The Financial Services Compensation Scheme (FSCS) is to refund a surplus of £42m to general insurance companies this year after lower than anticipated compensation pay-outs in the sector.
The body also announced it was unlikely to charge levies to the sector for 2006/07.
Loretta Minghella, chief executive of the FSCS, said: "This is great news for insurance firms. 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.
"While 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."
A spokesman for the ABI said: "We have been in discussions with the FSCS and the announcement is welcome news for the general insurance sector."
