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Policyholder Protection

What are Policyholder Protection schemes and what do they actually cover?


Introduction


Policyholder protection schemes are designed to act as a safety net for policyholders should the insurer with whom they are invested become insolvent.


The UK introduced the Policyholder Protection Act 1975 (PPA) which allows the Policyholder Protection Board (PPB) to act as an industry funded safety net should an insurer become insolvent.


The Isle of Man Government introduced The Manx Life Companies Voluntary Policyholders Protection Act on the 5th of April 1988 which provided Policyholder Protection for all policies issued after 5th April 1988; this was subsequently followed by the Life Assurance (Compensation of Policyholder’s) Regulations Act 1991.


Some 10 years later in 2002, Guernsey introduced the Insurance Business (Bailiwick of Guernsey) Law which required their insurer’s to have arrangements in place with the Guernsey Financial Services Commission (GSFC) in order to protect the interests of long-term investors. Unlike the UK and the Isle of Man, Guernsey did not opt for a state run scheme placing the responsibility onto the insurers themselves.


Who do these schemes actually cover?


Whilst schemes differ from jurisdiction to jurisdiction, they are generally a way for the policyholder to recover some value should the insurer with whom they are invested become insolvent. Until that happens, the scheme is dormant.


The UK’s protection scheme is restricted to UK residents who hold assets in the UK or who were sold a financial product whilst UK resident, whereas the Isle of Man scheme protects policyholder’s wherever they reside in the world providing they hold assets with an Isle of Man based insurer.


Guernsey schemes may not be as clear cut therefore, anyone looking to invest with a Guernsey Insurer should check with the company concerned to ascertain who, what and where is covered.


The Insurer’s responsibility


A UK insurer must maintain records where necessary to identify the assets allocated to its long-term business fund and whilst the FCA will ordinarily not intervene or place specific requirements on the insurer; they will however review solvency on case by case basis based upon the aim of maintaining market confidence.


Insurers based in the Isle of Man are required to maintain an account for the assets attributable to the long-term business fund and whilst it can be practical for the insurer to appoint a 3rd party to undertake this role for operational purposes, there is no regulatory requirement to do so.


Guernsey insurers are required to appoint a GSFC authorised Trustee, which in turn may appoint a custodian who are responsible for safeguarding the company’s assets. They are not responsible for the management of the policyholder’s funds. Insurers are required to maintain a minimum level of solvency which is monitored regularly whereas the Trustees are required to report to the GSFC if 5% or more of the Trust asset value is paid out within one calendar month. They must also provide a certificate of assets held & the assets movement on a quarterly basis.


The outcome of insolvency


For long term investments in the UK, the PPB may look to transfer the ongoing policies of an insolvent insurer to another company otherwise the PPB must pay 90% of the fund value of the policy for the purpose of liquidation; however assets may not be transferred out of an insurer’s long-term fund unless they represent an established surplus.


In the Isle of Man, the Scheme is simply required to pay policy owners an amount equal to 90% of the surrender value (subject to the provisions of the scheme) with no upper limit in place.


As no government compensation scheme exists in Guernsey, an insurer is required to hold 90% of Trust liabilities with the appointed Trustee/custodian to ensure a legal separation between the policyholder’s assets and the insurer’s shareholder assets/ creditors. Many Insurers in Guernsey have been known to increase this hold up to 100%. The flexibility of the Trust arrangement is suitable for products where the surrender value is linked to the performance of the underlying investment.


What isn’t covered by compensation schemes?


In the UK the following types of policyholders are excluded from any form of compensation, this includes the directors, managers, corporate bodies, persons holding more than 5% of the capital, auditors, actuaries and any other persons who have contributed to the firm’s insolvency.


Like the UK, Isle of Man regulations state no compensation will be paid to persons who are controllers of the insolvent insurer. It should be noted that a policyholder’s claim may be reduced or rejected if submitted more than 6 months after knowing the insurers insolvency, 18 months after insolvency and/or if the claimant is protected under any comparable scheme.


And finally...


Policyholder protection schemes do not cover losses incurred through poor investment performance. They are only of relevance should the insurer become insolvent.


For long-term investors, it is essential to have a scheme in place that protects their assets in the worst case scenario. Where investors are considering Guernsey Insurance companies over IOM Insurers; and where policyholder protection scheme are a concern; the questions would have to be whether a government backed scheme is more robust than one provided by an industry?


Important notes


Please note that the information provided is for general information purposes only and should not be relied on as advice. Whilst we have ensured this information is correct from our understanding of the schemes as at 28 October 2013, it is also subject to change. This document is for financial advisers only and not to be distributed to retail clients.


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