When you decide to get into the insurance game, you probably think about how everything is going to be great because the insurer is the one who should help you in trouble. That much is certain, but what if the insurance company itself experiences some troubles and fails completely? What happens to its clients, one of which is you? If you ever thought that insurance is a free of risk type of risk transfer, you were not completely right.
Do not worry, as this is a mistake that too many organisations make and it can end up being a very costly one for everyone involved. Insurance companies can fail and do fail. Nobody is fully immune to the downsides of business, and different kinds of trouble can come from various sides. If you are not intimately aware of your insurer’s financial situation, you are only purchasing the illusion of risk transfer, trouble waiting to happen.
Fortunately, there is a way around that. Below in the article you will learn what to look for and what it takes to remain safe if or when your insurance company fails.
But Aren’t I Protected by the FSCS?
That is a fair question, and the answer is yes, at least in the majority of cases. The Financial Services Compensation Scheme exists to protect financial services customers when their firms fail.
If you are a private business, you can have most of all your claims covered by the FSCS as long as you meet the compensation criteria. Here is what you will need to prove and make sure you have/do:
- First of all, your insurer needs to fail. In other words, the insurer can no longer cover your claim nor return the money you have paid in the form of premiums so far.
- The insurer was authorised to do business by the FCA or PRA when you purchased your policy.
- You are owed a civil liability.
- You can prove that you have suffered financial losses as a result of the fail.
- You are a private individual or business.
If all those criteria align with your circumstances, you can make a claim from the FSCS. But pay particular attention to the last point.
The FSCS does not protect public bodies, because they are not required to purchase insurance in any way, shape, or form.
What Can Public Bodies Do?
Organisations that are not covered by the FSCS are, sadly, out of luck if their insurer fails. That is why you need to be exceptionally careful about who you choose to insure with.
That means you will have to rely on preventative measures, rather than on compensation schemes to protect yourself. In order to do that, you should start by determining the insurer’s financial status. And here, your most important resource is the company’s Solvency and Financial Condition Report.
All but the smallest insurers are required to publish SFCR documents in line with the Solvency II directive.
It provides important insight into an insurer’s financial condition focusing on their overall risk profile. Technically, this document is made to satisfy regulators, but it is publicly available. If you know how to use it, you can understand a lot about the insurer.
With that information, you can start making some hard decisions. Namely, deciding what you should insure and what you should not.
If your financial condition is more stable than your insurer’s is, it hardly makes any sense to insure with them.
Moving on, you might think it is just a matter of finding the right insurer. However, it is not quite that simple. The SFCR can tell you a lot but it will not tell you everything. Moreover, you will have data for the last reporting period. But it is very difficult to track what happens to your policy after you have purchased it.
Insurer’s change owners, become absorbed by other companies, and change names frequently. Your policy might end up in the hands of a completely different organisation than the one you purchased it from. You will never have the time to continuously track it and keep creating risk mitigation scenarios based on possible insurer failures.
A better approach is to first decide what you want to insure. As a general rule of thumb, only insure what you definitely cannot afford to lose in your business. This means that those crucial parts that you cannot survive without should always be covered, while the rest can be risk managed to the best of your capabilities.
After you have determined everything, come to a decision that satisfies your leadership team about a minimum acceptable level of insurance. Then, decide on an insurer that is relatively stable based on their SFCR.
As a private business, if your insurer fails, there is no need to panic. Most or all of your claim will be covered by the FSCS.
As a public body, don not wait for your insurer to fail. Take measures to protect yourself when buying public body insurance. Use the SFCR to learn as much as you can about an insurer and only insure what you need to.
If you want to learn more about the SFCR and how to leverage the information within it, we can definitely offer some help and educate you on how best to approach the whole situation.
At InsuranceInspect Services, we provide a customized insurance consultancy product that will help you understand your insurer and protect yourself from a potential insurer failure. If you were unlucky enough to experience the failure of your insurer, do not waste any more time and start saving what you can today. Furthermore, if everything is still in order, you might still benefit from feeling safer and being protected from future trouble, so make sure to check out the offer anyway.