We’ve been slow out of the blocks, but the introduction of a Financial Claims Scheme (FCS) announced last week finally brings Australia into line with international standards around policyholder protection.

Federal Treasurer Wayne Swan says regulators will be given added capacity to quickly “recapitalise distressed banks, credit unions, building societies or general insurers”.

The FCS will give holders of bank deposits and insurance policyholders quick access to cash and claims should a bank fall over or an insurer collapses.

The decision has been on the cards for years and reflects recommendations by the Council of Financial Regulators, HIH Royal Commission, and the global Financial Stability Forum.

Though the detail is sketchy, APRA will administer the scheme, which within a week of a company collapse will take over the insurance claims process.

It will provide full insurance cover limited to individuals, small businesses, and not-for-profit organisations.

The scheme will not apply to life insurance, superannuation, or investments.

Should a general insurer collapse, a court-appointed external delegate will also step in to steer the company.

The Government will look to recoup its outlay during the liquidation process, and if it can’t, will look to impose levies on “relevant financial institutions”.

That raises questions. If a specialist insurer collapses, for example, will a levy apply to the entire general insurance industry? That and other questions wait to be answered as the policy takes shape.

Allianz Australia Corporate Affairs GM Nicholas Scofield says the Federal Government has at least started off on the right foot in selecting a retrospective funding model.

He says there is little sense in “building a large fund that may never be used”.

“Our decision not to object to such a scheme was subject to it being a post-event funded model, as has been proposed,” Mr Scofield told insuranceNEWS.com.au.

“Prudential reforms introduced post-HIH significantly strengthened the industry and reduced the chance of a similar occurrence, but of course you can never say never.”

HIH was the country’s second-largest general insurer before its collapse in 2001 saw various lines carved up among insurers including QBE, Allianz Australia, and IAG.

It also cost the Federal Government around $800 million in the form of the ad-hoc HIH Claims Support Scheme.

That was administered by ICA, which brought on board four insurers to manage claims.

The Federal Government is moving to avoid a repeat of that cost, says Mr Scofield.

“The Government paid out an enormous amount of money from consolidated revenue to compensate policyholders affected by the HIH collapse,” he said. “Most comparable countries have policyholder protection schemes in place, so it’s not too hard to understand the policy rationale for it from the Government’s perspective.”

Australia’s move means NZ is now the only OECD country without government guarantees covering depositor funds.

The insurance measures will give Australians comparable provisions to consumers in Canada and the UK.

In Canada, the industry-funded non-profit Property and Casualty Insurance Compensation Corporation covers claims from failed insurers.

Almost all licensed insurers in Canada are compelled to join the scheme, and pay their levies upfront.

The UK’s Financial Services Authority operates the Financial Services Compensation Scheme, which collects annual levies from insurers capped at £970 million ($1.98 billion) per year.  

ICA declined to comment on the local proposal, but is unlikely to view the scheme with unbridled enthusiasm.

In a February 2006 submission to the Council of Financial Regulators, ICA said it saw some merit in a retrospective fund controlled by an independent body, but it was ultimately against the idea.

It said impeding issues such as regulation and taxation needed resolution before compensation could be considered.

Some of its concerns have since been addressed but by no means all.

Insurers are still paying big money in tax, meaning despite its merits this compensation scheme may be viewed as yet another industry impost.