The FSCS steps in to compensate policyholders from the now-liquidated insurer

UK policyholders of failed Gibraltar-based insurer Lemma Europe Insurance Company received some welcome news today after the Financial Services Compensation Scheme (FSCS) stepped in to ensure they get some compensation.

Many policyholders became worried that their claims would not be paid out after Lemma froze claims payments and the company was put into liquidation last month.

But the FSCS today put some of those fears to rest by pledging it would compensate a maximum of 90% of a claim, with no limit on the size of the claim.  

It is only now that the scale of the Lemma fallout has been unveiled, with up to 7,000 UK policyholders affected by the firm’s collapse.

Fortunately, as Lemma was authorised by the Financial Services Authority (FSA), claims against the insurer were protected by the FSCS.

An unwelcome trend

This is not the first time a Gibraltar-based insurer has gone bust, leaving its policyholders with outstanding claims.

Aldgate Insurance Company collapsed in 2009, and only last month, Hill Insurance Company stopped trading after it was found to have no capital backing.

The Financial Services Commission (FSC) argues that Lemma and Aldgate cannot be compared and there is not a pattern to these failures.

In the case of Aldgate, the FSC argues there were capital injections but it was still not convinced about the insurer’s financial stability, and the FSC forced it into run-off.

But in Lemma’s case, the main problem was with the shareholders who refused to inject additional capital into the business forcing, the FSC to step in.

The FSC argues these technicalities have some merit, but the problem is that its reputation as a regulator has been damaged by these failures.

Moving forward, it is essential for the FSC to ensure that Gibraltar strictly adheres to the new Solvency II standards that are scheduled to come in to play on 1 January 2014.