If a private policyholder's non-compulsory insurance provider goes into liquidation, how will the Financial Services Compensation Scheme settle their claim?

The Financial Services Compensation Scheme (FSCS) is designed to protect consumers when financial services firms fail, ensuring that policyholders receive compensation for their valid claims. In the event of a non-compulsory insurance provider going into liquidation, the FSCS specifies certain limits and proportions for payouts in line with their compensation rules.

The correct understanding of the compensation structure states that the scheme compensates policyholders for 90% of the first £2,000 of the claim and covers 100% of any amount beyond this threshold. This means that claims involving amounts greater than £2,000 will be compensated fully for that excess. This structure is intended to provide a safety net while ensuring that the compensation fund remains sustainable.

This model allows for partial protection for smaller claims while providing full coverage for larger losses, reflecting a strategy aimed at balancing the needs of multiple policyholders without overexerting the resources of the compensation scheme. By using this method, the FSCS can effectively provide significant support to those with more substantial claims in addition to offering some measure of compensation for smaller claims.

The other options do not reflect the FSCS's peculiar structure for payouts and fail to accurately represent how the scheme functions in relation to different claim amounts. Understanding this framework is crucial for