Guy Vanner examines Brexit and the implications for offshore insurer FSCS protection
It is perhaps of little surprise that uncertainty surrounding Brexit has thrown up questions relating to investor protection and compensation for the UK customers of offshore insurers.
In the UK, the Financial Services Compensation Scheme (FSCS) encompasses insurance company providers of long-term life and permanent health/incapacity insurance contracts. It gives a backstop of 100% protection, with no upper limit against failure of the insurer, if this occurred after 3 July 2015.
Whether or not in the past (and currently) the FSCS encompassed offshore bond providers is not entirely clear cut. However, a reasonable interpretation by providers is that if the company is also authorised to operate in the UK by the UK regulatory authorities, then the FSCS will apply.
A key consideration here though is that the cover is specifically and solely in respect of the insurance company.
If the investments within a customer’s product with that insurer ‘fail’, and say any bond effectively collapses in value due to this, then the FSCS may well not be of relevance. And offshore bonds are effectively product wrappers for such investments. The regulatory nature of each investment component will be of relevance to
FSCS applicability here.
The likelihood of absolute insurer failure of the type that would trigger the FSCS was and remains unlikely (particularly since the advent of Solvency II and its risk-based capital management thresholds and alerts). However, degradation or impairment of the financial position of insurers, to an extent that would damage their operational capability and thus negatively impact the reasonably held expectations of customers and their advisers, was – and remains – much more of a real and significant concern.
Given the above, and in particular the need for much broader consideration of any insurer’s financial sustainability, the assessment position now and after Brexit, appears largely unchanged.
There are a couple of common, but understandable misconceptions associated with financial strength assessment, which are relevant to this:
- That financial strength is purely about solvency. It should not be. While solvency will always be important and a factor in financial strength assessment, it is not the whole picture.
- Believing that financial strength is just about the recovery of client assets. Recovery of assets is of course crucial, but to restrict financial strength consideration to this could be misleading and falls below the requirement to deliver a broader set of customer outcomes.
Thinking, ‘well, the assets sit with a custodian, or there is a policyholder protection scheme that will kick in, so my financial strength won’t matter’, is unlikely to be good enough. Effectively, saying that if that part of the customer value chain somehow fails or is impaired, there will be no change in customer experience.
Unfortunately, that simply is not the case. The route to asset recovery or protection funds/compensation is not the experience the customer reasonably expected when they signed up. And therefore, the uncertainty, delay and distress cannot be so easily dismissed.
There are nuanced and other differences in insurers’ understanding and interpretation of the changes (not unsurprising given the overall Brexit uncertainty and range of potential outcomes that remain at the time of writing), and guidance may consequently differ between offshore bond providers.
However, most seem to believe that any FSCS protection would cease immediately in the event of a no-deal Brexit or at the end of any transitional period if the UK leaves with a deal.
The FSCS suggests that, for information about the protection it offers, contact should be made directly with the insurer firm. I would agree with this and suggest continuing to also ensure a broader understanding and consideration of financial sustainability.
Guy Vanner is managing director of AKG