I write to comment on Anthony Peppers letter in the June edition (bit.ly/28TE2sE).
I write to comment on Anthony Pepper's letter in the June edition (bit.ly/28TE2sE). I believe he has misunderstood Peter Morris's comment, which was, I think, referring to the Financial Services Compensation Scheme as a mitigant for life office insolvency risk as far as a policyholder is concerned. Peter rightly points out that product risk is not compensated like insolvency risk.
This is not to take away from Anthony's general point about compensation risk, and I concur that insurers need to take the issue seriously. While the risk is higher for those such as intermediaries giving advice, there is nonetheless a risk to life office solvency in the more extreme cases, or where the office offers advice. The damages that could result are not - in my view and without being legally qualified - "insurance obligations" to which the rules for technical provisions apply, and therefore fall under accounting principles, subject always to Article 75. My feeling is there is therefore unlikely to be any balance sheet provision required on such a general basis.
I do, however, think an internal model should result in appropriate capital for this risk.
I do not see that the cases cited by Anthony go as far as covering mere ill-performance, though misrepresentation or non-compliance with the Conduct of Business Sourcebook would seem to be analogous to the facts of the Saville v CCL case - again to my non-lawyer's eyes. The case seemed to hang on the unsuitability of the contract for the policyholders and a failure to comply with the Insurance Conduct of Business Sourcebook though, and not to some intrinsic toxicity. Plevin v Paragon does not have general application to insurance, as it relied upon section 140A of the Consumer Credit Act.
Andrew Chamberlain
8 June 2016
