a discussion paper in which it seeks to explore the appropriateness of increasing Financial Services Compensation Scheme (FSCS) protection for eligible policyholders to 100% for certain types of General Insurance (GI). The discussion paper follows the publication of an emergency policy statement 21/20 in October 2020 which enhanced FSCS protection for eligible policyholders of buildings guarantee insurance from 90% to 100% to prevent substantial loss of coverage by policy holders following the administration of an insurance undertaking. Back then, the PRA announced an upcoming review of the FSCS pertaining to other GI products which is now being done.
The PRA’s objectives with respect to the UK insurance market are: to promote the safety and soundness of regulated firms and to ensure an appropriate level of protection for policyholders. Naturally, safety measures for insurers also contribute to policyholder protection. Although the PRA is working on an insurer resolution regime and on rules to facilitate easier market exits, the Authority emphasizes that it is not a zero-failure regulator, and some insurers may still fail. In such cases, the FSCS must act as a backstop. Currently, not all policyholders receive 100% protection, and only eligible policyholders benefit from the FSCS altogether. Therefore, the PRA is now exploring the appropriateness of increasing FSCS protection for eligible policyholders for certain types of General Insurance (GI). The PRA has thereby identified some GI areas where it deems a lower coverage to be particularly problematic for consumers in case of an insurer’s failure. These include the following:
– insurance backed guarantees;
– home insurance;
– motor insurance;
– private health insurance;
– travel insurance; and
– public liability insurance.
As an increased level of protection will also come along with higher FSCS levy rates for insurers, the PRA is particularly keen of finding out their views upon an increase in FSCS protection for consumers. The PRA also presents alternatives to such increase to 100% coverage, such as
1. an increase only for those GI products with a life circumstances impact (LCI) (which is somewhat difficult to assess);
2. providing the FSCS with the discretion to pay out 100% if it deems such payment appropriate for individual firm failures;
3. allowing the FSCS to lower the payout benefits received by policy holders by the excess costs to provide a 100% coverage for all GI products;
4. implementing a phased approach (deductible approach) to provide a 100% coverage on GI products up to a certain limit and – beyond this limit – a 90% coverage; and
5. leave everything as is.
Finally, the PRA is addressing another issue in the discussion paper: the definition of „small business“ with respect to policy holders. Specifically, the Financial Services Compensation Scheme currently pays out GI claims only to eligible claimants, with small businesses allowed to make claims under the FSCS if listed in Policyholder Protection Part 7.2. The current definition of a small business in Policyholder Protection Part 7.2, established in 2000, is a partnership, body corporate, unincorporated association, or mutual association with an annual turnover of less than £1 million. The PRA is concerned that this £1 million threshold may no longer be suitable, limiting FSCS protection to only the smallest businesses. This becomes especially problematic for Professional Liability Insurance (PLI), potentially causing financial hardship for businesses just outside the small business definition. As the small business definition in the Companies Act 2006 encompasses firms that
– have an annual turnover of not more than £10.2 million;
– have a balance Sheet total of not more than £5.1 million; and / or
– have no more than 50 employees
the PRA seeks views on aligning the current FSCS small business definition with the one of the Companies Act.
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Any comments on these issues may be submitted to the PRA up to January 24, 2024.