The Federal Government has enacted the Financial Claims Scheme Policyholder Compensation Facility for the first time.

The facility, which was only set up last year, was brought into action late last week for a small general insurer, Australian Family Assurance Limited (Austfam), which has been in run-off since 2000.

Financial Services Minister Chris Bowen says Austfam currently has 18 policyholders with known outstanding claims.

He says the Government, through the Australian Prudential Regulation Authority (APRA), will fund payments under the facility, “with the costs to be recovered as far as possible through the liquidation of Australian Family Assurance”.

Mr Bowen was at pains to point out that the Australian Family Assurance issue is “not connected with recent developments in the global economy and they pre-date the new prudential supervision regime for general insurers that was introduced in 2002”.

“These events are very specific to the company,” he said. “There are no implications for any other Australian-authorised general insurer.”

The legislation allows APRA to use Government funds to pay claims of up to $20 billion and administration costs of up to $100 million. APRA can then recover these costs through the liquidation of the general insurer.

If that isn’t sufficient, the remaining costs can be recovered “by way of levy of up to 5% of the gross premiums of general insurers”.

[Also see ANALYSIS].