Seven years after the collapse of HIH Insurance, the Federal Government’s Financial Claims Scheme may compel insurers to cover the cost of a future failure.

Treasurer Wayne Swan last week announced the Federal Government will introduce legislation allowing depositors quick access to cash and claims if their bank or general insurer folds.

The scheme will be administered by the Australian Prudential Regulation Authority (APRA) and funded by the Federal Government – with a levy on insurers lurking in the wings.

Full details are yet to be released but up to $20,000 will be immediately available to bank customers while insurance policyholders will have access to full claims cover.

The Government will try to recover the cost from the liquidation process, but “relevant financial institutions” may be levied on any shortfall.

That means general insurers may be asked to contribute if one of their own goes to the wall.

The scheme brings Australia into line with international standards and is based on the recommendations of various reviews including the HIH Royal Commission, the Council of Financial Regulators and the global Financial Stability Forum.

It will not apply to life insurance, superannuation, or investments.

The HIH collapse cost the Federal Government about $800 million in the form of the HIH Claims Support Scheme set up to compensate policyholders.

The Insurance Council of Australia (ICA) – which has been ambivalent about the suggestion of a scheme for years if it involved insurers dipping into their own pockets – declined an approach by insuranceNEWS.com.au for comment.

For more about this issue go to the Analysis section.