Failed insurance companies – who gets involved and what do they do?
When insurance companies become insolvent (i.e. they stop trading), there are a few parties who step in to achieve the best possible outcome for customers:
1. FSCS
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme. If a financial services firm that is regulated by the Prudential Regulation Authority (PRA) or Financial Conduct Authority (FCA) goes out of business, we can compensate their UK customers, subject to our rules and limits.
We are fully independent, and our funding comes from levies that are paid by all the financial services organisations that we protect.
We help UK policyholders of failed insurance firms
We are governed by the Policyholder Protection Rules, and within these rules, we protect as many UK insurance customers as we can: namely individual policyholders and small business policyholders with turnover of less than £1 million. Risks based in the UK are typically covered. However, there are some kinds of insurance that are not eligible for protection, so please check if you're not sure. FSCS is able to protect most types of general insurance at 90%, without an upper limit.
If a regulated insurance company is no longer able to pay its customer claims due to insolvency, we protect eligible policyholders. Where possible, policyholders will be refunded the remaining portion of their policy premium (subject to the rules) or we will try to arrange for a replacement policy with another insurance provider on their behalf. In either case, we provide the funds and support throughout.
We may also be able to cover the costs for UK policyholders’ claims, sometimes long after the insurance company stops operating. However, we don't handle customer claims directly – the insurer will likely appoint a separate run-off agent (also known as a claims handling agent or simply claims handler) to manage these from end to end.
2. Insurance brokers / sub-brokers
Insurance brokers (or sub-brokers, who work for the broker) act as intermediaries between customers and insurance providers. They find the insurance products and policies that are best for customers’ needs and do the paperwork to facilitate the purchase.
When an insurance company fails, the broker(s) who sold their customers its policies may try to arrange for a replacement policy from another insurer providing a similar lever of cover. Brokers have permissions and legal authority to act on behalf of their customers.
3. Insolvency practitioners
An insolvency practitioner (IP) is appointed by the court when an insurance company fails; i.e. if it enters administration, liquidation, or stops trading. The IP may work in the insolvency department of a legal or accountancy practice, or the IP can be a firm that specialises in insolvency. Their main job is to handle the financial management of the failed insurance company, including collecting and selling company assets to repay the people and firms that the insurer left out of pocket (its ‘creditors’). You can listen to our podcast to learn more about what an IP does.
As noted, when an insurance company becomes insolvent, the broker(s) that sold their policies may try to replace policies with a new insurer. If this isn’t possible, the IP will calculate refunds for policyholders, based on the remaining portion of their policy. Once they pass this information to us, we run some eligibility checks, and pay compensation to the policyholder.
How to contact the IP
You can usually find contact details for the insolvency practitioner (IP) on the failed insurance company’s website, or here on our website – simply search the firm’s name in the box at the top of any page. You can get in touch with the IP as soon as the insurance company has gone into liquidation or administration, as they will have taken over management of all their affairs, including claims. The IP may recommend that you contact the run-off agent that they have assigned to handle policyholders’ claims.
4. Run-off agents (also known as claims handling agents)
Policyholders who are making claims under their policies are often asked to talk to the run-off agent / claims handling agent that is assigned to handle policyholders’ claims from start to finish (with oversight and approval from the IP). Claims handlers’ contact details will be on the insurer’s website and FSCS’s website.
If claims are eligible for FSCS compensation, the claims handlers will contact FSCS to arrange for payments to be made. If a claim is not eligible for FSCS compensation (e.g. the policyholder was a large business, or the risk was not based on the UK), the policyholder’s claim will be recorded with the IP and will be eligible for a dividend should the IP be able to pay one.
The run-off agent’s activities include determining liability, arranging repairs and paying customers’ insurance claims. In turn, FSCS pays the run-off agent the cost of these claims.
Find out more about claiming compensation for a failed insurance company, or what to expect when an insurance company fails.