U.K.’s FSCS to Refund $74 Million to Insurers; No Levy for 2006/07

January 20, 2006

The U.K.’s Financial Services Compensation Scheme (FSCS), which administers claims payments when insurers are unable to do so (usually due to insolvency), has made what has to be an unprecedented announcement. It intends to refund a surplus of £42 million ($74 million) to “relevant firms in the general insurance contribution group A3 [1] before the end of the financial fiscal year 2005/06.”

The FSCS said it was able to offer the refunds following “significant recoveries made from general insurance estates and lower than anticipated compensation payments in the sector.”

Even more good news was forthcoming. The FSCS also said: “Based on current information, it is unlikely to need to raise a levy on this contribution group during 2006/07. This is due to a short-term reduction in the funding requirements for general insurance compensation claims during 2005/06 and into 2006/07.”

Chief Executive Loretta Minghella made the rather evident comment that, “This is great news for insurance firms.” She noted that in recent years, “the general insurance sector has had to pay significant amounts for compensation payments relating to the defaults of insurers such as Independent, Chester Street, Drake and KWELM. Whilst our primary role is to pay valid compensation claims we work hard to secure recoveries wherever we can. The timing and actual amount of any recoveries is difficult to predict, and during 2005/06 we recovered significantly more in the insurance sector than we anticipated.

“In the general insurance area our costs are largely dictated by the liabilities that emerge in relation to insolvent insurance estates and the timing of any recoveries made are dependent on the insolvency practitioners,” she continued. “We are experiencing a short-term reduction in funding requirements, which means we should have sufficient funds to pay general insurance compensation claims during 2006/07 and up to the next expected levy collection in the Summer of 2007. Although we currently estimate that a significant levy will be required to fund general insurance compensation claims in 2007/08, possibly over £100 million [$176.4] million, it was clear after discussions with the ABI [Association of British Insurers] that a refund now would be appropriate.”

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