When a UK-authorised insurer fails, the Financial Services Compensation Scheme (FSCS) is the body that steps in to protect eligible policyholders, paying out on valid claims so that cover does not simply disappear along with the failed firm. How much of a claim gets covered depends on what kind of insurance it is — the scheme does not apply a single flat rate across every policy type.
Three tiers of protection
Compulsory insurance carries the strongest protection: 100% of a valid claim, with no upper limit, for policies such as motor third-party liability and employers' liability cover written on or after 14 January 2005. The reasoning is straightforward — these are policies the law requires people and businesses to hold, so the FSCS treats a shortfall as unacceptable regardless of cost. Long-term insurance, which covers products such as life assurance and pension annuities, also carries 100% protection, a level the Prudential Regulation Authority (PRA) moved to after a 2014 consultation concluded that gaps in long-term cover could have serious, lasting consequences for policyholders who had paid into a product over many years.
Everything else — non-compulsory general insurance such as home, travel, contents and most pet insurance, along with pure protection policies like critical illness and income protection — sits at 90% of the claim, with no upper limit on the amount covered. That means a £40,000 home insurance claim against a failed insurer would see £36,000 compensated by the FSCS, with the remaining £4,000 falling to the policyholder. The 90% rate has applied since a set of reforms took effect on 1 January 2013, which aligned general insurance with the compensation limits used elsewhere in financial services and removed an earlier, more complicated structure that paid 100% of the first £2,000 of a claim and 90% of the rest.
A live question over the 90% rate
The gap between 90% cover for general insurance and 100% cover for compulsory and long-term policies has not gone unquestioned. The PRA opened a review in November 2023, publishing a discussion paper, DP2/23, that examined whether the 90% rate for general insurance should rise to match the other tiers. As part of that work, the PRA and FSCS reviewed general insurance claims data covering the five years from August 2018 to August 2023 and found that paying every one of those claims at 100% instead of 90% would have added roughly £39 million to total compensation costs over the period. The paper set out several options, including raising the rate only for specific, higher-risk categories of general insurance rather than across the board, a targeted approach the PRA noted would still push costs up industry-wide even if less than a blanket change. No confirmed change to the 90% rate has taken effect as a result of that review at the time of writing.
Who actually gets covered
Eligibility for FSCS protection is not automatic for every policy sold in the UK. It applies to firms authorised by the Financial Conduct Authority or Prudential Regulation Authority to carry out insurance business, which rules out cover bought from insurers operating without UK authorisation, even where they are permitted to sell into the UK market under certain cross-border arrangements. The scheme has paid out more than £26 billion since 2001 across all the financial services sectors it covers — deposits, investments, mortgage advice, debt management and insurance among them — and has helped more than 4.5 million people over that period, according to figures the scheme itself has published.
For a policyholder, the practical step if an insurer fails is usually not an application to the FSCS directly in the first instance. Claims are typically handled through the administrators appointed to wind down the failed insurer, with the FSCS funding the compensation that flows through that process. Existing policies are not simply cancelled the moment an insurer enters default — the FSCS can continue certain types of cover, particularly for general insurance, for a period after failure so policyholders are not left without protection while the process plays out, though the exact continuity arrangements depend on the type of policy and the circumstances of the specific insolvency.
Funded by the industry, not the taxpayer
The compensation the FSCS pays out does not come from general taxation. The scheme is funded entirely by an annual levy on firms authorised by the FCA and the PRA, split into separate funding classes so that, broadly, the sector where a failure occurs contributes toward the cost of compensating that sector's customers. The levy covers two components: compensation costs, which is the money actually paid out to customers of failed firms, and management expenses, which cover the FSCS's own running costs, split between fixed base costs and costs specific to a given funding class. The Prudential Regulation Authority and FCA jointly consult each year on the management expenses levy limit for the coming financial year, most recently through a January 2026 consultation covering the 2026/27 period.
That industry-funded structure is part of why the scheme's cost falls, at least in part, on the same sector its compensation protects — a general insurer's annual FSCS levy contributes to a fund that would pay out if a rival insurer collapsed, not just its own customers. For a policyholder deciding whether to buy cover from a smaller or less familiar insurer, the FSCS levels the field to an extent: as long as the firm is UK-authorised, the same compensation tiers apply regardless of the insurer's size or how established it is in the market.