Annuity clients will be able to claim back 100 per cent of the outstanding value of their policy should their provider go bust, the Prudential Regulation Authority has confirmed.
In October, the PRA proposed increasing the limit to 100 per cent. Currently annuities are covered under the Financial Services Compensation Scheme’s insurance rules, meaning 90 per cent of the value of eligible claims will be paid, with no upper limit on redress.
The regulator said in its recently published policy statement on policyholder protection that compensation will be extended to all long-term insurance products and certain types of general insurance products to 100 per cent.
Furthermore, to avoid complexity it is not introducing a cap on large claims. It stated that this will “simplify protection levels and therefore make it easier for policyholders to understand the extent to which they are covered”.
Previously, the PRA had said that the long-term locked-in nature of annuities meant that many policyholders had a lower capacity to protect themselves or seek alternative cover.
The regulator added the compensation costs associated with funding life insurer failures would increase compliance cost for protected firms and potentially could have implications for competition in the market.
Increasing cover to 100 per cent, based on the previous compensation payments averages for the life, pension and general insurance provision for the period of 2008–13 would have amounted to an average of £7m, the PRA found.
However, it believes the benefits will outweigh the additional costs. It is also worth pointing out that no annuity provider has gone bust since the FSCS was set up.
The new rules will come in from 3 July.