Why directors need to know this
Firstly Insurance companies cannot be wound-up voluntarily. They have to get the consent of the Prudential Regulation Authority (PRA). The PRA is a department of the Bank of England that is “responsible for this prudential regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms.
The PRA makes sure that the insurers it oversees meet certain statutory requirements or Threshold Conditions in order to operate. These include maintaining appropriate capital and liquidity and having suitable management. The PRA looks to ensure that any company that fails to meet these standards or fails in other ways does so in a way that avoids significant disruption to the supply of critical financial services.
Since the turn of the Millennium, there have been 18 General Insurer defaults so their work to protect policyholders and their interests is important and necessary.
Once the PRA approves the measure, any insurer that cannot meet its financial obligations can be placed into administration by a court. At this stage the Financial Services Compensation Scheme (FSCS) will also become involved.
The FSCS will evaluate policies to see if there are any assets that can be made available to help refund affected customers and set a value on those assets when an insolvent insurer is eventually wound-up.
As well as offering compensation for eligible policyholders that have suffered a demonstrable financial loss due to the collapse of an insurance company, they will also help source new insurance cover with other suppliers. There is no guarantee that a new insurer could be found however and policyholders would have the onerous task of purchasing their own insurance.
FSCS guarantees do not cover non-financial losses nor policyholders residing outside of the UK. This includes the Isle of Man and the Channel Islands which have their own financial jurisdictions.
There is no upper limit to the amount of insurance protection an eligible claimant can receive and for compulsory forms of insurance, such as vehicle insurance, 100% of their money is protected.
The FSCS will also protect up to 90% of non-compulsory forms of insurance although again there is no upper limit. Since 2011, they have paid out over £60m to claimants of failed financial organisations.
There is no set time scale on how long the FSCS takes to process compensation claims although claims against deposit takers will usually be completed and paid within 20 working days. Claims against investment firms or brokers can be longer and could take months as they are usually more involved and complex.
Broker liability could also be a factor if the product or policy was purchased through one.
Insurance and other financial brokers have a legal responsibility to offer customers a skilled service which includes warning clients about insurance companies who are facing financial problems. A broker who does not disclose this information or offers products from insurers that are insolvent could find themselves liable if it can be proven that they were negligent in the process.
What if I have outstanding insurance claims?
A major knock on effect of your insurer becoming insolvent is there is no set time scale for the FSCS to process any outstanding claims. This can have a major effect on cash flow if:
- You have outstanding claims for loss of equipment through theft.
- Third parties have outstanding claims against you which would have been covered by insurance.
The loss of the equipment, without a quick resolution from your insurance company can be devastating for your cash flow. Likewise if third parties have claims against your business, if your insurer becomes insolvent, they may choose not to wait for the FSCS to pay out and pursue you directly, which they are generally entitled to do.
Either of these circumstances can place you in a difficult situation which is genuinely not your fault.
If you find yourself in this unfortunate situation, particularly with the insolvencies of Alpha Insurance, Horizon Insurance or Qudos Insurance last year, with claims which could take years to be paid out our BusinessRescueExperts can help.
The best thing you can do is take expert advice to protect your financial position, especially when you are the victim of a bad situation.