Advisers operating in the protection and health insurance sector are set for a second consecutive year with no additional levy for the Financial Services Compensation Scheme (FSCS).
In its latest update the regulator confirmed there would be no levy for the General Insurance Distribution Class, which includes advisers in the health and protection sectors, in the current 2023-24 financial year and it did not expect one for 2024-25 either.
The FSCS said latest figures for the segment were largely consistent with its May forecast.
“There is, however, a small surplus of £3.5m expected that will be taken forward and used to offset the levy in 2024/25,” the FSCS said.
And forecasting for next year it continued: “We currently anticipate that no levy will be required for the General Insurance Distribution class in 2024/25.
“This is mainly because we are not expecting any new firm failures within this class, and we are continuing to see a decrease in payment protection insurance (PPI) claims.
“Although PPI claims are decreasing, we anticipate that these claims will continue to be the main type of claim we receive for this class in 2024/25.
“The expected 2023/24 class surplus, circa £3.5m, will be carried forward to 2024/25 to cover the compensation costs forecast for this class for that year,” it added.
Industry levy up next year
Overall, the total 2023-24 levy for the industry remains as forecast at £270m, however total compensation costs for the year are now expected to be £36m less than forecast at £435m.
This reduction is primarily due to fewer claims decisions being made than anticipated, mainly within the Life Distribution and Investment Intermediation (LDII) class.
There is also a higher-than-expected surplus in the General Insurance Provision class due to recovering approximately £23m from Gibraltar-based Green Realisations 123 Ltd, formerly MCE Insurance Company.
For 2024-25 the current early forecast levy for the next financial year is up £145m to £415m which is based on expected compensation costs totalling approximately £457m during the year.
The biggest burdens of the increase next year will be felt by the investment provision class, up to £44m from no levy this year, and the LDII class, up by £39m to £140m.
The General Insurance Provision (up £32m to £146m), Deposits (up £20m to £26m) and Life and Pensions Provision (up £6m to £20.5m) classes are also likely to see sizeable increases in levy.
“Although the levy is expected to increase in 2024/25, due to the lower surpluses carried over from the previous financial year, compensation costs remain relatively stable,” the FSCS said.
“For the most recent three years, including the forecast for 2024/25, compensation is between £400m – £460m.”
Firms already failed
FSCS interim chief executive Martyn Beauchamp, who recently replaced Caroline Rainbird, noted claims trends had been continuing, with most compensation paid out for poor financial advice and legacy insurer failures – which include some of the most complex defaults and claims it handles.
“More than 80% of the total compensation forecast for 2024/25 relates to firms that have already been declared in default,” he said.
“This gives us more certainty in these indicative figures, which have been carefully calculated by working with the regulators and third parties such as insolvency practitioners.
“Of course, things can change: unexpected defaults, changes in policy or shifts in economic conditions can all contribute to FSCS needing to pay more or less compensation than initially forecast,” he added.