The Prudential Regulation Authority's (PRA) consultation into increasing compensation payable under the Financial Services Compensation Scheme (FSCS) could affect protection policies, a consultancy has said.
Currently the FSCS provides 90% cover to all policyholders (with the exception of certain types of compulsory insurance which receive 100% cover).
In a statement, Andrew Bailey, deputy governor of the Bank of England and Chief Executive of the Prudential Regulation Authority had said: "Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis. Ring-fencing will improve banks' resilience, by protecting them from shocks, and facilitate orderly resolution - both of which are needed for a stable financial system.
"These proposals will allow customers to have continuous access to the money in their bank account - or receive payment from the FSCS if this is not possible. Additionally, the increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails. "
The PRA is proposing increasing the cover to 100% for additional insurance contracts including protection policies and general insurance claims arising from the death or incapacity of the policyholder.
Kim Durniat, partner in Barnett Waddingham's Insurance Consulting Practice, said: "The PRA are proposing to increase the cover of the FSCS for a range of insurance contracts including protection products.
"The CP proposed to increase cover for claims arising from death or incapacity to 100%, including for the protection part of combined savings/protection products. The reason is that policyholders may be dependent on a particular level of protection without the capacity to make alternatives arrangements once the event has triggered."
She added: "The increase in protections will of course be welcome to policyholders, although according to the PRA's projections it may result in a relatively large increase in levies: about £7m on total levies of £600m-£1000m, about 20-30% of which typically related to insurance. It is not yet clear from the proposals how this will be apportioned but we would expect (life) firms with larger annuity books to be affected more."
The consultation is open until 6 January 2015.
