§ 7.45 p.m.
My Lords, I beg to move that this Bill be now read a second time.
The Bill makes a number of amendments to the Policy Holders Protection Act 1975. That Act provides a system of compensation to certain policyholders of failed insurance companies. Before providing your Lordships with details of the proposed amendments, I should explain how the compensation scheme works.
The scheme is administered by the Policyholders Protection Board. If an insurance company fails and goes into liquidation, the board is required to compensate policyholders who are holders of "United Kingdom policies" as defined in the Policy Holders Protection Act. In relation to general business policies the protection is 100 per cent. in the case of compulsory insurance requirements, such as third party motor cover Other claims are protected to the extent of 90 per cent. provided the policyholder is a private individual, including private individuals as members of partnerships. In relation to long term business the board is required to try to secure continuity of cover so that 90 per cent. of the future benefit of the policy is protected. If this proves impossible, the board is required to pay a sum equal to 90 per cent. of the value of the policy in the liquidation. I should add that marine, 313 aviation and transport insurance and reinsurance business is not covered by the Act. Nor is Lloyd's of London, which has its own compensation scheme.
The compensation scheme is funded by levies from the insurance industry. Insurance companies are liable to pay levies amounting up to 1 per cent. of their worldwide premium income in any one calendar year derived from United Kingdom policies. General business companies pay for general business insolvencies and life companies pay for life insolvencies. In practice, the full levy has only once been called for in relation to general business and never in relation to life business. Even so, the board has collected some £342 million in respect of general business failures and some £6 million in respect of life business failures.
The new Bill has three main aims. The first is to restrict the Policy Holders Protection Act's coverage to exclude risks located outside the European Economic Area from the compensation scheme. The second is to update the Act to reflect the development of the single European market in insurance and the associated changes to insurance regulatory regimes throughout the European Community. Finally, the Bill introduces a number of technical measures designed to provide greater certainty for consumers and speedier settlement of claims by the Policyholders Protection Board.
As I indicated earlier, the Act is currently designed to protect so called "United Kingdom policies". These are policies issued by insurance companies in the United Kingdom, irrespective of the location of the risk. Therefore a policy of insurance sold by an insurance company in London to a private individual in the USA would be covered. But an identical policy sold by that company's subsidiary in the USA would not be covered.
As it has turned out, the Act's current geographic coverage may well have had a damaging effect on the industry's competitiveness. As a consequence of one insolvency, claims from US private policyholders, most of whom are members of partnerships, have amounted to £160 million, and there are more costs to come. This amounts to almost half of the levy raised to date. These costs have been largely borne by UK consumers in the form of higher premiums.
The Bill therefore proposes to confine the protection scheme to risks and commitments located in the European Economic Area, the Isle of Man and the Channel Islands. This is consistent with our EC obligations. Overall, however, it will reduce insurers' exposure to pay claims under the Act.
When the Policy Holders Protection Act 1975 was enacted, all insurance companies wanting to carry on insurance business in the United Kingdom had to be authorised by the Department of Trade and Industry. Hence the Act's protection was confined to business carried out by authorised insurance companies. The EC Third Insurance Directives, which were implemented in the United Kingdom in 1994, allow EC companies authorised in other EEA states to transact direct insurance business in the United Kingdom without the need for further authorisation. Business can be carried out through an establishment—that is, a branch—here 314 or directly from another member state. The Insurance Companies (Third Directives) Regulations 1994 kept United Kingdom branches of EC companies within the scope of the Policyholders Protection Scheme, despite the fact that they are no longer regulated by the DTI.
However, this left an important gap, because EC companies carrying on business here directly from another EEA state (so-called inward services business) are not currently covered. At the moment the amount of business transacted this way is extremely small, but over time it is expected to grow significantly. The Bill therefore brings for the first time EC companies providing insurance from an establishment elsewhere in the EEA within the scope of the compensation scheme.
Because the Act's geographic coverage is altered, it follows that the basis on which insurance company levies are calculated should be altered too. As I indicated earlier, the levy is currently based on worldwide premium income derived from UK policies. That basis needs to be maintained for some time, because there are substantial liabilities arising from the current geographic coverage of the Policy Holders Protection Act and those need to be discharged. For the moment, therefore, the only changes made by the Bill will be that, subject to de minimis provisions, EC companies carrying on inward services business here will be liable to pay levies on premiums in respect of UK risks and commitments; also, that premium derived by UK companies from policies covering risks and commitments in the Isle of Man and the Channel Islands will be brought into account. At a later stage, it will also be possible to reduce the levy base for companies established in the United Kingdom. For UK authorised companies the levy would be based on premiums in respect of EEA risks and commitments and for EC companies on UK risks and commitments. The European Economic Area includes Iceland, Norway and Liechtenstein additional to those countries in the European Community.
The remainder of the Bill's provisions are largely technical, designed to improve the workings of the scheme. Their effect will be to strengthen consumer protection and speed up payment of claims. The most significant of these improvements is to modernise the Act's provisions in relation to so-called schemes of arrangement.
Over the past few years, schemes of arrangement have become the normal method of dealing with the insolvency of non-life insurance companies. Schemes are more flexible and less costly than the alternative of liquidation, and are generally better adapted to the rather specialised nature of insurance company insolvency.
The Policyholders Protection Board is able to participate in schemes by virtue of its discretion to assist a company in financial difficulties, under Section 16 of the Act. However, the scope of Section 16 is not quite as wide as the scope of the provisions which would apply in a liquidation, and some difficulties have been encountered in practice with some of the detail of its operation. The Bill amends Section 16 to deal with these difficulties. This will in future ease the process of putting together a scheme in which the board is to participate.
315 Other provisions allow the Policyholders Protection Board more flexibility in collecting levies—through raised borrowing powers and collection of levies by instalments. There is also a provision to close a loophole whereby insurance companies within a group could reduce their levy payments due to reduced net premiums, achieved by inter-group reinsurance.
The Bill also removes an obstacle which has prevented insurance intermediaries making interim payments to policyholders in cases of hardship and provides equal status under the compensation scheme for all parties covered by an insurance contract so that, for example, named drivers on a motor insurance policy would receive the same treatment as a contracting policyholder.
I should point out that the Bill also makes consequential amendments to the Friendly Societies Act 1992. That Act contains provisions to bring registered friendly societies within the scope of the compensation scheme but such provisions have not yet commenced.
I hope that I have been able to provide a clear and concise explanation of a complex and somewhat technical Bill. Taken together, its various provisions should be welcomed by the insurance industry and consumers alike. I commend it to the House.
§ Moved, That the Bill be now read a second time.—(Viscount Chelmsford.)
§ 7.55 p.m.
§ Lord Haskel
My Lords, I thank the noble Viscount for explaining his rather complicated Bill. I see that the noble Baroness the Minister has an important engagement this evening, so I shall be brief.
Any Bill coming before the House so close to an election is obviously looked at with some suspicion. However, this seems to be a rather technical Bill which tidies up and modernises the Policy Holders Protection Act 1975. However suspiciously we look at it, we can see nothing threatening. So I welcome it.
We think that the Policyholders Protection Scheme, whereby policyholders are protected when an insurance company fails, is a good scheme. We welcome the Bill in the interests of the consumer.
There are several advantages to the consumer. As the noble Viscount told us, the Bill assists policyholders of failed insurance companies, by giving them added protection through the Policyholders Protection Board. It speeds up the settlement of claims and enables intermediaries to make payments on account in case of hardship. Perhaps the most important benefit to the consumer is that drivers are able to continue using their car if their insurer fails. However, the noble Viscount said that transport insurance is not covered. Does that still apply? Also, savers who buy certain investment bonds from insurance companies are protected if the insurance company fails. Can the Minister confirm that that protection will continue?
We welcome the inclusion of business transacted by British insurance companies in the Isle of Man and the Channel Islands, as that will eliminate any uncertainty.
316 We also welcome the stronger protection that the Bill gives to those people with policies issued by insurance companies based elsewhere in the European Economic Area. That is because those insurance companies based outside the United Kingdom but transacting business here will also have to contribute to the Policyholders Protection Board where a similar scheme does not exist in their own country. We welcome that harmonisation. Will the Minister tell us which countries have a similar compensation scheme?
We certainly agree that it is about time that the Policyholders Protection Board's finances were brought up to date. I understand it is some 20 years since that was reviewed, and we welcome this opportunity. It is important because last year the board paid out £120 million to customers of London United Investments in North America. London United Investments went bust in 1990. The board also had a considerable number of claims from Lloyd's Names resulting from the collapse of their stop-loss policies. Have all those been cleared up? Can there be a cut-off date; or does the board have to wait until the policies are no longer valid? From the noble Viscount's remarks, I assume that they have to.
All this should help British insurance companies to become slightly more competitive, as the levy should be reduced. However, it appears that companies based in the United Kingdom will still have to pay levy on premiums collected outside the European Economic Area. In effect, they will continue to pay levy on worldwide risks.
If other insurance companies in the European Economic Area are not required to pay a levy on their worldwide premium, when will British insurance companies be able to stop paying this additional levy? Perhaps the harmonisation is not so harmonious as we thought. As the noble Viscount told us, half the levy raised to date applies to countries outside the European Economic Area. The levy on premiums paid from outside the EEA by UK-based companies obviously needs to be run down as quickly as possible.
Apart from that, the Policyholders Protection Scheme, under the 1975 Act, seems to be a good scheme for both policyholders and insurance companies alike. It is right that it should be brought up to date and modernised. It is right that there should be similar schemes within the European Economic Area.
Therefore, this is generally a good Bill. We congratulate the noble Viscount on steering it through this House. We wish it every success.
§ 8 p.m.
§ Baroness Miller of Hendon
My Lords, the Government welcome the Bill which has already been passed as a Private Member's Bill in another place with government and all-party support. I wish to thank my noble friend Lord Chelmsford for the clear way in which he explained it to us this evening.
As my noble friend said, the Policy Holders Protection Act 1975 provides a system of compensation to certain policyholders of insurance companies. The scheme is designed to protect the most vulnerable and therefore concentrates its efforts on private 317 policyholders, such as for motor and household insurance although it does not cover commercial transport. However, it also covers insurance taken out by partnerships which are deemed to be a collection of private individuals and the insurances which incorporated businesses are compelled to purchase by law: for example, third party motor insurance and employers' liability insurance.
The Government began a review of the Policy Holders Protection Act in response to growing criticism from the insurance industry about the size of their potential liabilities to pay compensation in respect of failed insurance companies. The review was undertaken jointly by the Department of Trade and Industry and the Association of British Insurers. This review could not be completed until the end of 1993 pending the outcome of legal proceedings concerning the coverage of the Act.
In July 1994, the Government published a consultation document which set out a number of proposals to amend the Act. Responses were received from both insurance companies and their representative bodies, consumer groups, insolvency practitioners and the legal profession. In all some 50 substantive representations were made. These demonstrated a wide measure of support for change, not only from the insurance industry but also from its customers who indirectly fund the cost of the scheme through higher insurance premiums.
In October 1995, the Government announced their intention to amend the Policy Holders Protection Act as soon as parliamentary time permitted. My noble friend Lord Chelmsford's Bill covers all the Government's proposals with two exceptions and I wish to draw these to your Lordships' attention.
The first relates to the coverage of partnerships under the Policy Holders Protection Act. As noble Lords have heard, the Act's definition of a private policyholder includes a partnership or other unincorporated body of persons all of whom are individuals. During the Government's consultations it was clear that many people were troubled by the fact that large and commercially sophisticated partnerships enjoyed much greater protection under the Act than incorporated businesses. It was also of concern that claims against large partnerships, for example in relation to professional negligence, were increasingly from other commercial bodies rather than private individuals. These bodies were somewhat removed from the individual consumer whose protection lies at the heart of the Act.
It was for this reason that the Government announced their intention to restrict the coverage of partnerships under the Act to compensation arising from compulsory insurance claims, thus putting them on an equal footing with incorporated companies.
My noble friend Lord Chelmsford's Bill does not include this measure because it was deemed, by the honourable Member for Bournemouth West in another place, to be too restrictive especially for members of small partnerships. The Government have accepted this and announced their intention of reviewing that particular proposal. The insurance industry has also 318 made it clear to us that they attach considerably more importance to a revision of the Act's geographic coverage.
The Bill also includes a proposal explicitly to extend he Policy Holders Protection Act's coverage to insurance policies issued by branches of United Kingdom companies in the Channel Islands and Isle of Man covering risks in those territories. Hitherto, there has been some legal doubt about whether such business was covered. Naturally, this has been of concern to the regulatory authorities there. The Government are pleased to support this provision, which has also been endorsed by the Association of British Insurers.
Experience has shown that it is necessary to have a compensation scheme to help policyholders of failed insurance companies. Within the United Kingdom we have a very good system of regulation and supervision of insurance companies to ensure that they are properly managed and have sufficient financial standing to pay claims. This function is undertaken by the Department of Trade and Industry.
But of course nobody can eliminate the risks of failure entirely, at least not without stifling a competitive market. In a competitive market place—and the UK is one of the most competitive market places in the world—some failures are inevitable. The Policy Holders Protection Act has therefore proved to be a valuable safety net.
Even so, as in all regulation, the Government need to balance the interests of the consumer and the industry they are regulating. I believe that everybody agrees that the current coverage of the Policy Holders Protection Act is drawn too widely and that this has had a damaging effect on the United Kingdom insurance industry.
This problem was clearly demonstrated by the failure of one large group of insurance companies—the insurance subsidiaries of the London United Investments Group sometimes known as the KWELM companies. We all hope that such an insolvency will not occur again. Nevertheless, it is right that the Act's coverage should be properly focused and that we should avoid the need again to pay large amounts of foreign claims at the expense of UK insurers and consumers.
The noble Lord, Lord Haskel, asked me whether we know how long the levy on the cover will take. I thank him for his great courtesy in informing me of the question beforehand and also for noting that I have to go out after these proceedings. I greatly appreciate it.
The Policyholders Protection Board's 1994 annual report stated that the so-called KWELM insolvency was a large and complex undertaking which would take many years to complete. Because of the nature of the business written, it has been impossible to set an accurate timescale. Much of the business underwritten by the KWELM companies was long-term professional indemnity and not all the claims have even yet come to light. It would be fair to say that it may be as long as 20 years before all those liabilities are discharged.
At the same time, we need to ensure that UK consumers are properly protected. The Bill provides for that. Not only does it strengthen protection for 319 UK consumers through coverage of inward services business from the European Economic Area, but also it provides greater certainty for consumers and should lead to speedier settlement of claims.
The noble Lord, Lord Haskel, also asked me whether certain investments made would be covered. If an investment is made as a result of taking out an insurance contract, the policyholder is protected by the Policy Holders Protection Act in the same way as other insurance products. My noble friend Lord Chelmsford has described the changes which the Bill will make in the Act's coverage. In short risks and commitments outside the EEA, the Channel Islands and the Isle of Man will not be covered. However, United Kingdom consumers will be better protected because insurance-related investment products sold by EC insurers not established here will be brought within the scope of the compensation scheme. I should point out, however, that more general investments are not covered by the Policy Holders Protection Act. Instead, they are covered by the provisions of the Financial Services Act which established the investors compensation scheme, providing redress to investors in circumstances whereby the investment firm is in default and unable to meet its obligations.
The noble Lord, Lord Haskel, also wanted to know about other countries' compensation schemes. I am pleased to tell him that no other member state has a compensation fund as comprehensive as ours, but some exist, especially in relation to third party motor business. None of those schemes will be directly affected by the Bill. Nevertheless, Section 21 of the Policy Holders Protection Act already permits the Policyholders Protection Board, with the consent of the Secretary of State, to exempt an EC company from the levy if there are equivalent arrangements to indemnify qualifying policyholders in the member state in which the company's head office is situated.
I should also like to make one point clear since I know that it has been the cause for some concern. It has not been the Government's intention to make any of the proposed changes to the Policy Holders Protection Act retrospective. The Government made this clear 320 when they announced their intention to amend the Act in 1995. I am therefore glad to see that Lord Chelmsford's Bill covers the point. Anyone holding an insurance policy currently covered by the Act will continue to benefit from its coverage until that policy expires. In the case of general insurance, policies normally run for 12 months and the Bill contains anti-avoidance measures to stop people prolonging protection indefinitely.
The new provisions on geographic coverage will, therefore, apply only to insurance policies taken out after the Bill comes into force.
As I have already indicated, on behalf of the Government I welcome the Bill. I am grateful to my noble friend for sponsoring it and I hope that it will soon become law.
§ 8.10 p.m.
My Lords, I thank the two noble Lords who have spoken. Both of them took part in the previous debate and are therefore tired and weary. The Minister, I know, has a date. I fear that I made a speech which was far too long. Perhaps I was expecting more excitement from noble Lords around the House than in fact was the case.
The noble Lord, Lord Haskel, made reference to a comment that he said I made on lack of transport insurance. I do not think that I did make such a comment. Perhaps he might care to look at the Official Report tomorrow. I was trying to get through the speech rather quickly, I admit, but I do not believe that I made such a comment.
The Bill has now received all-party support. I hope that your Lordships will give it a Second Reading this evening. I commend the Bill to the House.
§ Lord Haskel
My Lords, before the noble Viscount sits down perhaps I may just explain that the reason why there is not a full House for his Bill has something to do with a football match between England and Italy.
On Question, Bill read a second time, and committed to a Committee of the Whole House.
§ House adjourned at eleven minutes past eight o'clock.