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10

Large levy increase could follow PRA's compensation plans, actuaries warn

Open-access content Friday 10th October 2014 — updated 5.13pm, Wednesday 29th April 2020

Actuaries have warned that planned rises in annuity compensation in the event of an insurer going bust could lead to large levy increases for the industry.

Barnett Waddingham's warning comes after the Prudential Regulation Authority on Wednesday proposed raising the Financial Services Compensation Scheme (FSCS) limit for long-term insurance policies to 100% of the value of the fund against firms declared in default.

The PRA said the increases would also include income drawdown, protection products, professional indemnity and general insurance claims rising from the death or incapacity of the policyholder. The FSCS currently provides 90% cover to all policyholders. 

But Kim Durniat, a partner at Barnett Waddingham's insurance consulting practice, said the increase in compensation could lead to a relatively large growth in levies of about £7m on total fees of £600m-£1bn, of which 20-30% is related to insurance.

She said it was not yet clear from the regulator's proposals how this would be apportioned but 'we would expect firms with larger annuity books to be affected more'.

'In particular, pension schemes looking to buy out will now note that the increased protection for pensions in payment makes compensation payable by the FSCS more generous than would be paid by the Pension Protection Fund (PPF).

'Under the new rules both cover 90% of deferred members and 100% of pensioner liabilities. This should reassure trustees who in the past might have been worried that a buyout could risk swapping PPF protection for the FSCS.'

This article appeared in our October 2014 issue of The Actuary.
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