If I were setting an FSCS Christmas quiz, everyone would guess pretty quickly what FSCS’s biggest compensation cost was in its 13 year history. The answer is the 2008 bank failures, of course.
But what about FSCS’s second biggest compensation cost?
I dare say the next best guess would be Keydata which failed in 2010 at a cost to FSCS of over £300m at the time – now offset, of course, by the substantial recoveries I wrote about last month.
But, in fact, Keydata is the wrong answer.
The right answer, it may surprise you to learn, is the cost of compensating policyholders left high and dry by the failure of insurance providers. FSCS’s compensation for insurance failure passed £1bn in June. We have paid out £404m in compensation to policyholders of Independent Insurance, and £399m to policyholders of Chester Street.
This may surprise you because FSCS protection for policy holders tends to fly under the radar of most people. That’s probably because the failure of an insurance provider is often a long-drawn-out affair, with claims continuing to arrive over many years as the estate is run off. There is not the drama of a bank failure.
That belies, however, the importance of the protection we provide. Many claims, for example, arise under employer liability policies and concern serious industrial illnesses such as mesothelioma, or under road traffic motor insurance covering accidents. Without FSCS protection for disease claims, the victims and their families would go uncompensated for their financial losses arising from the anxiety and cost of serious illness and in many cases, sadly, premature death. Meeting motor claims protects both personal injuries and gets people back on the road.
The relative invisibility of FSCS protection of insurance is not in itself an argument for raising awareness. In most cases, FSCS protection may not be a factor in people’s decision to buy insurance. We all need insurance to protect our homes and their contents. Some insurance – as for motor cover – is compulsory.
So many policyholders only discover that FSCS protects them at the point at which that protection is triggered.
But I wonder whether this also holds for longer-term insurance products such as life assurance, pension saving and annuities?
Where consumers are being asked to commit to long-term products which depend, if promises are to be kept, on the long-term financial strength of the provider, it surely is material to know that FSCS will step in if, in the future, that provider gets into difficulty.
The Government’s reforms of retirement saving add weight to this. From April of next year, consumers will have full discretion about how to invest their retirement savings. The traditional option of buying an annuity – an insurance product – will compete with a wide range of other ways to invest in order to generate income in retirement.
Consumers will need to understand then how FSCS protects the different products available. We shall produce our own information while also working with the key players such as the Pension Advisory Service, the Money Advice Service and others to ensure that they do.
Who insures the insurers will no longer be an academic issue.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).