Category: Claims handling · Reviewed by Simon Temme, Account Executive · Last reviewed 2026-06-11
The Financial Services Compensation Scheme (FSCS) is the statutory compensation scheme that pays eligible claimants where an authorised financial services firm has failed and cannot meet its claims — including insurance claims against insolvent insurers.
FSCS provides the backstop protection that turns regulated insurance from a credit-risk product into a substantively risk-free one for eligible policyholders. Where an authorised insurer becomes insolvent and cannot pay claims, FSCS steps in within defined limits.
The compensation framework is statutory (FSMA), with detailed rules in the FCA Handbook’s COMP sourcebook. The funding comes from levies on the regulated industry.
FSCS is established under FSMA Part XV. The implementing rules are in:
Key provisions for insurance claims:
The protection limits for general insurance:
The scheme covers both:
FSCS engagement follows insurer failure. The PRA declares the insurer in default; FSCS then takes over the claims management.
For policyholders with claims already in progress at the date of failure:
For policyholders whose policies are still in force at the date of failure:
FSCS levies are calculated annually based on the projected compensation pay-outs. Levies are paid by all FSCS-authorised firms across the relevant funding class. Major insurer failures can trigger substantial levy increases for the surviving industry.
For brokers and intermediaries, FSCS protection also applies where the broker has been negligent in placing cover (e.g., placing cover with a firm subsequently shown to be unable to meet claims) — within defined limits.
Recent prominent FSCS engagements have included the failure of various general insurance firms (the Independent Insurance Company collapse in 2001 is the historical reference; later failures have included some MGAs and smaller insurers).
“Compulsory insurance” protection — 100% with no upper limit.
“Non-compulsory insurance” protection — 90% with no upper limit for general insurance.
“Long-term insurance” protection — 100% within the long-term insurance contractual provisions.
“Broker-failure” protection — separate FSCS protection for losses arising from intermediary failure.
“Run-off protection” — protection for policyholders whose cover continues after the insurer’s failure.
A small general insurer fails in March 2026. The PRA declares default. The insurer’s book includes approximately 24,000 active policies and 1,800 open claims. The FSCS engages immediately.
For active policies: FSCS arranges that policyholders are notified and given a transition period to obtain replacement cover. Where compulsory insurance is concerned (motor, EL), FSCS continues to provide cover for a defined period to allow placement of replacement insurance.
For open claims:
The FSCS pay-out is funded by an industry levy. The cost is approximately £180m, spread across the general insurance levy class. Levies are increased for subsequent years to recover the cost over time.
By Matt Bartlett, Director, on 2026-06-11. Next review: 2026-12-11.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-11. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
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