It is quite tempting to satirise the saga of European Risk Insurance Company (ERIC), the Icelandic insurer. But this is not an epic tale of larger than life characters feuding in the Iceland of long ago.
It’s instead the story of an insurance failure, with consumers in the UK needing FSCS’s support. And it illustrates some important things about the scope of FSCS protection, the UK insurance market and the lack of a consistent EU framework to govern responsibilities when firms operating across borders fail.
So let’s start with some facts.
FSCS protects insurance policies sold by UK authorised insurers. That protection covers 90% of the value of most policies and 100% of the value of compulsory insurance, like motor policies.
We are unusual in providing this protection. There is no EU Directive covering the protection of insurance policies. Most other EU member states have no equivalent scheme. Nor do our international partners outside the EU.
FSCS’s protection is, however, an important part of the security enjoyed by UK consumers. Since FSCS came into being in 2001 we have dealt with 25 insurance failures, funded pay-outs to over 63,000 policy holders and compensated over 56,000 consumers for the residual value of their policies.
Unlike many of the other failures with which FSCS deals, insurance failures can generate claims over many years where a firm goes into run-off under the control of an insolvency practitioner (IP).
We continue, for example, to meet employer liability claims arising from the failures of Independent Insurance and Chester Street which both failed in 2001. By this means, FSCS is protecting many victims of industrial diseases like mesothelioma and the families of those victims.
Professional indemnity claims can also take years to be resolved. Working with the IPs, FSCS has developed an effective model to handle the run off of protected claims.
More recent failures have illustrated a new phenomenon – failures of firms based in the European Economic Area1 who have “passported into” the UK under a single market directive. And that brings us back to ERIC, the insurer.
Now the open market principles here are exemplary. Insurers operating under equivalent regulatory regimes throughout the EEA are able to provide services in other member states.
This increases choice and competition. It’s positive for consumers.
And to protect the UK consumer, unlike comparable schemes elsewhere in the EU, FSCS covers UK risks insured with firms based in EEA countries because these failures do cause anxiety for consumers.
The recent failures of ERIC, and Lemma Europe Insurance Company, a Gibraltar-based firm, do, though, impose costs on UK levy payers. They do also highlight that, without an EU directive establishing a clear home/host state responsibility, policyholders need to take extra care to understand the protection available on the failure of their insurer.
More than 24,000 people in the UK had insured risks with ERIC, for example. FSCS is already meeting claims against these policies.
So, like all good Nordic sagas, the tale of ERIC the insurer may be based in Iceland, but it does resonate in the UK.
1The European Union plus the member states of the European Free Trade Association: Iceland, Liechtenstein and Norway.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).