Policyholder protection

This policy statement (PS) provides feedback to responses to CP21/14 Policyholder Protection, CP20/14 Depositor Protection and CP4/15 Depositor, Dormant Account and Policyholder Protection - amendments. It sets out the proposed rules for the PRA Rulebook, which are intended to align the existing insurance compensation rules more closely with the PRA’s statutory objectives, and will contribute to the future operational effectiveness of the Financial Services Compensation Scheme (FSCS) in providing continuity of cover, payment of benefits falling due and compensation in the event of the failure of an insurance firm. The policyholder protection rules and statement of policy take effect on and from 3 July 2015.

CP21/14 closed on 6 January 2015. It proposed rules on UK insurance policyholder protection noted above.

CP20/14 closed on 6 January 2015. It proposed rules on depositor protection and included rules on the FSCS Management Expenses Levy Limit and Base Costs Part and the FSCS Management Expenses in respect of Relevant Schemes Part that apply to insurers as well as deposit-takers.CP4/15 set out proposals for transitional provisions and new rules in the PRA Rulebook and consequential amendments to the PRA Handbook that arise as a result of the rules being proposed in CP20/14 Depositor Protection and CP21/14 Policyholder Protection. Final rules on depositor protection and the management expenses noted above are set out in PS6/15 - Depositor and dormant account protection.

The PS is relevant to UK insurers (including those that establish a branch or operate on a freedom of services basis in the European Economic Area (EEA)) as well as EEA insurers that establish a UK branch or operate in the United Kingdom on a freedom of services basis, and Channel Islands insurers and Isle of Man insurers (PRA-authorised insurers)(see note 1). It is also relevant to firms who have assumed responsibility for liabilities from PRA-authorised insurers (successors), the FSCS, the Society of Lloyd’s, and policyholders.

Proposals addressed by PS5/15

In light of feedback received to CP21/14, CP20/14 and CP4/15, the PRA revised some its proposals and have clarified others. The PRA has also given additional clarity in the statements of policy. The main proposals being implemented include:

• Compensation limits – the PRA is changing the proposal consulted on to extend the compensation to all long-term insurance products to 100%, as well as maintaining the CP proposals for general insurance. The PRA is not introducing a cap on large claims.
• Successor firms – the PRA is maintaining the successor firm proposals. FSCS protection will be provided post-transfer for policyholders who have outstanding protected claims against an insurer whose claims were covered by the FSCS before their policies transferred to a successor firm.
• Assignment and subrogation – the PRA is retaining the current terminology and the proposals in CP21/14. The FSCS will be given flexibility in the way it seeks recoveries from failed insurers and third parties after paying out compensation, through new powers of automatic and electronic assignment and automatic subrogation of policyholders’ rights.

The appendices to the PS set out:

• Policyholder Protection rules;
• Lloyd’s direction and rule; and
• a statement of policy setting out the PRA’s expectations of the FSCS in respect of policyholder protection.

PS6/15 sets out further rules relevant to PRA-authorised insurers:

• FSCS management expenses levy limit and base costs rules;
• FSCS management expenses in respect of relevant schemes rules; and
• consequential amendments to the existing rules which are structural and do not represent a change in policy.

1. References to PRA-authorised insurers include all such firms, even though EEA insurers will, in fact, be authorised by their own home state regulator.