PRA consults on FSCS general insurance limit

PRA is consulting on whether there should be an increase in the FSCS limit for general insurance.

Currently, eligible policyholders will get either 90% or 100% of a valid claim on a failed insurer paid by the FSCS, with the percentage depending on the type of insurance. Over time, more and more types of cover have been moved to 100% coverage, and PRA now thinks it would be appropriate to increase the limit for additional types better to align with its objective of getting an appropriate degree of policyholder protection and supporting its objective of promoting the safety and soundness of firms.

Currently, FSCS will provide 100% cover for:

  • long-term products;
  • claims in respect of liabilities subject to compulsory insurance, PII or buildings guarantee insurance; or
  • claims in respect of and arising from the death or incapacity of the policyholder due to injury, sickness or infirmity.

PRA is now considering:

  • changing the rules so there is 100% coverage for all general insurance products – which has many advantages but the main disadvantage would be higher levies;
  • targeted additional coverage, to focus on products with the potential to have a life circumstances impact (where an appreciable proportion of policyholders would face a material negative impact if not 100% covered) – but PRA’s research has not shown a good way to assess this before the LCI actually occurs;
  • rule-based discretion enabling PRA to make decisions based on individual circumstances relating to the LCI – but again the relevant criteria are hard to define in advance;
  • moving all GI to 100% protection and introducing an “FSCS excess” which would deduct a specified amount from each claim – but, although the excess would likely be very small, it could nevertheless result in a number of claims being moved to nil. Alternatively the first set amount of a claim could be paid at 90% and the rest at 100% but again this would disadvantage smaller claims;
  • a “reverse deductible” that would provide 100% cover for a certain amount and 90% for anything exceeding that – this mirrors an approach used in the early 2000s which the then FSA replaced to simplify and streamline claims processing. Also, this would not prevent the occurrence of an LCI in all cases; or
  • make no changes

Separately, PRA asks whether the current definition of “small business” in the Policyholder Protection Part is still appropriate. The current limit of less than £1m annual turnover may now be too low, given it covers only the smallest businesses.  PRA seeks views on what the appropriate threshold should be. It suggests it should maybe be brought in line with the Companies Act definition of a “small company”.

Consultation closes on 24 January 2024.

Emma Radmore