IoM policyholder protection case study

The following case study provides an explanation on when a policyholder of a policy held with an Isle of Man insurer may or may not be covered under the Isle of Man Life Assurance (Compensation of Policyholders) Regulations 1991.

Mr Jones has owned a single premium life assurance policy since 2001 with Trouble and Strife Life Assurance Company (‘Trouble and Strife’), which is based on the Isle of Man. He invested £300,000, as the initial premium, no additional premiums have been paid.

On 1 December 2012 Trouble and Strife announced that they had become insolvent. The surrender value of the bond on 1 December 2012 was £425,000.

Mr Jones’s investment is subject to investment risk and the value of the policy can rise as well as fall on a daily basis. It is the surrender value of the policy on the day that the insurer became insolvent that would be used to calculate the amount of compensation he would be entitled to. The maximum amount that Mr Jones would be entitled to claim under the Life Assurance (Compensation of Policyholders) Regulations 1991 (‘the Scheme’) is £382,500, which is 90% of the surrender value of the bond as at 1 December 2012.

Investment risk associated with the underlying investment

If Mr Brown invested £100,000 into a life assurance bond and requested 100% investment into a US dollar denominated equity fund which over time falls in value, he would not be able to claim under the Scheme for the investment loss he has incurred.

The investment risk the client chooses to take in respect of the bond is their responsibility and is not covered under the Scheme.

Similarly, if Mr Brown held shares, for example, in a blue chip company, which were transferred in specie (i.e. as part of the premium) into his life assurance bond, and the blue chip company goes into liquidation Mr Brown will suffer the investment loss on the value of his shares and he is unable to claim under the Scheme.

There are a number of factors to be aware of.

(a) All underlying assets in a life assurance bond are legally owned by the life assurance company. Mr Brown has transferred the ownership of the shares from himself to the life assurance company and no longer has any legal entitlement to the shares; and

(b) The Scheme is in place to compensate eligible policyholders of an insolvent life assurance company, not to compensate for risks associated with investing in the underlying assets of the policy. The outcome is the same where a policyholder is holding a collective investment, OEIC or unit trust with a fund management group and the fund management group goes into liquidation.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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