Poor data hampering FSCS from tracing customers of collapsed unrated insurers

Up to 30% (24,760) of customers who took out latent defect cover with collapsed unrated Danish insurer Alpha Insurance have still not been traced and compensated by the Financial Services Compensation Scheme (FSCS), because of a lack of customer information.

FSCS chief financial officer Jimmy Barber told Insurance Times it began compensating Alpha’s customers last summer, but has only managed to be paid out to almost 70% (16,875) because of poor customer data, since the insurer collapsed in May 2018.

Barber said: “In every single failure near enough we have had issues with data, that isn’t always universal – if you take Enterprise for example, some of the brokers had excellent data. Others took up to two years to tell us who their customers were and give us enough data to enable us to make a payment.”

The FSCS is working with the Managing General Agents’ Association (MGAA) on data standards to prevent further situations like this. 

Peter Staddon, MGAA managing director, said it revised its code of ethics last year, including a provision on data collection that would assist the FSCS with policyholders if their insurance company is deemed in ’default’. Staddon is set to retire in July this year. 

But FSCS have learnt other things from major collapses including how it should update customers and how to work with insurers in Gibraltar.

On average the FSCS has helped 350,000 customers over the last four years across all collapses.

Making the right payment 

The FSCS has been clear with brokers about what information it needs including at the very least knowing who the policyholder is, how much unexpired premium they have and the value of their claim. 

“We don’t ask for lots of information, we ask for the bare minimum to make the right payment to the right person,” Barber said.

As well as brokers, the FSCS works with Biba and the ABI.

Branko Bjelobaba, managing director of compliance consultancy Branko Ltd said he struggled to see why record keeping can be so poor in today’s digital age. 

He said: “Insurers and brokers need to keep adequate records and if these are intermediated sales then why haven’t the brokers been able to furnish evidence? If done under a binder it is likely that they will hold much more than the insurer.”

Challenges

Barber said his biggest challenge to date was Enterprise’s collapse due to its sheer scale as well as a lot of policies being sub-broked. The insurer also failed with little notice, had a varied book that included motor policies and was running off a jewellery book. 

Alpha’s latent defect insurance book was also challenging because the FSCS could not find another market for the value of those policies in the interest of continuity, which meant that customers premiums had to be returned, on top of not being able to trace all of its customers.

Another problem is that many customers do not know who they are insured by because some policies are white labelled meaning the the insurer sits behind the policy. 

The levy

Overall, the FSCS pays out around £140m per year and is levy-funded by the insurance industry.

It is also involved in recovering money from failed estates that it can then offset against its levy. Barber says it recovered £80m from Independent Insurance after it failed in 2001. However, it is still dealing with the fall-out from the collapse. 

Staddon added: “While we do not expect our insurance partners to be deemed ’in default’ there is, none the less, an expectation on all intermediaries, brokers and MGAs alike, that they should seek to protect the end consumer. One way of doing this is for brokers and MGAs to accept that obtaining the relevant data is sound business practice and ensures that FSCS can perform its duties as expected and laid down in the event that they deem an insurer to be in default.

”When considering the refund of premium as a result of an insurer default, there is an expectation that the consumer will be reimbursed, within a specific time period, for the unused portion of the insurance premium. While the broker would no doubt be in a position to replace insurance coverage, the insured would be facing the additional cost to replace their insurance policy. By providing the FSCS with the appropriate contract details they would be able to adhere to their obligations and the policyholder would receive the appropriate return of premium.”

Onus on the production chain

Clive O’Connell, partner, head of insurance and reinsurance at law firm McCarthy Denning, told Insurance Times: “Perhaps the need is not for the sophistication of open insurance, but for an obligation to be imposed on intermediaries to retain such data in a form which allows for automatic checks that will identify affected customers.”

This is because often customers might not know who is actually providing the cover.

“They think of buying insurance from a broker or an MGA, through an affinity scheme or even a supermarket or price comparison website and not from the risk carrier.

“If they happen to glean that a Liechtenstein-based insurer such as Gable had been placed into liquidation, they would be oblivious to the impact that had on them,” he said.

“The insurer and those in the production chain, particularly those most proximate to the customer, should bear responsibility for ensuring that the customer is made aware of the failure. Any obligation placed on the insurer would be possibly worthless and so the onus must rest on the production chain.”