Umbrella fund is needed if an insurer collapses

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Insurance is taken out to protect against the unexpected. Whether it is a motor accident or flooding, permanent disability or a theft, if a policy has been taken out and the premium paid, both the insurer and insured expect payment to be made.

The aim is clear and unambiguous: any money paid under the contract is to place the insured in the position they were in prior to the claim.

Imagine the horror of waking up to learn that your insurer has gone into liquidation.

Unless an insolvency practitioner has been able to persuade another insurer to pick up the risk overnight – a most unlikely scenario – instantly there would be no protection.

This would mean no cover if you attempted to drive.

Yet motor insurance is mandatory.

No cover for your home, even though you have contracted to the mortgage lender that there is protection in place.

There is a simple and workmanlike solution: insurance companies should have an umbrella sinking fund into which a small proportion of every premium is paid so that, in the event of financial inadequacy, there can be proper payment – not just of any sums properly due – but a refund of the unused part of any premium.

The UK insurance industry is not small.

After the United States and Japan, it is the third largest in the world.

It is responsible for £1.8 trillion investments, equivalent to 26 per cent of the UK’s total net worth.

It insures 19.7m households for their contents cover and 16.6m buildings and so the collapse of a major insurer would have a devastating effect.

The Association of British Insurers, the trade body for most insurers, says it would expect other insurance companies to rally round and help.

Such a thought is laudable but hardly a professional basis to proceed.

Other insurance companies may help but are likely to be choosy as to which parts and policy holders they wish to add to their inventory.

The plan outlined is not rocket science.

A similar one exists for airline failure.