Isle of Man Life Assurance Compensation Scheme

Life Assurance (Compensation of Policyholders) Regulations 1991 – Consumer Information

 

The Isle of Man Financial Services Authority (‘IOMFSA’) has published this guidance to assist persons who wish to gain an overview of how it is anticipated the Life Assurance (Compensation of Policyholders) Regulations 1991 (the ‘Policyholder Compensation Scheme’ or ‘PCS’) will operate if the PCS is activated.

The guidance does not and is not intended to constitute legal advice nor is it a ruling on the law. Reference to the precise wording of the PCS is always recommended and if you are in doubt as to the meaning or interpretation of the PCS then you should take legal advice.

A Guide for Consumers’ Questions…

The PCS is a fund of last resort coming into effect only when the Authority’s comprehensive framework of statutory protection measures has been unable to prevent the failure of an insurer. Because of this the likelihood of the PCS being invoked is considered remote.

The PCS seeks to compensate policyholders holding ‘protected contracts’ with a ‘Participant Insurer’ in the situation where the Participant Insurer has become insolvent and is unable, or likely to be unable, to satisfy claims under its protected contracts.

The PCS pays compensation to policyholders, up to a maximum of 90% of the value of the protected contract.

Money is not collected in advance to fund compensation payments, instead is collected as and when required, by contributions from the other Participant Insurers that did not fail.

The PCS is not designed to act as an unlimited provider of funds in the event of a systemic crisis. It is limited in what it can and cannot do and the amount of compensation that it can pay out.

This means that, in the event of a very large Participant Insurer failing or multiple Participant Insurer failures, the PCS is unlikely to be in a position to provide all policyholders with the maximum amount of compensation.

The PCS covers protected contracts issued by Participant Insurers for long-term business insurance.

A protected contract means a contract of insurance effected by a Participant Insurer. This includes contracts issued from branches of a Participant Insurer.

A ‘Participant Insurer’ is an insurer authorised to carry on long-term business in the Isle of Man (i.e. insurance business under classes 1 and 2).

Long-term business insurance is defined in the Insurance Regulations, made under the Insurance Act 2008 as contracts of insurance that must provide cover for at least 5 years and in normal circumstances cannot be terminated by the relevant insurer before the expiry of that 5 year period. This could include, but is not limited to, contracts of the following descriptions:

  • life;
  • annuity;
  • linked long-term;
  • permanent health;
  • tontines; and
  • capital redemption.

All contracts that would fall within the definition of long-term business except for the fact that the term is less than 5 years, are treated as falling within that definition if the Participant Insurer concerned has provided written notice to the Authority that it intends to treat all contracts within that description as long-term business.

To be certain if your contract qualifies as ‘long-term business’ in these circumstances you should contact the insurance company that issued your policy.

As long as the principal objective of your insurance contract is long-term business, it is classed as a long-term business contract even if it contains additional insurance provisions which do not fit within the definition of long-term business noted above.

To be certain if your contract qualifies as ‘long-term business’ in these circumstances you should contact the insurance company that issued your policy.

The PCS does not protect policyholders who have different types of insurance contracts, such as general insurance contracts concerning motor insurance, home insurance or similar policies of insurance.

The PCS does not protect policyholders whose policies were originally written by insurance companies outside of the Isle of Man and subsequently transferred to an Isle of Man insurer.

The PCS does not provide protection against investment or other financial losses arising out of the investments which may be held within a long-term insurance contract. It is designed to deal only with the failure of a Participant Insurer.

 

To be certain whether or not your policy is covered by the PCS you should contact your insurance company directly.

Yes. There is a particular exclusion of persons who are controllers of the insolvent Participant Insurer and the Scheme Manager may also reject any claim from any person who has any responsibility for, or profited directly or indirectly from, the circumstances giving rise to the Participant Insurer’s insolvency.

Compensation is payable under the PCS up to a maximum of 90% of the value of the Participant Insurer’s liability under a protected contract, determined at the date of the failure of the Participant Insurer.

The actual level of compensation you receive will depend on the basis of the claim that you make and the level of funds available in the PCS and therefore may be less than 90% of the value of the contract.

Compensation is determined at individual policy level – therefore, if you have multiple policies with the failed insurer, each one will be eligible for compensation.

In the event of a very large Participant Insurer failing or multiple Participant Insurer failures, the PCS is unlikely to be in a position to provide all policyholders with the maximum amount of compensation.

No. All policyholders are covered equally irrespective of whether they are a natural person or a non-natural person (such as a company or trust) and irrespective of where in the world the policyholder is resident. The PCS also does not differentiate on the basis of nationality.

Yes. The PCS provides compensation for all protected contracts irrespective of the currency in which they are held. For the purpose of calculation of the amount that may be payable as compensation, the foreign currency value of your contract would be converted to sterling at the rate prevailing on the date on which the Participant Insurer became insolvent.

When the Scheme Manager becomes aware that a Participant Insurer is at risk of being declared insolvent and there is no prospect of the business being either continued or transferred to another Participant Insurer, it may activate the PCS.

Save in such circumstances as the Scheme Manager considers that it ought to be allowed, in order to obtain compensation from the Scheme, the policyholder has to make a claim within 6 months of becoming aware of the insolvency.

The Scheme Manager, in conjunction with a receiver / liquidator, will determine whether the policyholder has entitlement to compensation, checking the information provided by the policyholder against the Participant Insurer’s records.

The claim process is free to policyholders.

In order to be able to pay or allow a claim from you for compensation from the PCS, the PCS (acting by the Scheme Manager) may require you to assign all your rights in respect of the money that the Participant Insurer owes to you, to the PCS.

This means that the PCS will take your place as the creditor of the failed Participant Insurer. This applies in respect of the whole value of your policy, even though the compensation payable will be less than the full value of your policy. Over a period of time the liquidator of the failed Participant Insurer will normally recover assets and pay the value received to creditors. In your case the liquidator’s payment will be made to the PCS.

Following your compensation payment, you may receive a further payment from the PCS if the amount the liquidator recovers in respect of your claim exceeds the compensation amount paid. In such circumstances the PCS (acting by the Scheme Manager) is entitled to make certain deductions, made in respect of interest and costs associated with recovery, before passing on any surplus amounts to you.

Ultimately, you will receive back the same amount as you would have received as a direct creditor in the failed Participant Insurer’s liquidation, less the aforementioned deductions (to the extent applicable).

The benefit of making a claim via the PCS for compensation, is the expedited recovery of the majority of the value of your protected contract.

Money is not collected in advance to fund compensation payments.

Instead the PCS will be funded, if and when required, by:

  • collecting contributions from Participant Insurers;
  • borrowing money; and
  • recoveries from the liquidator.

The value of the failed Participant Insurer’s liabilities under its protected contracts and the level of compensation to be paid from the PCS will determine the size of the contribution required from each Participant Insurer.

Participant insurers will require time to appropriate the funds and pass them to the PCS, therefore acquiring the funding for compensation payments is likely to take a significant period of time.

The maximum contribution the PCS can obtain from a Participant Insurer (no matter how many Participant Insurer failures may take place) is 2% of the value of their long-term business liabilities, calculated as at the date on which the insolvent Participant Insurer became insolvent.

Participant Insurers may decide to pass on the cost of their PCS funding contribution to their own policyholders, where their terms and conditions allow.

The PCS (acting by the Scheme Manager) may also (but does not have to, or may not be able to) borrow money.

There is no prescribed time frame for the payment of compensation.

The compensation fund will only be able to begin to distribute funds once it has begun to receive funding.

In the event of a very large Participant Insurer failing or multiple Participant Insurers failing, the PCS  is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.

The Scheme Manager of the PCS is the Authority.

The Scheme Manager may appoint an agent to administer the PCS on its behalf when a compensation fund is created to provide compensation to the policyholders of a failed Participant Insurer in the PCS.