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Assurance Companies Bill

Volume 415: debated on Monday 12 November 1945

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Order for Second Reading read.

7.18 p.m.

I beg to move, "That the Bill be now read a Second time."

This Bill is one which has been on the stocks for a considerable time; indeed, legislation of this character was foreshadowed in the King's Speech in 1938 but, owing to the imminence of war at that time, it was not introduced and, since then, there has been neither the opportunity nor the urgency for this legislation. Now, however, that the ordinary business of assurance is being resumed in the international field, it is of the utmost importance that this Bill should be passed, because it has as its main object to make as certain as possible that there are no failures of British assurance companies in the future which would, of course, entail great losses to policy holders. The Bill is an agreed Measure in the sense that it is welcomed by all those concerned in the business of assurance, as well as having, I think, the support of the successive Governments which desired but had no opportunity to bring it before Parliament. It is in some of its aspects somewhat technical and complicated, and the necessity of legislating by reference to the principal Act, that is, the Assurance Companies Act of 1909, makes it appear perhaps even more difficult to follow than it really is. Its main purpose is to underline the stability and security of the British insurance market, not only for the benefit of our domestic policy holders, but for those to whom we give this service throughout the world.

It would perhaps be proper in this connection to inform the House of the attitude of the Government towards the future of British insurance business. The Government have no intention of interfering with the transaction of insurance business by private enterprise save to the limited extent to which insurance at home may be affected by the existing proposals relating to personal social insurance and industrial injuries. It is the desire of the Government that insurance should be in the future as in the past dealt with on an international basis and as business of an international character. Perhaps the House would like me to give a few figures in order to emphasise the size and the importance of this business and also its international character. The assets of the United Kingdom assurance companies exceed £2,265,000,000. The nett premiums received in 1943 by those companies from all branches of insurance other than industrial assurance was £265,000,000, of which £99,000,000 represented life and £166,000,000 other branches of insurance. Of our life assurance, about 90 per cent. is business within the United Kingdom, but of our general assurance business nearly 70 per cent. arises from outside the United Kingdom. In addition to that there is, of course, the business of Lloyds, for which precise figures are not available, but it is on a very considerable scale. It is estimated that the nett profit accruing to this country from our insurance business overseas amounts to some £20,000,000 a year. That invisible export is, of course, an asset of very great value in our economy, especially at the present time.

The world-wide reputation of our insurance market stands very high, and the soundness of the British companies and of Lloyds are the basis upon which that business has prospered in the past. The existing law relies on the principle of the opportunity of freedom of business with publicity of the results. Returns are deposited by the insurance companies with the Board of Trade, and the information is laid before Parliament every year. Returns are thus made available to informed opinion in the country, publicity being held to be the best check on unsound underwriting methods. While we can be satisfied that the general position in the insurance market is completely satisfactory, experience since the last war has shown that the powers of the Board of Trade need strengthening in order to prevent small speculative concerns being started to transact the more hazardous classes of business in which they often think that some quick profit can be earned. There are some existing concerns which are of insufficient financial strength to give the high standard of security that is required. Hon. Members will recollect that after the last war a number of failures occurred of small companies transacting marine insurance, and after the passage of the Road Traffic Act in 1930 which made third-party motor vehicle insurance compulsory for the first time, there were failures of some small companies which transacted that class of business. In all, and for varying reasons, there have been since 1919, 34 failures of insurance companies. The trouble has been limited to what was the mere fringe of the insurance market, but nevertheless it tended to besmirch the reputation of the market as a whole, and to that extent to jeopardise the reputation of British insurance abroad. I know the House will agree that it is very important that nothing of that sort should be allowed to occur again.

The whole subject of insurance has been inquired into by two committees, the first under the chairmanship of Lord Justice Clauson, which reported as long ago as 1927, and the second under Sir Felix Cassel which reported in 1937. Legislationto give effect to the recommendations to these committees was, as I have said, promised in the King's Speech of 1938. and it is now necessary to legislate for those essential reforms that are immediately required in our insurance legislation. To carry out in full the reports of the two committees as they stand would take up too much time, both of the draftsmen and of Parliament, and, in any case, after the lapse of so many years since the committees reported, some of the recommendations would need complete reconsideration in the light of the changed circumstances. Essential recommendations which must be carried out now are, first, marine aviation and transit insurance to be brought within the ambit of the principal insurance companies act, and, secondly, the steps to be taken as recommended by the Cassel Committee to prevent the formation of mushroom companies and to enable the Board of Trade to step in at an earlier stage than is possible under the existing law with a view to preventing insolvency of companies. The important recommendation of the Cassel Committee in regard to the setting up of a central fund to deal with claims by third parties which are not met for various reasons, will be dealt with in the manner which was explained by my right hon. Friend the Minister of Transport in an answer which has been given to a Question today: that is to say, by an agreement voluntarily entered into between him and the insurance companies and Lloyds which will fully cover that point.

The revival of overseas trade and the great development of civil aviation that is forecast make it essential that marine and aviation insurance should be brought within the ambit of the Assurance Companies Act as soon as possible. That is the purpose of Clause i of the Bill. Whenthe Air Navigation Act was passed in 1936, the Government had it in mind to bring within the ambit of the principal Act of 1909 primarily third-party insurance, which was made compulsory by that Act, but aviation insurance is much wider than mere third-party insurance and is generally accepted as being analogous to marine insurance. It is therefore proposed to deal with aviation business in the same way as marine business. So far as marine business is concerned, I have already pointed out that, after the last war, there was a number of failures of small companies, and the development of civil aviation might, in the absence of proper safeguards, induce concerns without sufficient substance to embark on this new business, to the very serious detriment of the reputation of our assurance market.

The Cassel Committee, for a strictly limited objective, suggested that the control of insurers doing a class of business made compulsory by Act of Parliament, such as the two I have mentioned—third party motor insurance and aviation—should be controlled by a system of licensing. They had in mind, at that time, the motor vehicle insurance business. As, however, the majority of composite companies transact this class of business, it would have meant licensing, in respect of all their business, the great majority of assurance companies, although it would, at the same time, have left out of control those concerns not transacting compulsory insurance.

The question, therefore, arises whether the licensing requirements should be made of general application. This method is not considered appropriate for businesses such as marine and aviation especially, which are international in -their scope. The object of the licensing proposed was to ensure the maintenance of an adequate standard of solvency with the minimum of outside control. The Board of Trade have, in consultation with their insurance advisers, come to the conclusion that the objects envisaged by the Cassel Committee could be substantially achieved, without the attendant disadvantages of a licensing system, by introducing into the Act itself standards of overall solvency with which insurers must comply. These the present Bill achieves in Clause 3, by requiring a margin of solvency for all general businesses as defined in the Bill, that is to say, marine, aviation, transit, motor vehicle, accident, fire, and employers' liability business.

The margin of solvency is, in fact, the additional reserve that was referred to and recommended in the Cassel Report. This is fixed at £50,000 or 10 per cent. of the previous year's premium income arising from the general business, whichever of these two amounts is the greater. The insurer who does not maintain this standard is deemed to be insolvent for the purposes of the Assurance Companies (Winding-up) Acts, 1933 and 1935. In order to watch over that position, the Board will possess powers of obtaining information contained in these two winding up Acts, and, if need be, by appointing an inspector to investigate the position. These powers, as the House will recollect, are ultimately subject to the control of the courts. The Board's purpose is so to use the new powers as to anticipate and prevent any insolvency arising. My Department have close contact with the insurance industry. We have worked very closely with them during the war, and these contacts will be maintained in the administration of the present Bill, by means of continuous consultation.

Provisions are also necessary to prevent new concerns with insufficient means from undertaking insurance business at all. Hitherto, an attempt has been made to achieve this end by a system of deposits, but, as the Clauson Committee pointed out:
"The primary purpose served by accepting a deposit is to discourage unsubstantial and speculative concerns from undertaking insurance business. It is not, in the opinion of the Committee, primarily to the deposit that a policy owner should look to security. The deposit must, unless enormously increased, be entirely inadequate if it is to be so regarded."
The conclusion has, therefore, been reached that undesirable concerns could best be discouraged by forbidding any concern in future from starting to do assurance business, unless it is a company incorporated under the Companies' Act, or, otherwise, with a paid-up capital of not less than £50,000. That provision will be found in Clause 2 of the Bill which contains certain safeguards for existing concerns. With this new requirement, combined with the provision for a solvency margin, which I have already explained in Clause 3, deposits, as they existed before, become unnecessary, and they are, therefore, in principle, abolished by Clause 4 of the Bill. As soon as the existing assurance companies satisfy the Board of Trade that they have attained the standards of solvency laid down in Clause 3 of the Bill, their deposits will be returned to them.

Clause 4—applies, in principle, the recommendations on the question of deposits contained in the report of the Cassel Committee. Assurance business being world-wide in nature, the strength of any concern depends on its over-all resources. We, in this country, have never favoured the earmarking of assets in a particular country for meeting the obligations arising in that country; a method which is followed, we believe erroneously, in the case of many countries overseas. If the total resources are pooled, they are available to meet an emergency in whatever part of the world it may arise. The way in which British assurance was able to meet the obligations arising from the San Francisco earthquake and fire is, I think, a very good illustration of the efficacy of this principle. Definite acceptance of this principle by Parliament will, I hope, set an example and do much, not only to emphasise the strength of British assurance to our foreign clients, but also to give a truer understanding of the fundamental principles of assurance business. The Dominion and Foreign companies in this country will receive exactly the same treatment as the United Kingdom companies. If they maintain the reasonable standard of solvency required for our own companies in the present Bill, they will be able to carry on their business here without let or hindrance.

The remaining provisions of the Bill are consequential alterations made by this Bill in the principal Act. The most bulky portions of this—Clause 6, and the Second Schedule—are concerned with the adaptation of the new provisions of the Act to the various special cases mentioned in Clause 6, that is existing assurance companies, Lloyds, and similar approved associations, mutual associations, friendly societies, trade unions, and miscellaneous special cases. It is not necessary at this stage, I think, to go into any of these in detail, since they meet the requirements of the various associations, companies, societies and unions to which they respectively refer. I repeat, in conclusion, that this is an entirely non-controversial Measure, welcomed by the insurance interests as it will make assurance doubly sure, so far as British companies and associations are concerned, and will thus make the British insurance market even more attractive to our overseas clients than it has been in the past. For that reason I ask the House to give a Second Reading to this Bill.

7.40 p.m.

I shall not detain the House for more than a very few minutes, although the Bill is an important one. We welcome it. I have twice been President of the Board of Trade in the last five or six years, and I remember seeing this Bill during both my first and second tours of duty. As the President of the Board of Trade has stated, if it had not been for the war I think it would already have become law. If I may say so, with respect, we have heard the President of the Board of Trade at his best. May I, with equal respect, hope that those great qualities of lucidity and audibility and courtesy may never be used in causes less worthy than that which is engaging the attention of the House this evening. In fairness to the right hon. and learned Gentleman I must say that I think he has done full justice to the matter, but I would like to emphasise that the Bill has two objectives. The first is the obvious one of trying to protect members of the public from mushroom insurance companies, to prevent the man who has prudently insured against the changes and chances of this mortal life, waking up one morning and finding he is not secure at all, and worse still, that his premiums have been lost. That is a very important and obvious object. The other one which the right hon. and learned Gentleman mentioned is scarcely less important. As hon. Members know, when one of these mushroom insurance companies does fail, our competitors overseas are not slow to blare the fact forth in headlines, and to say, "Failure of British insurance company," etc. That does do some damage, though one must not exaggerate, to the reputation of British insurance as a whole.

No one speaking on this subject could possibly pass by this part of the matter without saying that there is no international business of which one can think, in which the reputation of British companies stands higher than it does in the business of insurance. Through many cataclysms and catastrophes and two world wars, the British companies have built up a reputation for always meeting their claims and meeting them quickly, and what is probably even more important, on some occasions meeting them when the legal validity of the claims might have been brought into dispute. It is on those two main grounds that we on this side of the House support the Bill. It is unnecessary to add much, but there is one point to which I must refer in passing. That is, the satisfaction I feel in seeing the abolition of the system of deposits. As the President of the Board of Trade has indicated, these deposits, by immobilising funds which would otherwise be available to meet claims, really impair rather than enhance the security. I welcome their abolition. It is a recognition of the principle that these funds are available anywhere—geographically—and are also of such a nature, within the control of the insurance company, as to meet claims wherever they arise.

There is one important matter on which I think the Bill is defective, and with which I must trouble the House. I hope the right hon. and learned Gentleman will consider this matter sympathetically. Under Section 3 of the Assurance Companies Act, 1909, separate assurance funds require to be formed for various classes of business, and Subsection (2) reads as follows:
"A fund of any particular class shall be as absolutely the security of the policy holders of that class as though it belonged to a company carrying on no other business than assurance business of that class, and shall not be liable for any contracts of the company for which it would not have been liable had the business of the company been only that of assurance of that class, and shall not be applied, directly or indirectly, for any purposes other than those of the class of business to which the fund is applicable."
In the present Bill, if hon. Members will turn to Clause 3, they will find in Subsection (1):
"Subject to the provisions of the Second Schedule to this Act, an assurance company carrying on general business shall be deemed, for the purposes of section one hundred and sixty-eight of the Companies Act, 1929,…. to be unable to pay its debts if"—
at any time of the period of examination applicable in its case—these are the operative orders—
"the value of its assets does not exceed the amount of its liabilities by whichever is the greater…."
Clause 3 of this Bill seems to contradict Section 3 of the 1909 Act, and one or both of two things must occur. The first thing that may happen is that the long-term business assets will be made available pari passu with those of general business in insolvency. In passing, the term "long-term business assets" is used in this Bill for the first time. It refers to such business as life business, and the term "general business" covers all such matters as motor and aviation insurance. The other point is that Clause 3 of the present Bill sets up a different test of solvency from that which would be applied in a liquidation. This is a somewhat technical point. I will try to make it as clear as possible. In a liquidation under the 1909 Act, where there has been a fund or where business assets have been set off against life insurance, and those assets are sufficient to meet the claims of the life policy holders, they would not suffer any damage, and the insolvency of other parts of the business would not affect them. But it appears that under this Act the test is different. It is whether the business is insolvent over the whole field. In other words, the whole of the assets are to be taken into account, and the life policy holders would appear to be put in a position where they would receive only that percentage of their claims applicable to the whole business. That seems to us to be a serious defect.

It is rather worse when one looks further into it, than it appears at first sight. Let us look at the business, over a three year period, of a company with an excellent life business. In the first year it has this business but it starts a very shaky business in motor and aviation insurance. In the second year the Board of Trade examines the affairs of the company and finds, on the test applied by this Measure, that the company is solvent or, in other words, the excellent nature of its life business, taken globally, carries the losses which are being made on the motor and aviation business. Therefore, it appears to me that under this Measure the Board of Trade has no power to order the compulsory winding up. Let us take the third year, when things get very much worse, and when the imprudent taking of these motor and aviation risks has, in fact, brought the company into a state of insolvency, as defined by this Measure. Then, it appears to me, the life policy holders have good reason to be aggrieved. They will say, "Why did not the Board of Trade wind up the company last year?" The answer is quite simple—because the Board of Trade had not got the powers. I think these are defects which ought to be remedied, and I ask the right hon. Gentleman if he will look into this matter. I know there are certain arguments on the other side. There do come times when an insurance company may weather the storm, but I do regard this affair of the life policy holders as worthy to be protected.

I also welcome the statement which the right hon. and learned Gentleman has made, and which I think I may translate into my own language by saying that he has no intention of nationalising the insurance companies. That will be very much welcomed, not only by the insurance companies, the management, the employees and the shareholders, but also by many people who hold policies abroad. It would not be at all graceful of me if I did not also congratulate the right hon. and learned Gentleman in this field on having such excellent advice. The advice which he has from his professional advisers on this matter is of a very high order. I conclude by congratulating the right hon. and learned Gentleman on the extremely able way in which this Bill has been presented to the House.

7.52 p.m.

Perhaps I might intervene for one moment on a particular point. The right hon. and learned Gentleman emphasised, quite rightly, the international character of the activities of the insurance companies. As a little parallel to this in the banking world, I remember being asked the difference between American and British banking systems, and answering that there was only one difference—the British banks stayed open. That is equally true of the British insurance companies. It does bring this point into prominence. The Exchange Control have been extremely wise and generous in their handling of matters connected with insurance companies, and in seeing that sufficient foreign exchange was available for them to carry on and expand their business. They realise full well that, in this way, very valuable hard currencies which were turned later into food, etc., were obtained. We hope that the same policy will be continued, and if we could have some assurance on that point it would enable these companies to continue their work under the wise provisions in the new Bill so ably presented by the President of the Board of Trade.

Question put, and agreed to.

Bill accordingly read a Second Time, and committed to a Standing Committee.