Phase 1: 1967 – 1972

The Companies Act 1967 

Introduction and overview

22 Part II of the CA 1967 amended the ICA 1958 and introduced new and stricter controls over the establishment and activities of insurance companies carrying out specified classes of insurance business, including ordinary long-term insurance business.

23 ‘Ordinary long-term insurance business’ was defined by section 59(6)(a) of the CA 1967 (and its successor provisions) to include ‘effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life’. long-term business was (and is) treated distinctly from ‘general business’ for many purposes under insurance legislation¹⁶. ‘Insurance business’ was not defined in the legislation at this time¹⁷.

24 The government department responsible for regulation under the CA 1967 (as under the ICA 1958) was the BT. The CA 1967:

• extended the classes of insurance business subject to statutory regulation to include all identified classes;
• introduced requirements for entities to obtain authorisation from the BT to conduct new classes of insurance business, based on criteria relating to initial resources, adequacy of arrangements for reinsurance and ‘fit and proper persons’;
• introduced powers for the BT to direct or require action by the company of specified kinds in specified circumstances, in particular to avert prospective insolvency; and
• imposed additional requirements in relation to insurance company accounts and the audit of accounts.

25 The impact of the CA 1967 was described as leaving the basic concepts of supervision essentially as before, namely, that each enterprise would be left free to determine the scope of its business, its relations with policyholders (including the terms of contract) and the management of its funds, subject only to the interplay of competition and to the final tests of maintenance of a proper degree of solvency¹⁸. In relation to the powers to intervene to avert insolvency, these were later described in an internal paper prepared for the Secretary of State in relation to proposed legislation to replace the CA 1967 as ‘hastily grafted on to the earlier power to petition for winding up when insolvency had occurred’¹⁹.

26 The criterion of ‘policyholders’ reasonable expectations’ as a ‘sweeping up’ ground for intervention appears to have been proposed by officials of the DTI as early as 1971 (by means of insertion of a new clause in the CA 1967), although it was not pursued at that time²⁰ .

27 The origins of this expression are obscure, but appear to predate the 1967 legislation²¹. The expression had been used in 1966 by RS Skerman, in a paper published in the Journal of the Institute of Actuaries entitled ‘A Solvency Standard for Life Assurance Business’²² in a particular context. In considering exactly what income and outgoings should be taken into account when testing solvency he described, as one of the three main problems, the issue of policyholders’ participation in profits under with-profits policies. He noted²³:

Although an office is not under a contractual obligation which can be quantified in relation to the benefits which its policyholders will derive from future profits, it would be unsatisfactory not to take account of the policyholders’ reasonable expectations when determining the value of its liabilities.

In identifying five suggested principles for a solvency standard for life assurance business he rejected the use of a gross premium basis of valuation as being appropriate only if ‘solvency’ was understood to mean ‘no more than fulfilling contractual obligations’. He considered that in order to fulfil policyholders’ reasonable expectations, it was necessary to use a netpremium²⁴ or other valuation basis which would produce stronger reserves.

Authorisation to conduct additional classes of insurance business

28 Under the CA 1967, companies²⁵ which immediately before 3 November 1966 were properly²⁶ carrying out a relevant class of insurance business were authorised to continue to do so, but those wishing to extend their businesses into additional classes required express authorisation from the BT (sections 60 and 61). Before issuing such an authorisation, the BT was required to be satisfied that the company fulfilled minimum financial requirements concerning the excess of the value of its assets over the amount of its liabilities and that where necessary, adequate arrangements for reinsurance of risks had been or would be made (sections 62 and 63).

29 No authorisation could be issued if it appeared to the BT that an officer of the company, its parent company or a person who controlled the company was not a ‘fit and proper person’ to be associated with the company (section 64). On issuing an authorisation, the BT was empowered to impose requirements regarding the initial conduct of business by the company, including restrictions on investments made by the company, the custody of assets and the supply of specified information for a period of up to five years, with supplementary provisions which rendered certain mortgages or charges created in contravention of the statutory requirements void against the liquidator and any creditor of the company (sections 65 and 66).

Restrictions on entering into new contracts of insurance

30 By section 68 of the CA 1967 the BT was empowered, in specified circumstances, to give directions which imposed restrictions on the carrying on of insurance business. Those circumstances included those where the BT was not satisfied about the solvency of the company²⁷, as well as those where statutory obligations were not being satisfied by the company; reinsurance arrangements were not considered to be adequate; it appeared that the ‘fit and proper person’ criterion under section 64 for authorisation would not be fulfilled if an application were to be made; or where it appeared to the BT that misleading or inaccurate information had been supplied when authorisation had been sought.

31 In the case of a company conducting ordinary long-term insurance business, the appropriate form of the restriction was to prohibit the company effecting further contracts of insurance on human life or contracts to pay annuities on human life. Companies were given the opportunity to make representations and the BT was required to consider any such representations before a direction was given. Notice of a direction was required to be published in the London and Edinburgh Gazettes. Criminal sanctions applied to a company which contravened a restriction imposed by a direction given by the BT under these powers. The BT could withdraw a restriction if it appeared to it that the restriction was no longer necessary.

Accounts, audit, documents and actuarial valuations

32 The former provisions of section 4 of the ICA 1958 which required the accounts and balance sheets of insurance companies to be in a prescribed form were replaced with a power for the BT to make regulations to specify the contents of the accounts and the documents to be annexed to them (section 71 of the CA 1967). The Insurance Companies (Accounts and Forms) Regulations 1968 were made under the amended provisions of the 1958 Act (and are referred to under a separate heading below).

33 The rules prescribed for the audit of accounts of insurance companies were extended to all such companies whether or not they were also governed by the Companies Acts; the BT was empowered to prescribe by description the person who should audit the accounts and the manner in which they should be audited (section 72).

34 The BT was also empowered to vary the length of an insurance company’s financial year (section 73). The requirements for signature of the accounts by specified officers of the company were slightly reduced in order to minimise delay in the deposit of accounts with the BT (section 75).

35 Requirements for companies to prepare an annual ‘statement of business’ under section 7 of the ICA 1958 (which had formerly applied only to those conducting accident insurance business) were extended to apply to companies conducting business of other prescribed classes (section 74 of the CA 1967).

36 By Regulation 14 of the Insurance Companies (Accounts and Forms) Regulations 1968, ordinary long-term insurance business became a class prescribed for this purpose and those Regulations prescribed the form of the statement (described as a ‘Summary of Changes in long-term Business’).

37 The BT, as an ‘appropriate authority’, was empowered to exempt an insurance company from the normal requirements of disclosure to shareholders and policyholders²⁸ of statements and reports annexed to the accounts if, in its opinion, disclosure ‘would be harmful to the business of the company or of any of its subsidiaries’ (section 76).

38 The maximum interval for actuarial investigation of the financial condition of an insurance company (including a valuation of liabilities) under section 5(1)(a) of the ICA 1958 for a company conducting ordinary long-term business was reduced from five years to three years (section 78 of the CA 1967).

39 The maximum interval of five years for the preparation of the statement of business under section 5(2) of the ICA 1958, in cases where an annual actuarial investigation was made, was not changed. Schedule 5 to the Insurance Companies (Accounts and Forms) Regulations 1968 set out the prescribed form of statement of ordinary long term business for the purposes of section 5(2) of the ICA 1958. It required considerable detail to be provided in relation to separately distinguished categories of contract in order to enable an independent assessment of the company’s liabilities to be made (see further paragraph 51 below).

Insolvency and winding up

40 Sections 7981 of the CA 1967 amended the provisions of the ICA 1958 regarding insolvency and winding up of insurance companies. The solvency margin requirements for companies conducting general insurance business (i.e. non-life business) were strengthened.

41 The BT as an ‘appropriate authority’ was empowered to impose requirements on insurance companies which were conducting business in a way which created a risk of insolvency. These requirements were framed in similar terms to those which might be imposed under section 65 when authorisation for a new class of business was to be issued, such as restrictions on the making of new investments of a specified class and the realisation of investments of that class²⁹, with the addition of a requirement through which the maximum amount of premiums received during a specified period could be limited (section 80).

42 The powers under section 15 of the ICA 1958, for the BT to petition for the winding up of an insurance company, were extended to include failure by the company to comply with specified requirements of the legislation. The former requirement that leave of the court should be obtained before a petition was presented was removed (section 81 of the CA 1967).

Notification of changes in officers and changes in control of the company and penalties for noncompliance with the legislation

43 Insurance companies were required to give written notification to the BT of any changes in officers or in the persons controlling the company, and of similar changes in respect of its holding company. Any person acquiring or relinquishing control of an insurance company (or its holding company) was required to give written notification to the company of that fact. A criminal sanction was imposed for noncompliance with the latter requirement (sections 82 and 83).

44 Various related criminal offences were created, for example in respect of the supply of false information in purported compliance with certain requirements of the CA 1967 and the ICA 1958. By section 89 of the CA 1967, individual officers of a company could be personally liable for any offence committed with their consent or connivance, or through their neglect (see sections 8491 regarding penalties and legal proceedings).

Miscellaneous

45 The BT was empowered to exempt individual companies from certain provisions of the ICA 1958 where compliance would be unduly onerous or inappropriate, and was empowered to make the application of those provisions less stringent (section 92 of the CA 1967). The BT was required to make an annual report to Parliament about insurance matters in place of the former obligation (under section 10 of the ICA 1958) to lay before Parliament the accounts and related documents deposited with the BT during the proceeding year (section 98).

The Insurance Companies (Accounts and Forms) Regulations 1968

46 From 1969 onwards, the accounts of insurance companies incorporated under the Companies Acts³⁰ were subject (in addition to the requirements of companies legislation) to the more detailed requirements of insurance companies legislation, initially, the Insurance Companies (Accounts and Forms) Regulations 1968³¹ (the ICAF Regulations 1968) which came into operation on 1 January 1969.

47 In view of the particular requirements of the ICAF Regulations 1968, it was possible that the figures provided by a company in order to comply with those Regulations would differ from the figures shown in the company’s profit and loss account and balance sheet produced to comply with general companies legislation.

48 The ICAF Regulations 1968 applied to all insurance companies (other than those conducting only industrial assurance business) and included a set of prescribed forms specifically for those conducting long-term business. The returns to be made in respect of long-term business under the five Schedules to the ICAF Regulations 1968 were: 

49 The primary objective of the returns was to provide the supervisory authorities with sufficient information to determine that a company was solvent and was not following a policy which could lead to future insolvency³² .

50 They were also a means by which policyholders might obtain information about the state of the company’s affairs, although it was noted that it was not widely known that the returns were available for public scrutiny and were not reasonably intelligible to an educated layman³³ .

51 In respect of the contents of the statement of ordinary long-term business of the company (under Schedule 5 to the ICAF Regulations 1968) it was specified that the statement must contain ‘such particulars as are sufficient to enable an independent assessment of the liabilities of the company’s ordinary long-term business to be made’.

52 From this it appeared that, at minimum, the returns should permit an independent actuary, with no other knowledge of the company than that contained in the statutory returns, not only to assess the valuation basis but also to perform a valuation on a different basis or bases in order to gauge the effect that the use of different assumptions would have on the value of the assets and liabilities³⁴ .

53 The ICAF Regulations 1968 required that the accounts prepared under section 4 of the ICA 1958 and all the statements, certificates and reports to be annexed to the accounts gave a ‘true and fair’ view of the affairs of the company as at the end of its financial year and of the profit or loss of the company for the financial year (regulation 2(1)).

54 However, the accounts and other documents were not to be deemed to fail to give a true and fair view ‘by reason only of the fact that the amount at which any asset of the company has been included in the balance sheet is less than the full value of that asset’. The effect of this proviso was obscure, as there was no requirement to show the difference between the full value and the balance sheet value.

 55  Furthermore, the meaning of ‘full value’ was itself unclear³⁵. The application of the general company law requirement for the accounts to show a ‘true and fair view’ in relation to the accounts of insurance companies and the valuation of longterm liabilities were to become major issues between auditors and actuaries³⁶ .

56 The most important of the prescribed documents were considered to be the balance sheet and valuation report. For a company which had carried out long-term business during the financial year, a certificate signed by the actuary (see paragraph 57) was to be annexed to the balance sheet stating  whether or not, in his opinion, the aggregate amount of the liabilities of the company in relation to its long-term business as at the end of the financial year exceeded the aggregate amount of those liabilities shown in the balance sheet (Regulation 5). However, no minimum was prescribed for the excess of the life fund over the actuarial liabilities.

57 Regulation 15 prescribed the qualifications required³⁷ of the company’s actuary as being either a Fellow of the Institute of Actuaries or of the Faculty of Actuaries or such other person having actuarial knowledge as the BT might, on the application of the company, approve.

The Finance Act 1971

58 Section 20(3) of the Finance Act 1971 amended section 226 of the Income and Corporation Taxes Act 1970 so as to enable a policyholder under a contract approved by the BT to take part of the policy benefit as a cash lump sum rather than as an annuity. That lump sum could be no greater than three times the annual amount of the remaining part of the annuity (and the election by the policyholder to take a lump sum was required to be made at or before the time the annuity first became payable to him or her).

59 This change gave policyholders greater flexibility. It enabled them (or their advisers) to assess whether the cash lump sum might be used to purchase a more beneficial annuity from another insurer on the open market. Later changes made to section 226 of the Income and Corporation Taxes Act 1970 by section 26 of the Finance Act 1978 made it possible for the policyholder to require that the entire cash sum representing his or her policy benefits be paid to another life insurance company, facilitating the introduction of what became known as the ‘open market option’.

The European Communities Act 1972

60 The European Communities Act 1972 (the ECA 1972) received Royal Assent on 17 October 1972 and had effect on 1 January 1973 when the United Kingdom (the UK) joined the Community.

61 On joining the Community, the Community Treaties and legislation became binding on the UK at an international level. The ECA 1972 was designed to give effect to the Community Treaties and legislation ‘internally’.

62 By section 2(1) of the ECA 1972, rights, powers, liabilities, obligations, restrictions, remedies and procedures from time to time created, arising from or provided for under the Community Treaties (as defined by section 1(2) of that Act) were given direct effect in the UK if the Treaty provided for the provision to have effect without further enactment in the UK.

63 By section 2(2), provision was made for certain rights and obligations under Community law to be implemented in the UK by means of subordinate legislation. This could either be through an Order in Council or by regulations made by a designated Minister or department, but in either case the form of the measure must be a statutory instrument approved by each House of Parliament, or subject to annulment by either House.

64 Following on from the various European Economic Community (EEC) and European Community (EC) Directives on insurance referred to below, subordinate legislation was made on a number of occasions to give effect to the Directives, in some cases amending the primary legislation.

65 It was plain that the aims of the Treaty of Rome would have a considerable impact on insurance business once the UK joined the Community. In general the UK regulatory regime, particularly for long-term business, was seen as being less interventionist and having less stringent rules than the regimes which applied in other EC countries.

66 The fundamental aims of the Treaty in terms of freedom of establishment and to provide services, the free movement of persons, services and capital and fair competition within the Community, were bound to have considerable implications for the regulatory regime in the UK. The process of harmonisation of the legislation to facilitate the aims of the Treaty was expected, at the least in the short-term, to lead to stricter rules in the UK.

67 However, it was suggested by the Minister for Trade (in a talk given on 1 November 1972) that, once the UK joined the Community, the Commission would welcome the liberalising influence of the UK in the preparation of the insurance directives, as such an approach accorded with the general philosophy of the Commission.

68 The twelve-year general programme for the progressive establishment of the Common Market included a specific, five stage, timetable for the introduction of the principles of freedom of establishment and freedom of services in respect of insurance transactions. This timetable was subject to substantial delay.

69 By the time the UK joined the Community, no Community rules had been promulgated in relation to direct insurance business³⁸. The First Non-life Directive (representing the second step in the five stage process of transition in the original timetable) was almost finalised, subject to the contributions of the countries (including the UK) who were about to join³⁹. The First Life Directive (or Establishment Directive) was at an early stage of preparation. It was anticipated that reaching agreement with other member states on solvency regulations was likely to be a difficult issue in view of the less stringent supervisory approach adopted in the UK.

Background to the role of the Government Actuary’s Department

70 Before GAD was formally created in 1919, actuaries who were to form part of that Department provided advice to the BT on life assurance matters⁴⁰. In a letter written in 1916, the actuary who was to assist the BT recorded that his duties for the Board were to include:

1. reporting generally on returns sent in by individual companies and occasionally to advise as to the meaning of legislation from an actuarial point of view; and
2. in the event of new legislation, to advise on proposals made.

71 With the creation of GAD in 1919, the arrangements between government departments and GAD were formalised. GAD had its own source of finance from a Parliamentary vote, so other departments were not expected to pay for its services at least until 1989⁴¹.

72 In addition to the matters referred to above, over the years GAD became involved in the liquidation of life assurance companies and participated in government committees of inquiry to address issues of concern in the field of life assurance.

73 By the 1930s, the role of GAD had gradually widened to include advising the BT on possible action to improve the position of policyholders and to make published information more transparent and informative. GAD was also asked to become closely involved in consideration of cases of suspected insolvency. GAD appears to have played a part in encouraging the BT to consult informally with the then insurance associations: the Life Offices Association and the British Insurers Association. Eventually GAD (and the Government Actuary) became involved in international life assurance issues and the emerging single European market for insurance business.

74 The role of GAD is not referred to in the legislation which creates and governs the regime for prudential regulation of life assurance companies. However, GAD’s services in scrutinising returns and seeking clarification of technical issues and its advice on problem areas, emerging legislation and guidance have been essential components in the scheme of prudential regulation. The experience GAD had built up over the years must have been of particular significance prior to any valuation regulations being introduced. In 1991, the Government Actuary described the role of GAD as follows:⁴²

From 1984 GAD has operated a major part of life insurance supervision as a delegated responsibility, under the terms of a written contract with the DTI, which lays down the respective responsibilities of DTI officials and of GAD. It is the responsibility of GAD to monitor the financial position of each life company, including examination of annual returns, quarterly returns (where applicable) and other information, to discuss matters with the company and, in particular, with the  Appointed Actuary, to clear up any uncertainties or to resolve any disagreements, and then to report to DTI with an assessment of the situation, including any recommendations for further action.

The Government Actuary went on⁴³ to emphasise that responsibility for supervising insurance companies rested with the Secretary of State supported by the Insurance Division of the DTI and that GAD was in no sense the supervisory authority:

However, as actuarial advisers to the DTI, GAD has a major contribution to make to the supervisory process. Insurance is a complex and technical business, which is not easily understood by generalist administrators and executive staff at the DTI…

75 The ‘written contract’ was a ‘service level agreement’, first made in 1984 between the DTI (Insurance Division) and GAD in respect of the role to be played by GAD in the examination of statutory returns made by insurance companies carrying out long-term business, and is referred to below.

76 The meaning of ‘appointed actuary’ and the significance of that role are explained in paragraphs 95 and 96 below. The series of letters sent by the Government Actuary to appointed actuaries of insurance companies from 1985 onwards, known as ‘Dear Appointed Actuary’ or ‘DAA’ letters, giving information on the working standards applied by GAD and its view of good practice in the actuarial profession, are also mentioned below. In practice, DAA letters were considered to set a minimum acceptable standard for appointed actuaries in determining provisions for particular risks in the valuation of liabilities⁴⁴ .

Footnotes

¹⁶ Ordinary long-term insurance business and industrial assurance business were together defined as ‘long-term business’. long-term business was excluded from the definition of ‘general business’ in section 33 of the ICA 1958 (as amended by Schedule 5 to the CA 1967).

¹⁷ It was first defined in section 34 of the Insurance Companies Act 1981.

¹⁸ National Report from Great Britain to the 19th International Congress of Actuaries, referred to in the Journal of the Institute of Actuaries (JIA) 101 (1974) at paragraph 7, page 54.

¹⁹ See the Report of the Equitable Life Inquiry led by the Right Honourable Lord Penrose ordered by the House of Commons to be printed on 8 March 2004 (the Penrose Report), Chapter 13, paragraph 16.

²⁰ See the Penrose Report, Chapter 13, paragraph 19.

²¹ A report on PRE prepared by a working party of the F&IA in 1993 (referred to below) suggests that the origins of the expression may date back to the 19th Century and describes the ideas behind PRE as being ‘deeply embedded in actuarial thought in concepts such as equity’ but with consumerist overtones added in recent years.

²² JIA 92 (1966) 7584.

²³ Ibid, at page 77.

²⁴ RS Skerman described the net premium valuation method as being one under which: ‘the premiums valued exclude any amounts included in the with-profits office premiums which would provide profits to policyholders. Thus, these amounts receivable in the future are not capitalized so as to reduce the amount of the liabilities and, if solvency is demonstrated using a net premium method, then, broadly speaking, the amounts included in future premiums which should provide profits for policyholders will, in fact, emerge as surplus from year to year in the future and be available for this purpose’. This was intended to do a good deal more than achieve solvency in terms of ensuring the fulfilment of contractual liabilities, it was intended as a ‘standard of good conduct’ so far as with-profits policies were concerned, linked to Skerman’s concept of the need to fulfil the reasonable expectations of with-profit policyholders: JIA 92 (1966) at page 79.

²⁵ I use the term ‘company’ throughout this Part of the report although the provisions of the CA 1967 and subsequent legislation also applied to certain unincorporated bodies. As noted, Equitable is a private unlimited company.

²⁶ i.e. without contravention of section 2(1) of the ICA 1958, which prohibited any person from carrying on life assurance or other specified kinds of insurance business unless that person was incorporated (under the Companies Act or otherwise) and held a paid up share capital of at least £50,000 (subject to certain exceptions).

²⁷ In the case of a company carrying on long-term business the test regarding solvency in the CA 1967, section 68(1)(b) was expressed as being that the BT ‘are not satisfied that the value of its assets exceeds the amount of its liabilities (including all prospective and contingent ones, but excluding those in respect of share capital)’.

²⁸ Section 8(6) of the ICA 1958 required an insurance company to provide a printed copy of the accounts, balance sheet, abstract or statement last deposited with the BT under section 8 of that Act to any shareholder or policyholder who applied for the document.

²⁹ As well as maintenance of assets of a minimum value in the UK and provision of information verified in a specified manner.

³⁰ Such as Equitable. 

³¹ SI 1968 No. 1408. 

³² Paper prepared for the Institute of Actuaries on 26 November 1973 by A Ford, FIA, FSA: JIA 101 (1974) 53–87. 

³³ Report referred to in footnote 18.

³⁴ Paper referred to in footnote 32.

³⁵ Ibid.

³⁶ See the Penrose Report, Chapter 11, paragraph 13 in relation to the practice of actuaries being to include ‘overprudent margins in liability valuations’ and auditors taking the view that this practice undermined the possibility that the accounts could show a true and fair view. The relationship between actuaries and company auditors was eventually the subject of a Guidance Note: GN7, first issued with effect from 1 January 1980.

³⁷ For the purpose of the interpretation provisions of section 33 of the ICA 1958, which defined an ‘actuary’ as an actuary who possessed prescribed qualifications (subject to a limited exception).

³⁸ An EEC Council Directive 64/225/EEC of 25 February 1964 had abolished restrictions on the freedom of establishment and on the free supply of reinsurance and retrocession within the Common Market. (A further directive had been issued in relation to motor insurance.)

³⁹ Talk by Minister for Trade at a seminar on ‘Corporate Insurance and Risks Today’, 1 November 1972.

⁴⁰ According to a paper by the Government Actuary: JIA 119 (1992) 313–343.

⁴¹ Since 1989 when a management review was undertaken, GAD has been expected to recover almost all of its costs from fee income from its clients.

⁴² In paragraph 14.23 of the paper referred to in footnote 40.

⁴³ In paragraph 16.10 ibid.

⁴⁴ Memorandum produced by the F&IA for the House of Commons Treasury Committee Inquiry into Equitable and the Life Assurance Industry, dated February 2001 (paragraph 8.2). See further paragraph 280, regarding the intended function of DAA letters.