23 May 2022
3 Min Read

Insurer Failure – Are You Covered?

Realising that an insurance policy fails to cover a claim can be devastating to any business. In some cases, policyholders are denied compensation altogether.

Most prominently, this happens in the public sector because the policyholder is exempt from compensation. To prevent this, a company or an individual needs to have a solid grasp of the policy itself. Plus, it pays to understand the FSCS compensation scheme and one’s eligibility.

Basic Notions

Truth be told, you purchase insurance at your own risk in the public sector – there’s just no compensation.

Insurance is there to safeguard private enterprises and their employees from claims that may exceed the companies’ budget. Of course, this also applies to individuals – but not in the public sector.

In an interesting turn of events, the central government fully or partially funds the public sector. In addition, the Insurance Premium Tax goes back to the central government. Of course, this applies to insurance for local authorities and insurance for public bodies.

Be that as it may, when analysing insurer failures the important question is: were you aware of the insurer’s financial position. Or, what financial aspects should you have been aware of?

As of January 2016, the answers to these questions have been at your fingertips. The Solvency II regime published SFCR – the Solvency and Financial Condition Report.

The SFCR Disambiguated

The idea behind the SFCR is to provide a public insight into the financial condition of an insurance company. It pays special attention to capital management and risk profile. In other words, the SFCR report is designed to make a company transparent to everybody. Here’s an example.

“The SFCR serves many types of stakeholders, with different levels of expertise and expectations. As a guide, this Policyholders’ Overview (Executive Summary, Company overview and Summary of material changes over the reporting period) aims to address the requirements of policyholders and we have done our best to make this understandable for everyone.” – LV Policyholders Overview of Solvency, 2018 report

With this in mind, Quantitative Reporting Templates (QRTs) provide support for the SFCR insights in the form of numerical data. However, QRT reporting is guided by complicated regulations, with reports of a highly technical nature, designed mainly for insuranc actuaries.

It’s safe to assume that this is one of the reasons SFCR data isn’t properly understood during your insurance procurement procurement process. But is there anything you can do to secure some compensation?

FSCS – Does It Help or Not?

The UK financial service regulators set rules which make an entity eligible for compensation under FSCS. In most cases, there’s nothing to worry about if you’re a private individual. That said, the FSCS does apply to some business and insurance for charities, but there’s a catch.

Even if the insurer fails, the FSCS pays between 90% and 100% of the claim to individuals and private enterprises. However, the public bodies get nothing (should the insurer fail) because the statute doesn’t require them to have insurance in the first place.

Despite Solvency II, insurers cannot guarantee claims in all possible scenarios; the reasons for this are technical. Namely, the insurers would have to hold a lot of capital as a safety net. They would then have to charge high premiums to compensate the shareholders for the risk of wipe-out, which means premiums would be uncompetitive.

The Bottom Line

When all’s said and done, solvency monitoring and careful analysis of the SFCR reports is crucial. And this is where a good insurance actuary comes into play. Their job is to see through the black box and help you make your own decision. Of course, this is even more important if there’s no compensation for you if your insurer fails.