Insurance companies get £40m rebate from compensation fund

The Financial Services Compensation Scheme handed a belated Christmas present to the insurance industry yesterday, returning more than £40m in unneeded levies, claiming it was unlikely the industry would have to pay any levy for the coming financial year.

The FSCS was set up four years ago to provide compensation for customers of financial services organisations that go bust, charging different levies to each sub-sector of the industry depending on the anticipated level of payouts in any one year.

The general insurance industry has been particularly hard hit in recent years, due mainly to the collapse of Independent Insurance in 2001. Since the FSCS's creation, it has demanded levies from the sector of £325m.

But in a statement yesterday, the body said having reclaimed more money from defunct institutions than it had budgeted for, it was now in a position to hand back cash to insurers.

The FSCS has paid out more than £400m in compensation to clients of bust general insurers since 2001. It has reclaimed £300m from the estates of the defunct companies.

Commenting on yesterday's announcement, Loretta Minghella, the 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 amount of recoveries is difficult to predict, and during 2005-06 we recovered significantly more in the insurance sector than we anticipated."

Ms Minghella added that in spite of the rebate, the FSCS anticipates tapping the industry for about £100m in 2007-08. It decided that returning the surplus now was the right move.

"We are experiencing a short-term reduction in funding requirements, which means we should have sufficient funds to pay general insurance compensation claims in 2006-07 and up to the next expected levy collection in summer 2007," she said. "Although we estimate a significant levy will be required to fund general insurance compensation claims in 2007-08, possibly more than £100m, it was clear after discussions with the Association of British Insurers a refund now would be appropriate."

About 300 insurers will benefit from the £42m refund. Other sectors of the financial services industry will not be given an indication of their FSCS levy for 2006-07 until 1 February.