Protecting policy holders

I have written before about FSCS’s response to the failures of the Enterprise and Gable insurance companies. 

Enterprise was a Gibraltar-based firm; Gable was a Lichtenstein-based firm. Both provided cover to UK customers through a network of brokers and sub-brokers across a range of risks, including motor.

For the record, these are the biggest single failures with which FSCS has had to deal in the last year.  

The numbers bear repetition. FSCS has so far met 93,302 claims under Enterprise and Gable’s policies at a cost of £49.73m; we have worked with brokers to put in place new insurance for around 66,393 policyholders and applied £15.06m of premium compensation to finance these new policies; we have also returned premia for another 16,715 policyholders at a cost of £4.5m.

And the story is far from over; we expect to pay out £66m further compensation in 2017/18.

These bare numbers tell only part of the story.

The failures of Enterprise and Gable hold important lessons for the resolution of insurance companies and for FSCS’s role in protecting policyholders.

It’s important, to start with, to appreciate that an insurance failure creates many complex and different demands to those of, say, the failure of a bank or building society. 

There is a communication challenge. Particularly where insurance was sold through brokers, many policyholders may not be aware the failure of an insurer affects them at all. But that is critically important where motor risks are covered and the Insolvency Practitioner intends to disclaim the policies. By contrast, depositors are generally well aware if their bank or building society gets into difficulty.

FSCS also faces choices about how best to protect policyholders. Our starting point for general insurers is to pay compensation including for return of premium, but this is often less convenient for policy holders; more expensive and time-consuming for FSCS and its levy payers.

So where possible, we’ll look either to facilitate the transfer of an insurance book or to finance new cover, securing continuity for consumers. 

Now, effective communication and timely protection depend on the fulfilment of some common conditions. Good, consistent, reliable information about the policyholders and the policies themselves is one.  Another is the active cooperation of the insolvency practitioner involved and of any brokers and sub-brokers involved in the sale of the original policies.

Some of these conditions have certainty been present in the resolution of Enterprise and Gable.

FSCS has worked well, for example, with the insolvency practitioners involved. With a particularly diverse book of business, the liquidator of Enterprise has been supportive throughout.

We have also been able to forge good relationships with many of the brokers who have worked with us to clarify data and to put in place new insurance to replace the policies disclaimed by the IP. The premium finance companies have also cooperated with us in these arrangements.

However, not everything has been plain sailing.

Information has been a persistent stumbling block. The insurers themselves do not have comprehensive records of their policyholders. So it has been a question of piecing together those records from the information held by brokers, sub-brokers and finance companies. Not all of those records have been easy to access or to reconcile.

Inevitably poor information leads to delay as FSCS tries to match the records.

These problems are compounded when, as has happened in a (mercifully) few cases, brokers or sub-brokers have been unwilling or unable to work with us on behalf of policyholders.

For the most part, we have been able to overcome these problems, but they do cause me concern for the future. How would FSCS cope if the failures were on a bigger scale or, for example, if we had at some future date to deal with the failure of a life assurer where there was an immediate requirement on FSCS to meet pension and other critical obligations? 

And the answers?

Well, I certainly take the view that record-keeping could be much better. FSCS ought to expect a failing insurance company to be able to assemble quickly a reliable and comprehensive record of policyholders even if it doesn’t hold all that information itself.

And we should be able to rely on the active cooperation of insolvency practitioners, brokers and finance companies.

These are matters we shall be taking up with our partners, the regulators, as part of our lessons learned review. 

That doesn’t necessarily mean that the answer is more regulation.  

But, as Enterprise and Gable illustrate, we do, as an industry, need to pull together effectively to protect policyholders when they find themselves exposed by failures they could not possibly have foreseen.