Motion made, and Question proposed,
That this House takes note of Commission Documents Nos. R/3247/73, R/3134/74 and R/402/75 on Direct Life Assurance and the Department of Trade's Supplementary Memorandum dated 26th April 1977.—[Mr. Ashton.]
The Question is, That this House takes note of Commission Documents as set out on the Order Paper. As many as are of that opinion say "Aye". To the contrary "No".
I think that the Ayes have it. The Ayes have it—[Interruption.] Order. Would hon. Members who wish to leave the Chamber please do so quietly.
On a point of order, Mr. Speaker. Has the business concerning EEC life assurance been moved?
I looked in the hon. Gentleman's direction. I shouted at the top of my voice and I put the Question and collected the voices for the Ayes and for the Noes. I did it quite clearly. I myself was surprised.
Further to that point of order, Mr. Speaker. Is it not the case that the motion was to have been moved by the Minister? Further, is it not the case that the proposition was to be put before the House on the recommendation of the Scrutiny Committee so that the House might consider the proposition? Is it now to be taken, or are we to assume, documents?
Obviously, I do not wish in any way to be unfair to the House, but I clearly put the Question. I read out "That this House takes note of Commission Documents" as on the Order Paper.
Further to that point of order, Mr. Speaker. Is it not the case that this motion requires to be moved before it is put by you from the Chair, and that it falls to be moved by the Minister responsible for explaining the documents to the House?
I understand that any Minister can move it, and one of the Whips moved it in my hearing. I do not want anyone to feel cheated of a debate. That is the last thing I want to happen.
That is what has happened.
Order. It is most unfortunate that the hon. Gentleman did not hear me put the Question.
Further to that point of order, Mr. Speaker. Of course we accept what you say, but this is rather an important matter and there was a lot of noise in the House. We did not hear.
The hon. Gentleman is quite right; there was a lot of noise in the House. I have no doubt at all that I put the Question clearly, but obviously some right hon. and hon. Members who wished to debate the subject, and expected to debate it, did not hear me put the Question.
Further to that point of order, Mr. Speaker. I think that this is a regrettable situation, and I must confess that I did not think that the situation was rendered audible. I do not know how the matter can be put right. Suffice it to say that this is a very important matter.
I can put it right. When I had the honour of being elected to this Chair, the right hon. Lady the Leader of the Opposition told me that I could do a lot of things with the support of the House and that I could do very little without the support of the House. If it is the will of the House—
Obviously, it is not the will of the hon. Member who speaks from behind me, but I want to be fair and I do not wish to cheat the House of a debate which it expected to have. The only way in which I can do it, since I have already put the Question, is to put the Question again. I should leave this Chair with a great sense of injustice if I felt that hon. Members had not heard me put the Question, and I will take the responsibility myself now for calling the Minister to move the motion. I call Mr. Clinton Davis.
I beg to move,
I welcome—indeed, now particularly welcome—the opportunity to debate these documents. This is the first time that an insurance directive has been considered by the House, and for that reason alone I think that it is necessary that the House should not be precluded from considering the background and the substance relating to these matters. As we all know, the insurance industry is a vital exporter, and European proposals affecting it are of corresponding interest. I start, therefore, by speaking generally about the insurance common market before I deal with the subject specifically before the House. The first point to make is that the insurance common market has not yet made much progress. Despite a mandate from the Council of Ministers requiring the whole insurance common market to be established by the end of 1969, the only directives in operation when the United Kingdom joined the Community were those covering motor insurance and reinsurance, which, in any event, is not supervised in most other member States. Shortly after our accession, hopes rose when a directive facilitating freedom of establishment for non-life insurers was adopted by the Council of Ministers in July 1973. This had already been in the final stages of negotiation before we joined the Community. Evidently, the then Conservative Government saw the directive as a log jam and considered that once it was broken other directives would follow in reasonable sequence. Accordingly, anxious not to cause delay, they sought only the minimal essential modifications, as they saw them, to the draft. I have to say that their optimism was not justified by subsequent events. Undoubtedly the main reason for this lies in the substantial differences in atti- tude which exist between member States. International trade is not a factor which is of major significance to the insurance industries of most of the other members of the Community. For us, different considerations apply. Our industry contributes substantially to our invisible earnings overseas. London is the centre of the international insurance market. In some European countries insurance industries are subject to a rigid system of controls, including controls of tariffs and policy conditions. These have evolved over a number of years within policies of consumer protection. Of course we also protect our consumers, and rightly so, partly through supervision of the industry by the Department of Trade under the Insurance Companies Act 1974 and the subordinate legislation that has emerged from it and partly by the Policyholders Protection Act. I would add, in parentheses, that a report appearing in Lloyds List last Monday that this Act was incompatible with or might be superseded by the EEC proposals is entirely without justification. As a result of strict controls in Europe, our insurers have so far been able to do relatively little business there. In 1975, out of total premium income from fire and accident business of £2·76 billion our main companies earned no less than £1·7 billion overseas. But business with other Community countries provided less than £0·36 billion—that is, one-fifth of total overseas earnings—which is less than we got for business in the USA alone. Given their traditional tight protective system and, in consequence, the small part played in international trade by their companies, I think it is fair to say that most of the member States have little interest in the directives and in establishing a common market in insurance. This is unfortunate because, as a result, not only are we denied our expected earnings from Europe but Europe is unable to provide the necessary base from which the European insurers as a whole might complete for business throughout the world. Unquestionably the business is there, particularly in the larger and larger risks that have to be covered. It is our desire to see member States competing effectively for this business and not held in a straitjacket. Faced with this situation, the Government took an initiative in the Council of Ministers earlier this year. We have secured agreement that directives on life establishment—the subject of our debate—and freedom of services for non-life insurance should be adopted speedily; if not, a further report will have to be made to the European Ministers next March. We have taken the precaution of insisting that these must be directives conforming with the treaty—that is, that they cannot, and must not, be expected to include a whole host of restrictive and detailed provisions, whatever their guise. The issues that we are debating specifically tonight cannot be seen in isolation. They must, I think, be viewed against the background that I have described—the way in which our approach has developed and the main thrust of what we are seeking to achieve. Discussions have been continuing at Council level since the end of 1974, I do not yet know when they will end, but the major points of disagreement are beginning to crystallise, so that they can be sent to ambassadors and then to Ministers for resolution. The major points outstanding can be identified in large measure with the differences that I have already outlined. That was why I was at pains to go through that background. They concern the operations of composite companies and the composition of minimum solvency margins. I shall deal in outline with two main aspects. The future of composite operations is covered by Article 13 of the directive. Currently there is a majority in Europe that does not support this form of undertaking. However, we want to be able to continue to authorise new composite companies as well as allowing continued operations of existing ones. We may get agreement to the latter point, but I think that it is very doubtful whether agreement will be achieved on the former. The continued existence of composites raises a further question of whether, and, if so, how, they should be able to undertake business throughout Europe. They are already able to open agencies or branches for non-life business under the first co-ordination directive. Specialist countries have agreed to the continuation of this arrangement, but they are not prepared to see life branches with similar possibilities. Instead, what they want, at least, is a branch of a specialist subsidiary. Concerning the second main issue—the calculation of solvency margins—there is no doubt that these are matters of some technical complexity. I shall try to simplify them as much as possible, not only for the benefit of the House but also for my own sakes. Here in the United Kingdom—also in Ireland—as part of our supervision of life insurance companies actuarial methods are used. These involve assessing the liabilities of each company in relation to its own particular collection of assets. The latter are valued on a prudent basis. Other member States of the Community rely on a more approximate method and, in consequence, require inbuilt safety limits. The two systems clearly have the same objective, but they proceed by very different means. The majority of member States do not wish to be tied to a mathematical evaluation of each company on actuarial bases. Nor do they feel able to trust a formula that does not have included within it an explicitly stated safety margin, such as that built into the methods they use. They are also unhappy about having alternative systems adopted as part of a common market. As a consequence of this, we are under great difficulties in seeking to negotiate acceptance of our system under Article 18 of the directive. There are other matters affecting these points which are currently under discussion, but I do not propose to go into detail here, though I shall do so later if hon. Members raise points on them and the House gives me leave to reply. As I have indicated, our essential difficulties are that life insurance supervision in the United Kingdom works on the basis of different principles from those commonly used on the Continent. What we have to decide is, first, whether, if we modify these principles, our industry will still be able to operate according to its usual practices and, particularly, to offer the wide range of policies now available to consumers at fair prices, and, secondly, whether some negotiated compromise would harm our overall expectations from insurance in Europe and the world at large. I would like to assure the House that my officials have been, and will continue to be, in close touch with the industry on this directive and, indeed, all other draft EEC directives. Moreover, the comments of hon. Members will be particularly relevant in our consideration of these matters. I would ask them, however, to remember that all co-ordination must involve some compromise; the question is the extent to which we can go. I hope, therefore, that we can concentrate on the likely practical effects of the proposal before us, recognising that a directive on this subject is an essential step in the creation of a genuine common market in insurance, which it is our objective to achieve, because it is by achieving this that the best interests of our industry—which has nothing to fear from competition—may be advanced.That this House takes note of Commission Documents Nos. R/3247/73, R/3134/74 and R/402/75 on Direct Life Assurance and the Department of Trade's Supplementary Memorandum dated 26th April 1977.
While I appreciate that the question of solvency margins in technical and complex, will the Minister say, in general terms, that the solvency margins adopted by our life assurance companies and calculated on an actuarial basis are more conservative than those adopted by our EEC competitors? If ours are more conservative, is it fair to say that we would have little problem in meeting the standards generally adopted in the EEC.
It is very dangerous to indulge in the use of the word "conservative" in this and in many other respects. We are seeking to enact a situation in this and other matters which is acceptable and beneficial to our industry.I have indicated that there is a need in all methods of negotiation of this kind for some degree of compromise to be effected, but compromise on both sides. I believe that the sort of evaluation that the hon. Member invites me to undertake would not be of any assistance in producing the effective answer to this difficult problem. I hope that the hon. Member will forgive me for saying that. I hope that the House will be in a position to help us by expressing strong and constructive views about these matters, which are very important to our insurance industry.
As I understand it, all these instruments are directives, and presumably require some form of subordinate legislation here before they become the law of this country. Do I understand that the directives are very far from being agreed upon between other member States, and that there are quite a number of stages to go through before there is any question of legislation binding this country?
My right hon. Friend is absolutely right. It is helpful to my officials, however, when they undertake these negotiations to have the views of the House. I firmly believe that the House is entitled to express a view on these sensitive issues, and, in so far as is possible, that view should be brought to bear in the difficult negotiations that I have outlined.I have tried to reach the end of my speech, but I seem to have subjected myself to cross-examination. I think it would be better if hon. Members put their points and I responded to them at the end.
I think that we shall be able to help the Minister to be firm by stating that we hope that he will maintain a firm negotiating position in the negotiations about the directive.When one examines individual directives in detail one realises how indebted the House is to the Select Committees of the House of Lords and this House which examine the proposed legislation and the huge volume of draft directives which pours into the Committees. I invite hon. Members to look at the Sixth Report of our Committee and see the huge range of subjects covered. I invite them to spend the couple of days necessary to go through any one of the directives mentioned. One comes away from the exercise confused and full of admiration for the work of the Select Committees, which do the valuable job of going through the draft directives and stopping the non-senses which would be perpetrated if some of the draft directives were ever to become anything other than draft directives. The objective of those who issued the first version of the directive—there have been a number of versions—was entirely laudable. It was the liberalisation of insurance throughout the EEC and the co-ordination of insurance provisions to ensure adequate protection for insured persons and beneficiaries in all member States. Who could object to those aims—to have a freer market in insurance and to have standard protections for those who take out policies in member States? The British life assurance industry's attitude was very well expressed in evidence to the European Communities Committee of the House of Lords by Mr. Purchase, Chairman of the EEC Committee of the Life Offices Association, on 17th April 1975. In very interesting evidence he said:
The evidence failed to take account of the full impact of the European Court's decision, handed down on 21st June 1974, in the Reyners case, when the Court confirmed that the freedom of establishment, the right of insurance companies in member countries to open up in other member countries, already existed under the Treaty of Rome and was part of the Treaty and, therefore, that there was no need for a directive on the subject. The first—and, I suspect, the most important—reason why Mr. Purchase welcomed the directive proved to concern something that was unnecessary, because the right of British companies to trade in the Common Market come to them automatically under the Treaty. One wonders whether the Life Offices Association would have been quite so enthusiastic about the directive, because the major reason for its welcoming it proved to be invalid. The second object of the United Kingdom industry was to preserve the right for the British to follow their own well-established technical principles. We are constantly being told how far we lag behind our Continental competitors in a variety of fields and how we should modify and modernise our procedures by copying theirs. That may be relevant in a number of fields, but it is certainly not a relevant argument in life assurance, where we are the undisputed European leaders. With life funds, according to the latest figures available, 45 per cent. larger than those of Germany, nearly six times larger than those of France, four and a half times larger than those of Holland, and 15 times larger than those of Italy, our industry is the largest, and has been consistently the most successful, in Europe for a very long time. I hope that it does not sound chauvinistic to say that no British Minister need apologise for arguing that there is no good case in the directive for abandoning principles in insurance that have stood us in good stead for a long time and have enabled the United Kingdom industry to build itself up into a dominant position. The difference between the technical principles involved here and in the Continental system were well summarised by Mr Dick, of the Insurance Division of the Department of Trade, in his evidence to the House of Lords' European Committee on 20th March 1975, when he said:"In general terms, we in the Life Assurance Industry would welcome the directive for two or three reasons. First, it will give our members the right to establish themselves in a European country if they wish to do so at any time in the future. Secondly, there are certain differences between British technical principles and Continental principles, and this directive would retain our own approach. That is important, because the directive, if passed, would have to be translated into British law and would therefore apply to all of our business."
The Department works on the sound principle that the British life insurance industry knows what it is doing. It needs watching, but it does not need to be put in a straitjacket. The net result of this general approach has been that we have an insurance industry that is flexible and capable quickly of producing interesting and sound new policies which please the customer as a result of the wide variety of choice in the sort of policy in which he may be interested. The Continental system is extremely inflexible and rigidly controlled. The result is that there is little variety between insurance companies. For instance, if a new policy is evolved in Germany, the whole industry produces the policy at the same time, on the same terms and under the supervision of the same people. The Department has argued forcefully in the negotiations—I hope that it will continue to do so—that we prefer a system which is more responsive to the customer and in which the customer really has a choice between companies. We accept as a result that there may from time to time be the odd company that does not perform as well as the others. That is one of the risks in the business when there is a choice for the customer. He can choose the company that he wishes to patronise. The Belgians have been trying for seven years to get permission to introduce a unit-linked insurance scheme. Such schemes were first produced by British companies, which decided that there was a market for them. They were blessed by the Department of Trade and were being offered by the British companies within weeks of the policy being evolved. We prefer to fight to ensure that British companies can continue to offer the flexibility and responsiveness that is such a feature of their activities. There are three main areas in which discussion and negotiations are continuing. The Minister referred to them in his speech. One is on composite companies and the provisions of Article 13. Many of our companies are composite companies carrying on life insurance business and other business with separate funds. The funds of the life insurance company are not available to meet losses on indemnity insurance. These companies have managed happily to combine two firms' business for some time and see no reason for the system to be altered. In Germany and other Continental countries, though certainly not in all EEC countries, there are more specialised companies that cannot carry on both activities. As a concession, the British industry is prepared to accept that no new composite companies should be allowed to be formed and take up composite insurance business. Speaking personally, I find it slightly illogical that we should allow companies to carry on doing composite business and say that it is not in any way objectionable and then say by way of a concession that we shall not have any new companies in that field. If the companies are doing a worthwhile job and are performing sensibly, new companies should be allowed to evolve. If they are not, they should be stopped. But we know that they are performing well, to the best of my knowledge, nobody has argued otherwise. So I hope that that concession, which I believe is a slightly nonsensical concession, will be made, along with the next concession that I shall mention, as part of a package which produces an acceptable directive. I do not believe that it is a major infringement of the sovereignty of British companies. It is an unnecessary one, and I do not think that it is one that we should concede unless our Continental neighbours also make concessions."If one tries to describe as briefly as possible what the difference is between the majority of Continental countries and this country, it is that the supervisory authorities in those countries control premium rates, the conditions of insurance policies, the kinds of things that insurance companies can invest in, whereas in this country we have a system which deliberately decides to leave to the insurance company itself as many of the business decisions it has to make for it to make itself in the light of the business conditions, and then we from time to time examine what they have done and the Secretary of State for Trade would only intervene in the affairs of a particular company if he saw good reason to do so"
Does the hon. Gentleman not agree that in spite of the concession composite companies should have the power to establish subsidiary companies under their wings?
As I understand it, one of the results of what I am saying is that a British composite company operating overseas would probably have to do its life assurance through one company and would probably have to set up a separate entity to do its indemnity assurance. I believe, from discussions I have had, that this is acceptable to the British insurance industry.The other item on which the British are prepared to make concessions in certain circumstances is on the basis for the calculation of solvency margins gross of re-assurance. I apologise that this subject is larded with jargon, but I have been able to discover no way in which to avoid it. There is an important point at stake here if we accept that we must move nearer to a Continental system of calculating solvency margins gross of reassurance. It will be quite absurd if we reach the situation in which the direct insurance company is carrying a gross margin covering the net liability on the policy and the re-insurer at the same time, is also providing the same gross margin to cover the same risk. For example, it is quite possible that under the proposed concession we should have a group in which one office reinsures with another. If we accept the system without changing our own rules, both offices will be making the same gross provision against the same risk. Within the group there will be two provisions for the same risk. I hope that the Department will examine that and that the Minister will comment on it when he winds up. I hope that he will assure the British industry that he will find a way of avoiding what would obviously be a nonsensical situation. Another major point concerns the whole question of the solvency margin. The Minister outlined the different approach to this problem. In this country we rely on the actuary making various actuarial valuations into which he builds an implicit margin. There is no explicit solvency margin, but in his calculation he builds in a margin that is implicit and will cover and provide a margin of solvency. In the German system there is a system of minimum valuations with an explicit solvency margin. The British industry felt that the problem had been dealt with and that it had been agreed that both systems should be allowed to continue. In one of the drafts it was provided that both systems would be allowed to continue, but in the new draft—which, although we are not discussing them tonight, is a direct descendant of some of the innumerable drafts that have already been produced—Article 18 has been further modified. It has been modified in a way that brings dismay to even the most ardent supporters of the EEC. Article 18 of the original draft provided for both the British implicit system and the German explicit system to co-exist. Then the French came along and slipped in a further provision, which is Article 31(b) (iii). That would have the effect of torpedoing the British system. If the French additional sub-sub-article were allowed to be included the British system would be totally undermined. The British have responded by tabling Article 18 111 (1) (b) (iv), which will have the effect of torpedoing the French torpedo of the British system. The commonsense thing would be to go back to the original directive that allowed both systems to co-exist. It makes one angry to see this tortuous way of adding sub-clauses to already complicated drafts that have the effect only of cancelling out each other and of returning the situation to its original position. The British industry has made clear that it is prepared to make concessions on the first two items to which I have referred. It does not feel that we should give way on the third item, and I entirely agree. I hope that the Minister or his officials will go to the negotiations and make that absolutely clear to our continental partners. If there is a right of establishment and if British companies, under the Treaty, have the right to go into other EEC countries and open offices, a major reason why the British industry was in favour of this directive has disappeared. If the directive as now drafted becomes statute it will effectively achieve absolutely nothing. The present system, without the directive, means that British companies would be allowed to go into the EEC countries and would have to conform to the rules of the individual countries. The net result of the directive—if we get it, after years of negotiations, into the shape that we want—will be that British companies will be able to do precisely that. I hope that the Minister will urge on his Continental colleagues the necessity of bringing these protracted and potentially absurd negotiations to an early conclusion. If it he is unsuccessful it will not matter much at all because, thanks to our rights under the Treaty, we shall operate in any case and we shall obtain the result that we want.
I was overcome by the gratitude and praise expressed by the hon. Member for Hertfordshire, South (Mr. Parkinson) for the Scrutiny Committee, of which I have just become a member. I am sure that the Members who pore through the many documents to which the hon. Gentleman referred will be pleased by his comments.I speak as a Member sponsored by the co-operative movement, which includes a large and successful insurance society. However, I have no direct connection with that society. These documents were prepared some time ago and there have been developments in life assurance since then. As the Select Committee report states, the life assurance industry welcomes the proposals for draft directives, although there would be no direct advantage to the industry in their adoption, since the decision of the European Court in 1974 ruled that freedom of establishment already exists within the EEC. Furthermore, whilst the proposals may reflect the British approach on some technical aspects, they reflect the Continental approach on many more. If adopted in the form of the latest draft of the proposals, as the hon. Member for Hertfordshire, South and the Minister have made clear, they would undoubtedly hamper the development of the British insurance industry not only in Europe, but in this country and in the many other countries where British insurance companies transact business. That would be a very serious matter. Therefore, whilst we might welcome an agreed directive as a first step towards greater freedom to transact insurance within the Community, it is important that the outstanding technical problems are resolved in a manner satisfactory to the British insurance industry so that its development is not hindered. I know that the Department of Trade has been working hard to achieve this end, but perhaps it could press even harder to ensure that the rather more liberal basis on which we permit life insurance to be transacted in this country, which may be an important reason why our insurance industry has been more successful than that on the Continent, is retained for the future. The points involved are technical, as the House has heard, and I should not wish to take up time unduly on them. There are, however, two matters which are extremely important, and I should like to mention them briefly. The first is a point not specifically mentioned in the report of the Select Committee. It is that relating to the different methods of calculating reserves, to which reference has already been made. We think that our system is the better. The Continentals think that theirs is. Both systems are sound and it should be possible for the life assurance directive to permit both to continue and not to exclude ours. Other countries, however, appear unwilling to permit this. We have sought to achieve a compromise, but up to now nearly all the compromises appear to have been made on our side. I hope that the Department of Trade will do its utmost to persuade the other countries to permit our system to continue as well as their own. It may not seem a vitally important point, but it seems completely unreasonable, when our system is as good as that on the Continent, that we should be forced to change a satisfactory practice that we have used for 200 years because they wish us to do so. After all, we have never sought to require them to change their practices in this respect, despite the long history and success of our system. My second point concerns composite companies, such as the Co-operative Insurance Society. Composite companies, which transact both life assurance and non-life insurance, have not grown up by accident. There are considerable economies in administration to be obtained by transacting life assurance and non-life insurance together, using the same selling and servicing organisation. It is, therefore, a considerable concession on our part to agree that no new composite companies shall be established, although I hope that an exception can be made for newly established subsidiaries of existing composite companies. The present draft directive goes further and provides that existing composites should divide their assets into two portions representing life assurance and non-life business respectively, as we have heard. It is not clear whether this would require existing composites to divide share capital and general reserves which they at present hold as a "last resort" reserve in common between life and non-life business. I understand that the Department of Trade takes the view that the draft directive would require no more than the present insurance Acts in this country require, namely, that funds relating to life assurance business should be kept separate but that general reserves can be held in common between life and non-life business. I hope that the Department of Trade will make sure that no ambiguity is left in this connection by the draft directive so that no change in our present law will be required. Any change requiring general reserves to be divided between life and non-life business would have the most serious consequences for the Co-operative Insurance Society and for its mutual business. The CIS transacts its business on a co-operative and mutual basis in both life and non-life sections and, therefore, cannot raise equity capital to support its non-life business. For this society to be forced by the directive to have to separate its non-life business into a subsidiary company would mean that it could no longer transact non-life business on a wholly mutual basis, and it would probably have to suffer considerable taxation disadvantages. There is a great deal to be said for insurance being transacted on a mutual and co-operative basis. I hope that the Minister will be able to assure me that the Department of Trade will do its very best to ensure that there is nothing in the directive that will go further than our present law or enforce the separation of funds and assets between life and non-life business.
My interest in and association with the world of insurance is fairly well-known to the House, but I start, nevertheless, by declaring an interest as the parliamentary consultant to the British Insurance Brokers Association. That is perhaps, in this context, an indirect interest, but it is worth emphasising, because, throughout the negotiations to produce this draft directive, insurance brokers and insurance companies have taken a broadly identical view, and brokers are as anxious as insurance companies to see that the directive comes to fruition, so that when companies are able freely to establish within the EEC, brokers will be able to follow and support them.I have a great desire to see this freedom to establish life assurance companies in the EEC. It is regrettable that we should have run into a number of very technical difficulties at this rather advanced stage of our consideration of the matter. I recall that during the 1960s I travelled extensively throughout Europe partly to interest Europeans in some British unit trusts and in British life assurance products. Although I can claim some success on the unit trust side, I was constantly frustrated by the conflicting requirements of the various national approaches to life assurance. I believe that as soon as we can achieve some movement towards the establishment of United Kingdom companies in the EEC we shall bring to this country an increased opportunity to improve our invisible earnings. I am confident that the United Kingdom stands to gain by being able to establish freely in EEC countries. Although I welcome the progress that has been made so far, I regret the obstacles that remain. I recognise that we cannot expect the acceptance of total British practice, but we should not easily allow the Continental practice totally to supersede a system that has been tried and tested over the years and that has built up experience. It would cause difficulties if the British insurance companies were forced to turn back the clock. In my short speech, I wish to concentrate on the two most contentious points—solvency margins and specialisation. I congratulate by hon. Friend the Member for Hertfordshire, South (Mr. Parkinson). I am sure that he will not take it amiss if I say that until today I had not thought of him as a major expert in insurance. He has obviously taken a great deal of time and trouble to mull over the details of this complicated issue. His historical analysis was masterly. Until 1975 the EEC's approach to this matter seemed broadly to reflect British practice, but it aimed to permit both British and Continental methods of valuation to run alongside each other. Recently there has been a growing demand on the Continent, particularly in Germany, for the Continental method of valuation to be adopted. Attempts have already been made by hon. Members to present to the House in non-technical language, a description of the subject of tonight's debate. I shall attempt to give a shorter, thumb-nail sketch. The British method includes the calculation of reserves using conservative acturial assumptions. I stress the word "assumptions", because part of Continentals' objection and failure to understand why we are so anxious to maintain our system is that they cannot conceive of any situation in which the word "assumption" can apply to the calculation of reserves. Their approach is not to leave to the actuaries freedom to exercise discretion. The Continental method—or the prescribed basis—gives less freedom to actuaries and has become an in-built part of the system. The freedom of actuaries in this country has led to rises in the payments of endowment and life policies over the years. Both systems are acceptable within their own national contexts. Co-existence between the two is possible. But pressure is growing for a compromise, which may have to be sought. I cannot see what is wrong with returning to the system that was previously acceptable to our EEC partners, namely, the co-existence of both systems. If a compromise is attempted, the horribly complicated formula that we are experiencing tonight will be nothing compared with the difficulty of understanding how it is to be applied in future. The Continentals fail to understand that the adoption of their system would not be acceptable to the British in relation to two specific types of policy. I refer first to what is almost a British phenomenon, which is the single-premium life policy. Twenty years ago, the only type of single-premium transacted by British insurance companies would have been an annuity. But now there is a growth industry in the single-premium life assurance business, and there are many varieties of policy that one can find on the British market. It would be very difficult, in my opinion, to continue to pursue this aspect of life assurance while applying the Continental system. There is another type of insurance which again may hardly apply on the Continent, and that is the non-profit whole life or endowment policy where there are no bonuses attached. Sometimes it is suggested that hardly anyone in 1977 effects a non-profit policy and so the Continentals may dismiss this as so much eyewash. But it is not. There are two distinct areas in which non-profit policies continue to apply. If a young couple are taking out a mortgage with a view to repaying it by an endowment policy, often their aim is to minimise their repayments, and one way is to opt for a non-profit rather than a with-profits policy. Then again, if there is an eventuality where a given sum will have to be paid on a given date in the future, it is possible for a non-profit policy to be effected. The single-premium life assurance policy and the non-profit life policy, which are both vital to the British insurance business, would be in- consistent with the Continental scheme of things. What about the argument put forward by the Continentals that there would be a distortion of competition if the British system were adopted? Not only do I think that that is vastly exaggerated, but I am not sure that we should be talking about competition at this stage. I would rather get much further along the way to getting this directive into operation and leaving the effect of competition to what might be called the "sharp end" of the market. When we are all established in Europe, we can consider the effects of competition. But I consider that in many ways the Continentals are exaggerating the effect of it at the moment. I turn to specialisation. Effectively, we are being told that a firm must be a specialist life company, like Standard Life, Scottish Widows', or Equity & Law, or it must, if it is a composite, create a specialist life subsidiary. Effectively, that would prevent very well known companies such as General Accident, Guardian, Royal Exchange, the Royal and the Phoenix going ahead as they are constituted at present. Why should that be so? The companies that I have named, many of them old-established composites, are among the strongest of the British companies. It would be folly to overlook the very great experience in life assurance that these composites have. Very often they have separate life departments and in many instances they are subsidiary companies of the composites. I urge the Minister to resist the suggestion that there should be this specialisation and this need to set up subsidiary companies. I have no wish to stand against the concessions about which my hon. Friend the Member for Hertfordshire, South spoke. But we must be careful that we carry these major British institutions, the composite insurance companies, along with us. We are told that trading accounts will be distorted, as I read the draft directive. I reject that. It is reasonable for the composites to be required to have separate management for their life assurance. It is reasonable to ask for separate life accounts. But there is no reason for the establishment of subsidiary companies. I end by saying that we are well along the way but that it is most disappointing that we have not progressed further. I believe that some firmness and resolution are called for on the part of the British Government although nobody wants to be extreme. These are high technical matters but on the two points to which my hon. Friend the Member for Hertfordshire, South and the hon. Member for Thornaby (Mr. Wrigglesworth) have concentrated their remarks, namely, the solvency provisions and specialisation, the British have a good and logical case. I feel sure that the whole House would support the Minister if he were to try to obtain some advantage for our position as the negotiations proceed.
I endorse what my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) said about the speech of my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson). I think that my hon. Friend displayed a mastery of the subject, while putting the whole matter into perspective. My hon. Friend demonstrated that it is far more important to get this matter right than to hasten into a decision that probably has little significant effect, certainly in the short term. The effect of the Reyners judgment ensured that insurers already have the right of establishment, the right to provide services throughout the EEC.We are assured by the explanatory memorandum and the remarks that have been made already that the key issues are solvency and specialisation. Anyone who has been through the vast mass of papers on this issue deserves considerable admiration. The whole bundle from the Vote Office must total several hundred pages. I commend the Scrutiny Committee if it has scrutinised with its usual thoroughness. It is a measure of the problems that we face as a House that we get this indigestible quantity of paper and are expected to comment intelligently upon it. Fortunately, we have the Scrutiny Committee to undertake some of that task before the matter reaches hon. Members on the Floor of the House. My main object is to comment on the two restrictions that have been mentioned. Emphasis has been laid on the great contrast between the Continental practice, in many cases, and the traditional British approach to insurance. On the Continent there is strict supervision of investment. There is even strict supervision of policy wording and premium rates. In many EEC countries there is a protectionist nationalist approach to insurance. That contrasts very much with the British approach, which, while allowing a great deal of supervision of company accounts, has been based on immense freedom and flexibility for the insurer. The result of the British system has been great and flourishing international insurance whereas in the EEC the companies are, broadly speaking, substantial only in national terms. The reason that I emphasise this is that I am a little sceptical about the whole concept of an insurance common market. Although I have doubts about the Common Market, I have no doubts about the desirability of the freest possible competition in these matters. There is no doubt about the ability of British insurance to compete and succeed against virtually all other insurance industries in the world. It is a paradox that the British insurance industry benefits to a large extent from the nationalist and protectionist approach of many other countries, in the sense that they remain national industries whereas we have become truly international. The longer they maintain their practice, the less competition they offer. The longer they remain national insurance centres, the more re-insurance comes into the London market. I suspect that there is little substantial benefit to come from an insurance common market in traditional terms. Where there might be some benefit is in those very areas where we have been told that the British insurer is so successful and the Continental insurer relatively unsuccessful. I am thinking especially of domestic insurance. We are often told that life assurance per capita in the United Kingdom is so much higher than on the Continent. Why is this? It is largely because of the success of the composite offices in this country. I suspect that the obstacles to which my hon. Friend the Member for Brentwood and Ongar referred and the problems of negotiation arise largely because the Community is aware, as are many of the national industries, that if the British composite companies are allowed freedom to operate throughout the EEC, a considerable impact could be made on the insurance industries of those countries. It may be in the end that our system and that of the rest of the Community are largely incompatible. I hope not, however, because I think that there are opportunities for the British insurers. But I do not believe that it can be right for composite offices—the offices that can, perhaps, gain most by expanding in the Community, if that becomes possible—to be hindered in the way proposed. I hope that the Under-Secretary of State will feel that the mood of the House is that there is no need to hurry into a bad decision on this subject and that he has the backing of the House and of the British insurance industry in trying to ensure that these substantial British composite offices have a right to continue to trade in their traditional form throughout the Community. That right should be applied equally to new composite offices which are formed. I see no reason why even they should be forced to set up subsidiary companies in order to transmit life business. I hope that the hon. Gentleman will use the expressions of view in this debate to secure the negotiating objectives which I think are already in his mind—to secure even further concessions than those indicated in the draft directive.
This has been a valuable debate in so far as hon. Members have urged me to be firm and resolute. That is always helpful to a Minister when he is going to work on negotiations. The fact that I intended in any event to be firm and resolute is by the way. Hon. Members have expressed their views on a number of important issues that arise out of the directive. There is no questioning the fact that there are substantial differences of opinion between ourselves and the other Member States, and these reflect the difference of approach to which I and others have referred.I accept the suggestion by the hon. Member for Faversham (Mr. Moate) that we do not want to get into a position where, because some people might suggest that it is necessary to make over-swift decisions, we do something injurious to the industry. I have no intention of allowing that to arise. But the fact is that we are approaching the point where decisions have to be made, and we do so in the best interests of promoting the long-term objectives which I outlined and to which even the hon. Gentleman, who is not a fervent admirer of the Community, also subscribes. It is in the context of seeing a genuine common market in insurance that we have to view this directive. Having given the general approach which I and my officials are applying to this matter, I think that the House would not wish me to reveal our negotiating hand totally tonight. The value of a debate of this kind is that it indicates to others the depth of feeling that hon. Members have and that the industry in this country has. I can give the House an assurance that the views expressed in the debate will be taken fully into account. As I indicated earlier, the continuing dialogue which goes on in this matter between my officials and the industry is an essential part of the negotiating position that we take, because we derive considerable strength from the expertise that the industry is able to offer to us. I think that I can conclude my general remarks, although optimists must not believe that, because this is my first "finally", I am about to sit down. It is certainly not our intention to agree to anything that will harm the United Kingdom industry, but I do not believe that we shall eventually be faced with a decision of that character anyway. I come now to the specific points raised by hon. Members. I do not claim to be an expert in this field. I do my best, although it may not be a very good best. The hon. Member for Hertfordshire, South (Mr. Parkinson) has been praised for his newly found expertise, which I admire. I certainly admired his presentation of the case on this occasion rather more than I did on another occasion when he intervened on the subject of the "Globtik Venus", an issue on which I felt more at home. On Article 18, III, 1 (b) the hon Member for Hertfordshire, South said that the original position that had been adumbrated was preferable to the revised version, and that, therefore, no great harm would be done if we went back to that position if these negotiations, with all their difficulties and complexities, were to founder. The trouble with that argument was that the first version, although more acceptable to us, was not acceptable to others. We there fore tried another approach, but the first version is still not acceptable to others. That is the problem with which we find ourselves. The fairly simple view—I do not mean that in any demeaning fashion—postulated in that way by the hon. Member for Hertfordshire, South is not quite as simple as it may seem. The hon. Gentleman referred to the European Court's decision in the Reyners case, and asked "Did it not confirm that the right of establishment already existed under the treaty"? My reply is that it did. It confirmed the right of establishment in the insurance field, but it recognised the necessity for co-ordination, which the directive is designed to achieve. The hon. Member for Hertfordshire, South, also asked whether United Kingdom solvency margins were greater than those in any other country. I am advised that generally they are much the same. It is very difficult to give a complete evaluation on a matter of this kind, but there are types of non-profit contract in the United Kingdom that do not appear in some member countries, because detailed actuarial control is not operated in those countries. That is one of the points of difference. The hon. Member for Hertfordshire, South then asked whether there would be duplication of solvency margins if every company had to relate those margins to its gross liabilities without deduction of re-insurance. I understand that this would be true if the solvency margins were to be calculated on the gross liabilities without deduction, but that is not the case. The current negotiations are related to the amount of the deduction for re-insurance which can be made before calculating the amount of the solvency margin. I have tried to deal with most of the points raised by the hon. Members. I turn next to the observations of my hon. Friend the Member for Thornaby (Mr. Wrigglesworth), who specifically asked whether the draft directive would require more than the current requirements in the United Kingdom on the division of assets by companies. I understand that that would not be the case. The directive makes no reference to general reserves, only to assets. I hope that that deals with that specific point. My hon. Friend also asked about allowing both systems of financial calculation to continue. The directive allows both systems for calculating reserves, which are necessary to cover liabilities, to continue. It is important to stress that point. The difference has arisen only on the calculation of the solvency margin to be held in addition to the reserves. I turn now—I was about to say "to my hon. Friend", because he so frequently is—to the hon. Member for Brentwood and Ongar (Mr. McCrindle). I assure hon. Members that by that remark I intended the hon. Gentleman no harm: I shall certainly be needing his support, and therefore I immediately withdraw the suggestion that he is an "hon. Friend" of mine. The hon. Member asked why composites should be forced to establish subsidiaries for life assurance. I think that the anwer to that is that they are not asked to constitute a special life subsidiary for their United Kingdom operations. They may continue to operate as composites in the United Kingdom. The proposal is that a subsidiary should be established if the composite wishes to do life business in specialist countries. Of course, that is the big question.
I hope that I in no way gave the impression that, although it is bad enough, perhaps, to be required to establish a life subsidiary to transact life business in the EEC, even worse, companies would have to create a separate subsidiary to go on transacting business in the United Kingdom in future. All along I have assumed that that was not so, and I am delighted that the Minister seems now to be confirming it.
I am delighted to confirm it. I dare not say that the hon. Member and I see eye to eye on so many issues, because that is obviously damaging and repugnant to a number of his hon. Friends.The hon. Member asked about single-premium and non-profit policies not fitting into the Continental system. I think that is quite true. Officials from my Department have gone to great pains in Brussels to try to explain this and to seek a version of the directive that would not militate against such policies. This matter is still under negotiation. It would not really be politic for me to go into that at this stage.
Will my hon. Friend comment on the problem faced by mutual societies in not being able to raise equity capital to back up their business?
I am not in a position to deal with that specific point.
I cannot be in a position to deal specifically with every single point that is raised. If I could please my hon. Friend the Member for West Stirlingshire (Mr. Canavan) on every issue affecting this matter, I should be delighted, but I must be caught out on one thing on a matter as technical and complex as this. I shall write to my hon. Friend the Member for Thornaby about the question he raised, and there may be other ways—
Will my hon. Friend write to me too, please?
If my hon. Friend wishes me to write to him, I shall be only too delighted to do so. I do so with relish whenever he writes to me. But I think that he ought to write to me first.I am grateful that we have had the opportunity of this debate. At one stage this evening it seemed that it was to be denied to us. That would have been very regrettable. I am particularly grateful that our stand in these negotiations should have received this united form of assistance from both sides of the House.
Question put, and agreed to.
That this House takes note of Commission Documents Nos. R/3247/73, R/3134/74 and R/402/75 on Direct Life Assurance and the Department of Trade's Supplementary Memorandum dated 26th April 1977.