PRA publishes DP2/23 on the FSCS general insurance limit

The Prudential Regulation Authority (PRA) published a discussion paper, DP2/23, on 2 November 2023 seeking views on whether Financial Services Compensation Scheme (FSCS) protection for general insurance (GI) should be increased from 90% to 100% of a claim, and on whether the current definition of a small business remains appropriate¹.

When an insurer fails, the FSCS pays eligible policyholders with a valid claim either 90% or 100% of the claim value, depending on the type of insurance¹. Eligible policyholders are covered for 100% of any benefit under long-term insurance products, and for GI claims in respect of a liability subject to compulsory insurance, a liability subject to professional indemnity insurance, a liability arising from the death or incapacity of the policyholder due to injury, sickness or infirmity, or a liability subject to buildings guarantee insurance¹. All other GI products are covered at 90% of the claim¹.

The PRA said the review follows its October 2020 emergency rule change, which raised FSCS protection for eligible policyholders of buildings guarantee insurance from 90% to 100% of their claim, and a commitment made at the time to examine whether other types of GI policy warranted the same treatment¹. It said that following a consultation in 2014 it had increased cover for long-term insurance to 100%, but kept most GI policies at 90% on the basis that they were short term, had no contractual lock-in and carried no significant costs of exiting and switching cover¹.

The paper also questions the definition of a small business in the Policyholder Protection Part of the PRA Rulebook, currently a partnership, body corporate, unincorporated association or mutual association with an annual turnover of less than £1 million¹. The PRA said this definition has not been amended since it was first introduced into the policyholder protection rules in 2000, and that the £1 million threshold may no longer be appropriate because it limits FSCS protection for certain GI policies to only the smallest businesses¹. The paper sets out alternative thresholds used elsewhere:

The paper includes indicative cost figures for paying claims at 90% and at 100%, including totals of £148,918,481 and £154,483,727 respectively, alongside other figures of £148,966,987, £120,812,966, £157,866,214, £190,229,079, £155,422,482 and £127,207,050¹. The paper does not set out which products or scenarios each figure relates to in the text available.

Why it matters for households

The level of FSCS protection determines how much of a valid claim is met if an insurer fails. For most general insurance policies, such as home or motor cover, the current limit is 90% of the claim, so a policyholder with an unpaid claim bears the remaining share of the claim themselves¹. If the limit were raised to 100%, that shortfall would not arise for the products affected. The paper also concerns small businesses, which under the current £1 million turnover test may fall outside FSCS protection for some GI policies¹. Any change would follow a future consultation paper rather than taking effect now, and the PRA has not proposed specific products for an increase¹. The FSCS pays claims only when a firm fails and only to eligible policyholders¹.

What happens next

The discussion paper closes on Wednesday 24 January 2024¹. Responses are requested by that date, with the PRA asking for them by email to DP2_23@bankofengland.co.uk, or by post to the Capital and Compensation Standards Team, Prudential Regulation Authority, 20 Moorgate, London EC2R 6DA¹. The PRA said feedback will help develop any potential policy proposals in a future consultation paper¹. No date for that consultation has been reported.