UK insurers face £150m bill to bail out failed competitors

Embattled general insurers must hand more than £150m from their depleted reserves to fund a compensation scheme for policyholders following the high-profile collapse of Independent Insurance last year and the failure of Chester Street.

The industry has 30 days to pay the money to the Financial Services Compensation Scheme (FSCS), the independent body which distributes funds to customers with insurers that go into liquidation.

All UK general insurers must make the payments, which equates to 0.66 per cent of their 2001 income from premiums on insurance policies after tax.

The levy comes at a bad time for Britain's general insurers. Firms are already reeling from the liabilities from the 11 September attacks, which are set to be the most expensive one-off hit to the industry.

The £150m levy is in line with what insurers expected after last year's series of insolvencies, but it is a massive increase on recent cash calls. Insurers have not had to pay anything into the central compensation pot since 1996, when they were only asked to find £48.3m, or 0.25 per cent of premium income.

General and life insurers have had to fund a communal compensation scheme since the Policyholders' Protections Act was established in 1974. The legislation was inspired by the spectacular collapse of Vehicle & General, which left thousands of policyholders without compensation when it went under.

The insurance industry's track record has been quite sound for much of the 1990s. Then in July last year the demise of Independent Insurance left many of its 500,000 policyholders and 40,000 businesses without cover despite the fact they had been paying premiums for years.

Independent Insurance ran into severe difficulties because it did not have enough reserves to cover the massive increase in business it was writing. The Serious Fraud Office is investigating the company.

The FSCS has paid out £16.59m to 652 former Independent policyholders in urgent need of interim cover and will pay far more to less-pressing cases in the next few months.

The funds will also be directed to customers of Chester Street Insurance Holdings, wound up a year ago after it was unable to pay out massive claims to companies whose workers had contracted illnesses such as asbestosis.

Suzanne McCarthy, the chief executive of the FSCS, said: "This levy should come as no surprise to the insurance sector. We expect that the majority of insurance companies will have already put funds aside to cover this."

One senior insurance executive said: "We made a cautious assessment that it would be 1 per cent for the next two years. It is less than that but it is still a huge increase on recent years."

Large insurers such as CGNU and Royal & SunAlliance have already announced they were reserving funds to pay the levy. CGNU set aside £14m and RSA reserved £10m last year.

The FSCS took over the role of paying compensation last month from the Policyholders Protection Board. It can levy up to a maximum 1 per cent of premium income.

The FSCS covers 100 per cent of claims for compulsory classes of insurance. For voluntary policies, it pays out the first £2,000 of any claim in full and 90 per cent thereafter, leaving individual policyholders to cover the remainder.