City official calls for 'living wills' for Britain's insurers

Industry-wide plans should be made in case of a company's collapse. Julian Knight reports

Britain's leading insurers should have to draw up a "living will" allowing them to be wound down more easily in case of financial collapse, a leading City official has said.

The idea of a living will, outlining the assets and liabilities of a financial institution and precise plans in cases of an emergency, was first proposed in the wake of the world banking crisis of 2009. However, at the time the idea was limited to banks and is being looked at by the Financial Services Authority and Independent Banking Commission to see how it would work.

Now, though, Mark Neale, the head of the Financial Services Compensation Scheme which overseas the return of investor and saver cash when a financial institution collapses, says that the idea of a living will should also stretch across the insurance sector.

"I would like to see the concept of living wills find its way into insurance, not just banks. It would help us to compensate investors and policyholders much quicker if there were plans in place in the event of a provider collapsing," said Mr Neale. "It would help to improve the way companies hold information about customers, making them easier to wind up in an orderly and structured way." Mr Neale's organisation aims to deal with claims for compensation from consumers within three months, but next year hopes to move this target forward to 20 days.

A senior executive at one of the UK's big four accountancy firms and an expert in living wills for financial institutions said that in principle there would be little to stop insurers from adopting living wills, and that it was a "logical extension" of the policy believed to be favoured by many in Whitehall and the FSA.

However, the insurance industry disagrees. "They would be an unnecessary imposition," said Trevor Matthews, chief executive of Friends Provident. "The regulator's solvency requirements for insurers mean we already are very well protected against collapse and there are other protections for policyholders too. UK insurers weathered the crisis, particularly compared to the banks. I can understand why the FSCS may think this mechanism is needed for banks but it's not right for insurers."

Likewise, the Association of British Insurers (ABI) said there were already plans in place in case of collapse. ABI spokesman Erfan Hussain said: "With banks the potential for contagion spreading across the financial system is far greater than with insurers. If an insurer goes under, the FSCS will look to find a buyer for its clients' policies. If none can be found, then it will administer an orderly wind-down. It's also worth noting that although insurers do fail from time to time, there have been few examples of late and those that have occurred have been dealt with effectively."

In February, the FSA concluded that living wills were the "equivalent of civil defence for the financial system" and were desirable.