Phase 2: 1973-1980

The Insurance Companies Amendment Act 1973

Introduction and overview

78 Shortly after the CA 1967 and the ICAF Regulations 1968 had come into force, consideration began to be given within the DTI and the actuarial profession to the need for still further revision of insurance legislation. The actuarial profession debated⁴⁵ the level and nature of supervision which applied in the UK and compared it to that which applied in other countries. It was suggested that the UK system was ‘probably the cheapest in the world’.

79 The relative roles of the DTI, GAD and company auditors and actuaries in the UK system were considered. Debate surrounded the respective roles of insurance company auditors (who were prohibited, by general companies legislation, from being an officer or servant of the company) and actuaries (who usually were company employees⁴⁶) in reporting on the financial condition of the company and some auditors had approached external actuaries to comment on the company actuary’s valuation (although the ICAF Regulations 1968 did not require the auditor to audit the certificate required to be given by the appointed actuary under those Regulations in relation to the aggregate amount of the company’s long-term liabilities).

80 Consideration was also given to whether the ICAF Regulations 1968 fulfilled the ‘publicity’ element of the ‘freedom with publicity’ objective (and what that objective meant), as those Regulations addressed the position from the standpoint of the DTI rather than that of policyholders, shareholders or the public.

81 Following the collapse of the Vehicle and General Insurance Company in 1971 leaving one million motorists without insurance cover, a Tribunal of Inquiry had been set up to consider the circumstances which had led to its failure, including the role played by the DTI and Ministers in failing to foresee and avert its collapse. Whilst this Inquiry related to the nonlife field, it was seen as highlighting the ineffectiveness of the then existing powers of intervention in general.

82 In 1971 the Scott Committee was formed by the DTI to consider the need for new safeguards in respect of property bonds and equitylinked life assurance.

83 Although it was not required to consider the whole of the life assurance business, some of the areas that Committee addressed, such as the role of the actuary in relation to the issue of solvency, were of wider significance.

84 Before the publication of the Scott Report in 1973, the Bill which led to the enactment of the Insurance Companies Amendment Act 1973 (the ICAA 1973) was introduced in the House of Lords. There had been close liaison within the DTI between those preparing the Bill and the Scott Committee secretariat⁴⁷. The Government accepted, in principle, all but one of the recommendations made by the Scott Committee⁴⁸ , although most of the recommendations were provided for in powers to make regulations rather than within the body of the Act.

85 In promoting the new legislation it was said that experience had shown that the powers of intervention under the CA 1967 were too inflexible and narrow and that wider discretion was required as it was ‘impossible to foresee all the circumstances in which an insurance business might run into trouble’⁴⁹.

86 The doctrine of ‘freedom with publicity’ was again referred to. The approach to government regulation adopted in other countries which encompassed premium rates, policy conditions⁵⁰ and choice of investment was rejected in favour of leaving these matters, as a general rule, ‘to the free play of competition’.

87 The comparatively less prescriptive approach adopted in the UK was seen as a benefit in terms of allowing innovation in the insurance industry, keeping costs down and encouraging healthy overseas earnings. However, it was acknowledged that there were circumstances in which the government should intervene ‘to react quickly and appropriately in order to protect the interests of policyholders’⁵¹. It was noted that ‘although we have almost certainly tried to supervise insurance too cheaply in the past, there is a point at which returns for increased expenditure must diminish sharply’. The stated objective of new legislation was ‘not primarily to penalise post facto dishonest or incompetent managements, but to protect policyholders by taking or requiring suitable corrective action in time to avert the consequences of imprudent or misguided policies’. The intention was to ‘strike a proper balance between, on the one hand, allowing the industry so much freedom that it can be exploited by rogues, and on the other hand, creating for the industry such shackles that it cannot give efficient, competitive and forward looking service to consumers here and abroad’⁵² .

88 In July 1973, the ICAA 1973 was enacted, with most of its provisions coming into force on subsequent dates. The Act gave new powers to the Secretary of State, refined existing powers and imposed new obligations on insurance companies. Important features of the 1973 legislation included:

• the reformulation and strengthening of powers of intervention (now expressed as being exercisable by the Secretary of State, rather than by the government department);
• an explicit statement of the grounds on which the Secretary of State might exercise his powers of intervention including (in section 12(1)(a)) that he considered it desirable for protecting policyholders or potential policyholders against the risk that the company might be unable ‘… in the case of long term⁵³ business, to fulfil the reasonable expectations of policy holders or potential policy holders⁵⁴’;  explicit role for the actuary appointed by the insurance company within the statutory regime;
• provision for separate identification of long-term assets and liabilities;
• power to make valuation regulations (arising from the Vehicle and General Report);
• provisions for continuation of long term business in liquidation; and
• the introduction of what might be described as greater ‘consumer protection measures’ such as a ‘cooling off period’ for prospective policyholders, powers to regulate advertising and offences in relation to misleading statements (following recommendations of the Scott Committee).

Exercise of powers following the commencement of the ICAA 1973 and the making of regulations and orders

89 The powers under the ICAA 1973 were expressed to be exercisable by the Secretary of State rather than by the BT or its successor government department, the DTI. Prior to the enactment of the 1973 Act the functions of the BT had been transferred so as to be exercisable concurrently by the BT and the Secretary of State⁵⁵. Section 54(2) of the 1973 Act provided that the functions of the Secretary of State under the ICA 1958 and the CA 1967, Part II should cease to be exercisable concurrently by the BT, so that they became exercisable by the Secretary of State alone.

90 Many of the provisions of the ICAA 1973 were dependent upon subordinate legislation being made. Regulations made for the purpose of the ICAA 1973 were to be made by the Secretary of State by statutory instrument subject to annulment in pursuance of a resolution of either House, as under the ICA 1958 (the negative procedure). However, the power to make orders under sections 1 and 28 (to amend earlier primary legislation in relation to the margin of solvency) were subject to the affirmative procedure, requiring a statutory instrument to be laid in draft and approved by resolution of each House.

Authorisation of insurance companies

91 The Secretary of State was given greater flexibility in relation to authorisation of insurance companies through new powers to vary the minimum financial standards under section 62 of the CA 1967 by order (section 1 of the ICAA 1973).

92 The provisions prohibiting the issue of authorisation to a company on the basis of the involvement of ‘unfit persons’ under section 61 of the CA 1967 were extended to include directors, ‘controllers’ and managers of an insurance company, with ‘controller’ being defined to include managing directors, chief executives and those in accordance with whose directions or instructions the directors of the company (or its parent company) were accustomed to act, or who controlled at least one third of the voting power at a general meeting of the company (or its parent) (section 2).

Actuarial valuation and the appointed actuary

93 The requirements for periodic investigation of the financial condition of the company and valuation of liabilities by an actuary for companies conducting life assurance (and certain other kinds of business) under section 5(1) of the ICA 1958, were to be construed as relating only to the long-term business of the company, as was the required statement of business under section 5(2) of the ICA 1958 (section 3(1) of the ICAA 1973).

94 The valuation of assets and the amount of any liabilities in respect of the long term business were to be determined in accordance with regulations⁵⁶ (section 3(3)). The maximum intervals for actuarial investigation and valuation of liabilities (three years) and for the statement of long term business (five years) were not amended. The Secretary of State was empowered to require the company to carry out a special actuarial investigation (under section 18).

95 Every insurance company subject to the ICA 1958 which carried on long-term business was required to appoint an actuary to the company to carry out the investigations required under section 5 of the ICA 1958. Whenever an actuary was appointed the company was required, within fourteen days, to give written notice to the Secretary of State of the name and qualifications of the person who had been appointed and notice was also to be given when their appointment ended (sections 3(5) and 3(6) of the ICAA 1973)⁵⁷. The actuary appointed under this requirement, and equivalent subsequent provisions, became known as the ‘appointed actuary’ (although the expression did not appear in the primary legislation).

96 The brevity and simplicity of the requirements in section 3 of the ICAA 1973 belie the considerable discussion which had taken place between the actuarial profession and the DTI about the role the company’s own actuary was intended to play in the overall regime for prudential supervision of companies conducting long-term insurance business.

97 It has been suggested that the system of prudential regulation of life insurance companies since the mid1970s has been only partly one of government supervision, containing elements of selfregulation, with (it was said) the F&IA standing in the place of a selfregulating organisation⁵⁸, although this view was not universally accepted.

Accounts and statements

98 Requirements for the deposit of accounts and other documents with the Secretary of State under section 8 of the ICA 1958 were updated and were required to include any report of the company’s auditor prepared under section 9 of the ICA 1958 (section 4 of the ICAA 1973).

99 The normal timing for the deposit of those documents (within six months after the close of the period to which they related) could be accelerated (under section 19). The Secretary of State was empowered to require an insurance company which conducted business of a prescribed class to provide periodic statements of its business in a prescribed form, accompanied by prescribed certificates, to enable a closer watch over its affairs (section 5 of the ICAA 1973). The timing of the provision of such statements could be accelerated by the Secretary of State (section 19).

100 The Secretary of State was empowered to prescribe classes of transaction which he considered likely to be undesirable in the interests of policyholders, in respect of which he was to be given prompt notification by the company (section 6).

Separation of assets and liabilities attributable to long term business and other measures to safeguard long term policyholders

101 All companies carrying out long-term business were required to maintain a specific account in relation to that class or those classes of business, with receipts being carried to a separate appropriately named insurance fund for each class of long-term business. The company was to maintain such books of account or other records as were needed to identify the assets representing that fund or funds. It was also to make arrangements to identify the assets and liabilities of the company attributable to its long-term business as at the last day of the financial year, in accordance with regulations made for this purpose⁵⁹ (section 7).

102 Section 8 prohibited the use of the assets representing the long-term business fund for any purpose other than that business, except in respect of any surplus in the value of the assets over the amount of the liabilities. A mortgage or charge created in contravention of this prohibition was void. Insurance companies were prohibited from declaring a dividend at any time when the value of the assets representing the long-term fund was less than the amount of the liabilities attributable to that business.

103 Where long-term policyholders of any class were entitled to participate in an established surplus (and an amount had been allocated to them in respect of the last preceding surplus), a‘relevant minimum’ amount was required to be allocated to those policyholders before any part of the surplus could be applied for purposes other than the long-term business⁶⁰ (section 9).

104 The Secretary of State was empowered to prescribe a limit on the value of transactions conducted by the insurance company or any of its ‘subordinate companies’⁶¹ with persons connected⁶² with it (calculated by reference to a percentage of the credit on the long-term fund). The effect of this provision was not to render any transaction unenforceable between the parties to it (section 10). However, contracts entered into by an insurance company which created a liability of an amount which was uncertain at the time the contract was entered into were rendered void by section 11, unless exempt by regulations.

Powers of intervention and the introduction of PRE

105 Sections 1225 of the ICAA 1973 contained provisions intended to expand and make more effective the powers of intervention given by the CA 1967 which, by that time, were considered to be too narrow and inflexible to address the wide variety of circumstances which could arise.

106 The intervention powers under the 1973 legislation fell into two categories: first those, as under the CA 1967 but expanded, which were designed to address readily foreseeable circumstances; and second a ‘sweepingup’ provision intended as a safety net to enable the Secretary of State to intervene in any other circumstances where the interests of policyholders required it but which could not be identified in advance⁶³ .

107 As a basis for the sweepingup provision, DTI officials involved in the preparation of the Bill had ‘commandeered’ an expression which had been used in an actuarial context (and apparently with a different purpose in mind⁶⁴).

108 As noted above, the expression ‘policyholders’ reasonable expectations’ had been suggested for inclusion in a clause to be inserted in the CA 1967 in 1971, but the proposal was not pursued at that time⁶⁵. The expression was included in the instructions to Parliamentary Counsel and found its way into the Bill which preceded the ICAA 1973. The interests of future policyholders were also drawn within the net of protection in the drafting of the 1973 legislation.

109 There had been some debate between GAD and the DTI about the practical implications of incorporating what was seen as a wideranging test for government intervention, in terms of the capacity and resources which would be required to monitor the need for reliance upon it, as well as concern among Ministers that there would be grounds for increased criticism of them when the inevitable failure of an insurance company occurred notwithstanding its existence.

110 However, I have not traced any record of detailed consideration having been given, prior to the enactment of the 1973 Act⁶⁶, to whether the expression would be difficult to interpret or apply in practice, or what implications (if any) this test might have if the interests of various classes of long-term policyholder were to conflict, although it was acknowledged that the action needed to protect future policyholders as opposed to present ones might differ⁶⁷. It was, as the government official proposing the clause indicated, an expression suggested ‘notwithstanding lawyers’ objections to lay competition’⁶⁸. It is conceivable that some benefit was perceived in its imprecision in terms of providing wide discretion for the regulator should it wish to intervene⁶⁹, but presenting difficulties for anyone seeking to compel it to do so.

111 PRE were built into the drafting of the ICAA 1973 in two ways. First, as one of the grounds on which any of the specific powers of intervention under sections 1321 might be used (section 12(1)(a)); and second, as an integral part of the most wideranging of the intervention powers under which the Secretary of State could require the company to take ‘such action as appears to him to be appropriate …’ (under section 21), if the specific measures in the preceding sections of the Act could not, alone, appropriately achieve the statutory objective of section 21.

112 The notes on clause 11 of the Bill when introduced in the Lords (subsequently renumbered as section 12 of the ICAA 1973) explained that the reference to PRE took account of the extensive participation of with-profit policyholders in modern long-term insurance profits.

113 It was suggested that with-profits policyholders might pay double the premium of nonprofit policyholders in order to participate in the future profits of the company. It was stated that, whilst it was reasonable to expect that the proceeds under the policy would be considerably greater than the basic sum assured under the contract (unless the policyholder died shortly after the policy was taken out), it was not reasonable to expect that the current bonus rate would be maintained come what may, although it would seem odd if only trivial bonus increases were awarded in return for substantially increased premiums. It was noted that companies issuing with-profits policies typically allocated with-profits policyholders ninetenths⁷⁰ or more of the profits but that the company normally retained discretion to vary the proportion.

Section 12 – grounds for intervention under sections 1321

114 Section 12 dealt with the grounds on which the intervention powers conferred on the Secretary of State in sections 1321 could be exercised and imposed limitations on reliance on section 21 (which related to PRE). In summary the grounds under section 12(1) were:

1. that the Secretary of State considered the exercise of the power to be desirable for protecting policyholders or potential policyholders against the risk that the company might be unable to meet its liabilities, or (in the case of long term business) to fulfil the reasonable expectations of policyholders or potential policyholders;

2. that the company (or a parent or subsidiary) had failed to satisfy specified statutory obligations under the ICA 1958, Part II of the CA 1967 or the 1973 Act;
3. that the company had provided misleading or inaccurate information to the Secretary of State for any purpose under the ICA 1958 or Part II of the CA 1967;
4. that the Secretary of State was not satisfied with the company’s reinsurance arrangements; or
5. that a ground existed which, under section 2 of the ICAA 1973 relating to the involvement of ‘unfit persons’ in the company, would prohibit authorisation being issued if it were to be applied for.

115 A further ground for intervention was specified in section 12(2). In the case of a company carrying on long-term business, the Secretary of State was empowered to intervene if he was not satisfied that the value of the assets representing the long-term fund exceeded the amount of the liabilities of its long-term business, with the value of assets and the amount of any liabilities to be determined in accordance with regulations⁷¹ .

116 In respect of the power to require the company to produce documents under section 20 of the ICAA 1973, an additional ground for exercise was specified: that the Secretary of State considered it desirable in the general interests of those who were or might become policyholders (section 12(3)).

117 The Secretary of State was given greater flexibility in exercising his powers of intervention in relation to insurance companies which had only recently obtained authorisation. In respect of companies which had obtained authorisation within the preceding five years (or those for which there had been a change of control within that period), the powers under sections 1318, 20(1) or 21 were exercisable whether or not any of the grounds summarised in paragraph 114 above existed, but any restriction imposed could last for no more than ten years (section 12(4)).

118 An express limitation was imposed on the wide ‘safety net’ power under section 21 concerning PRE: that this power could only be used if its purpose could not be appropriately achieved by relying on one of the specific powers under sections 1320, or could not be so achieved by reliance on those powers alone.

119 There was an express requirement (in section 12(6)) for the Secretary of State to state the grounds on which he was exercising any of the powers under sections 1321, unless he had given notice of the proposed exercise of the power under section 22 (in relation to section 13, restrictions on new business) or section 23 (unfit persons).

Section 13 – restrictions on new business

120 The intervention power under section 13, to impose restrictions on effecting new contracts of insurance or varying existing contracts, was said to permit the Secretary of State a more discriminating means of restricting new business than under the former provisions of section 68 of the CA 1967. A restriction under section 13 might apply to only part of an insurance company’s business, through specifying by description the contracts to which it was to apply.

Sections 14, 15 and 16 – requirements about investments, maintenance of assets in the United Kingdom and custody of assets

121 Section 14 gave power to the Secretary of State to require a company not to make investments of a specified class or description and to realise assets of a specified class or description. This was intended to give greater flexibility to apply such a requirement to a particular investment if necessary. Such requirements could be framed so as to apply only to assets representing the long-term fund (or only to other investments).

122 Section 15 empowered the Secretary of State to require that the company hold in the UK assets of equal value to the whole or a specified proportion of its UK liabilities. Unlike the former provisions of section 80 of the CA 1967 the grounds for exercise of this power were not limited to cases of threatened insolvency, but included all the grounds listed in section 12 (in common with other intervention powers under the ICAA 1973 summarised below).

123 Where a requirement had been imposed by the Secretary of State under section 15 for the maintenance of assets in the UK, he could impose an additional requirement that the assets be placed in the custody of a person approved by him. The custodian was to hold the assets as trustee for the company (section 16).

Section 17 – limitation of premium income

124 Section 17 elaborated on the former requirement of the CA 1967, section 80(1)(d) to enable the Secretary of State to impose a limitation on the new business taken on by the company, by restricting the aggregate amount of premiums it was to receive during a specified period. Separate restrictions could be imposed as regards life and general business. The limitation could be applied to premiums net of reinsurance costs.

Section 18 – special actuarial investigations

125 A further form of intervention relied upon the appointed actuary. The Secretary of State could require any company which carried on long term business to cause its actuary to make an investigation into its financial condition (including a valuation of its liabilities) in respect of the whole or any part of its long-term business, as at a specified date; to cause an abstract of the appointed actuary’s report of the investigation to be made and to prepare a statement of all or part of its long term business as at the date specified.

126 The valuation was to be conducted in accordance with ‘any applicable valuation regulations’⁷². The form and content of any abstract or statement were to be the same as those required under section 5 of the ICA 1958 (namely, as prescribed in the ICAF Regulations 1968).

Sections 19 and 20 – acceleration of accounting information and production of documents

127 The Secretary of State could require that the accounting documents which were to be deposited with him under section 8 of the ICA 1958 should be submitted up to three months earlier than their due date, provided at least one month’s notice was given to the company. Periodic statements required under section 5 of the ICAA 1973 could be required earlier than the originally specified date.

128 Section 20 empowered the Secretary of State (or a person authorised by him) to require the company (or any person appearing to him to be in possession of them) to furnish him with such books and papers⁷³ as the Secretary of State might specify, and authorised the Secretary of State to take copies of them. The Secretary of State could also require the person in possession of the documents or any director (present or past), controller or auditor employed by the company to provide an explanation of any item or, if any items were not produced, to state (to the best of the person’s knowledge and belief) where those items were. Statements made in compliance with these requirements could be used in evidence against the person who made them.

Section 21 – residual power to impose requirements for the protection of policyholders

129 This short section provided:

The Secretary of State may require a company to take such action as appears to him to be appropriate for the purpose of protecting policy holders or potential policy holders of the company against the risk that the company may be unable to meet its liabilities or, in the case of long term business, to fulfil the reasonable expectations of policy holders or potential policy holders. (Emphasis added.)

130 As noted, this was a power of ‘last resort’. The Secretary of State’s powers under section 21 could only be relied upon if the purposes of the section could not be appropriately achieved through reliance on the powers in sections 1320 or by reliance on those powers alone.

Notice of proposed exercise of powers

131 Under section 22, the Secretary of State’s power to impose a restriction on entering into new business under section 13 could only be exercised if he had given the company written notice that he was considering exercising that power and of the ground on which he was considering exercising the power and had invited the company to make written representations to the Secretary of State and (if the company so requested) oral representations to an officer of the DTI appointed for this purpose.

132 Section 22 did not apply if the proposed ground for exercising the power was that under section 12(1)(e) (involvement of an unfit person in the company), unless that person was a controller of the company, in which case the controller was also to be served with notice.

133 Section 23 provided for prior notices in cases where the proposed ground for exercising any of the intervention powers under sections 1321 was that under section 12(1)(e) and the person being considered under the unfitness requirements was a person other than a controller of the company.

134 Notice was to be served first on the person concerned, setting out the grounds on which such action was being considered and inviting them to make representations and (unless the Secretary of State decided, having considered those representations, not to exercise intervention powers), an equivalent notice was then required to be served on the company, identifying the grounds, inviting representations and specifying the powers proposed to be exercised.

Power to rescind or vary requirements imposed and obligation to publicise

135 Under section 24, the Secretary of State was given power to rescind or vary at any time a requirement imposed by sections 1321. Five years after its imposition, a requirement could only be relaxed through variation.

136 Notice of imposition, rescission or variation of a requirement under section 13 (debarring a company taking on new business) was to be published in the London and Edinburgh Gazettes and in such other ways as the Secretary of State considered expedient for notifying the public. Written notice of a requirement in respect of the custody of assets by an approved person under section 16 (or its variation or rescission) was to be served on the registrar of companies.

Power to bring civil proceedings

137 Section 25 extended the general power of the Secretary of State under section 37 of the CA 1967 to bring civil proceedings on behalf of a body corporate where it appeared to him that such proceedings ought, in the public interest, to be brought. In relation to insurance companies, this power also arose in relation to information or documents obtained under the ICA 1958 or the CA 1967 (and not just in respect of the information and documents specified in section 37 of the CA 1967 which applied to bodies corporate generally).

Transfer of long term business

138 Sections 26 and 27 updated the provisions of section 11 of the ICA 1958 in so far as it applied to the transfer of long-term business between insurance companies. In the absence of these statutory provisions, the consent of every policyholder would be required before any transfer could be effected. Section 26 provided for either the transferor or the transferee company to petition the court⁷⁴ to sanction a transfer scheme and prohibited the scheme being carried out unless an order was made. The petition was required to be accompanied by a report from an independent actuary on the terms of the scheme.

139 Publication and notification requirements had to be fulfilled, including a requirement to provide long-term policyholders with a summary of the independent actuary’s report indicating the likely effects of the scheme for them. The court was prohibited from making an order sanctioning the scheme unless satisfied that the transferee company was, or immediately after the making of the order would be, authorised to carry on long-term business of a class or classes to be transferred under the scheme.

140 Both the Secretary of State and any person ‘who alleges that he would be adversely affected by the carrying out of the scheme’ were entitled to be heard on the petition. In making an order under section 26, the court could make provision for the transfer of the whole or any part of the transferor’s undertaking and liabilities, the allocation or appropriation of shares etc. by the transferee, the continuation of legal proceedings, the dissolution (without winding up) of the transferor company and incidental and consequential matters. Office copies of the court order were to be deposited with the Secretary of State by the transferee company.

Insolvency and winding up

141 Sections 2931 were intended to improve the procedures for winding up insurance companies, with particular reference to the position of long-term policyholders.

142 Section 28 expanded on the provisions relating to the margin of solvency under section 13 of the ICA 1958 which applied to companies conducting general business, by empowering the Secretary of State to amend section 13 by order to substitute amounts specified or determined in accordance with that section. Specific provision was made for the assessment of the margin of solvency for insurance companies which carried on long-term business in addition to general business, by specifying how the amount of its long-term business liabilities was to be calculated (section 28(5)).

143 Sections 2931 contained new windingup provisions. The Secretary of State was empowered to present a petition for the winding up of an insurance company subject to the ICA 1958 where it appeared to him that it was ‘expedient in the public interest that the company should be wound up … if the court thinks it just and equitable for it to be so wound up’. This power did not apply if the company was already being wound up by the court. Where the petition for winding up had been presented by another person, a copy of the petition was to be served on the Secretary of State who was entitled to be heard on the petition. Provision was made for the general rules about winding up under section 365 of the Companies Act 1948 to include rules relating to the determination of the amount of an insurance company’s liabilities to policyholders of any class or description.

144 Section 30 applied specifically to the winding up of companies subject to the ICA 1958 which conducted long-term business and prohibited such a company from being wound up voluntarily. In general, the assets representing a long-term fund could only be made available to meet the company’s liabilities in respect of its long-term business (section 30(3)(a)). Rules, additional to those under section 365 of the Companies Act 1948, could be made to provide for such matters as the identification of assets and liabilities attributable to the long-term and other business of an insurance company.

145 Where money or property had been recovered by the company through an order under section 333 of the Companies Act 1948 (misappropriation by directors) in respect of its long-term business, the court was to include in the order a direction that the money, property or contribution be treated as assets of the long-term fund.

146 Section 31 introduced a new measure to provide for the continuation of the long-term business of an insurance company in liquidation. The liquidator was required to carry on that business with a view to its being transferred as a going concern to another insurance company (either existing or specially formed) unless the court ordered otherwise.

147 The liquidator was empowered to apply to the court to appoint a special manager of the long-term business if the liquidator was satisfied that the interests of the creditors required it. If it thought fit, the court was empowered to reduce the amount of the contracts made by the company in the course of carrying out its long-term business⁷⁵. On the application of the liquidator or of a special manager or of the Secretary of State, the Court could also appoint an independent actuary to investigate the long-term business of the company and to report on the desirability or otherwise of that business being continued and on any reduction in the contracts that might be necessary for its successful continuation.

Valuation regulations

148 Under section 32, provision was made for the value of assets and the amount of liabilities to be determined in accordance with valuation regulations (made by the Secretary of State). Such regulations could make different provision in relation to different cases or circumstances. The regulations made under these provisions for the purpose of valuing assets are referred to below. No regulations for the determination of liabilities were made under the ICAA 1973. This was first addressed in the Insurance Companies Regulations 198176 (ICR 1981), Part VI.

Changes of director, controller or manager

149 Before appointing a managing director or chief executive an insurance company was required to serve the Secretary of State with written notice stating that it proposed to appoint a person to the position and providing prescribed particulars.⁷⁷

150 The Secretary of State was given a three month period to give notice of his objection to the appointment on the grounds that the person concerned was not a ‘fit and proper person to be appointed to the position in question’. The effect of such a notice served by the Secretary of State within the three month time limit was to debar the company from making the appointment⁷⁸ .

151 The Secretary of State was not obliged to disclose to the company or to the person concerned any particulars of the ground on which he was considering service of notice of objection. Provision was made for representations to be made by the company or the person concerned in respect of a notice of objection given by the Secretary of State (section 33).

152 Section 34 made similar provision to that in section 33 in respect of persons who were proposed to become a ‘controller’ of an insurance company other than as the managing director or chief executive. This applied to the third category of ‘controller’ defined in section 2, namely, a person in accordance with whose directions or instructions the directors of the company (or its parent company) were accustomed to act or a person who alone or in association with others was entitled to exercise, or controlled the exercise of, one third or more of the voting power at a general meeting of the company or its parent.

153 A person who became, or ceased to be, a controller of an insurance company was required to give the company seven days’ written notice of that fact and of such other matters as might be prescribed. Those who became a director or manager of an insurance company were to notify the company in writing of such matters as might be prescribed. The company was required to give the Secretary of State written notice of anyone becoming or ceasing to be a director, controller or manager of the company (section 35).

154 The involvement of a person in an insurance company whom the Secretary of State considered was not a fit and proper person to be a director, controller or manager of the company was one of the grounds on which the Secretary of State’s powers of intervention were exercisable (section 12(1)(e) of the ICAA 1973, see paragraph 114(e) above).

Miscellaneous provisions (sections 3638 and 4247)

155 Section 36 required the Secretary of State to deposit with the registrar of companies certain of the documents which had been deposited with him by an insurance company under the requirements of the ICA 1958 and the ICAA 1973.

156 Under section 37 of the ICAA 1973, the Secretary of State was empowered, on the application of an insurance company or with its consent, to treat certain business of the insurance company as either being or not being ordinary long-term insurance business.

157 Section 38 provided the Secretary of State with the power to disapply specified statutory provisions of the ICA 1958 and the ICAA 1973 or to modify those provisions through a direction made by order. (Comparable powers had been given to the BT under sections 92 and 93 of the CA 1967.)

158 In consequence of recommendations made by the Scott Committee, section 42 of the ICAA 1973 provided that a person making a misleading statement, promise or forecast to induce a person to enter into a contract of insurance would be guilty of an offence⁷⁹. Sections 44 to 46 dealt with the new ‘coolingoff’ period provisions. They required an insurance company to provide a statutory notice, by post, to any proposed long-term policyholder containing prescribed information.

159 A notice of cancellation was required to be annexed to the statutory notice, stating the person’s right to withdraw from the transaction within a specified period. A new power to make regulations was included in section 47 in respect of ‘linked long-term policies’ (i.e. those under which the benefits were wholly or partly determined by reference to the value of, or income from, property).

Offences and penalties

160 Section 52 provided for (and extended previous provisions in respect of) offences for noncompliance with the requirements of the insurance legislation, including the new requirements relating to the separation of assets and liabilities attributable to long-term business and the application of the assets of a company with such a business under sections 79.

The First NonLife Directive 73/239/EEC

161 Two days before the ICAA 1973 received Royal Assent, an EEC directive on insurance was made (73/239/EEC, 23 July 1973, the First NonLife Directive). Although this Directive expressly excluded life assurance, it provided a ‘foretaste’ of the extent to which UK legislation on insurance would be affected by the need to remove restrictions on the establishment of insurance providers from other member states and to harmonise supervisory legislation.

162 One of the main features of the First NonLife Directive was the requirement for insurance companies to possess a supplementary reserve, known as the ‘solvency margin’, represented by free assets in order to make provision against business fluctuations, and for this solvency margin to be calculated on a uniform basis throughout the EEC.

163 The First NonLife Directive was implemented through a series of statutory instruments made in 1977 to amend the Insurance Companies Act 1974 in respect of nonlife business and its application to companies from other EEC member states. It was not until 1979 that a comparable directive was made in relation to life assurance (79/267/EEC, 5 March 1979, referred to below).

The Insurance Companies Act 1974

164 The Insurance Companies Act 1974 (ICA 1974) came into force, subject to ‘transitory’ provisions⁸⁰, on 31 August 1974. It was a consolidating Act to amalgamate almost the whole of the ICA 1958, the relevant provisions of the CA 1967 and the ICAA 1973, and to repeal the earlier insurance legislation.

Subordinate legislation following on from the Insurance Companies Amendment Act 1973 and Insurance Companies Act 1974

Identification of long-term assets and liabilities

165 To give effect to the requirements of sections 7(3) and (4) of the ICAA 1973, the Insurance Companies (Identification of Long Term Assets and Liabilities) Regulations 1973⁸¹ were brought into force on 1 January 1974. They included an obligation on the company to deposit a certificate with the Secretary of State indicating that the required arrangements had been made.

Valuation regulations

166 Section 32 of the ICAA 1973 (section 78 of the ICA 1974) provided for regulations to be made in relation to the determination of the value of assets and the amount of liabilities, in any case in which the value or amount was required by any provision of the Act to be determined in accordance with valuation regulations’.

167 The first set of valuation regulations made for this purpose were the Insurance Companies (Valuation of Assets) Regulations 1974⁸² which were brought into operation on 1 February 1975. As their name suggests, they dealt solely with the valuation of assets. They made provision for the manner or basis on which such items as shares in dependent companies, debts and other rights, land, equipment and other shares, investments and assets were to be valued.

168 The value of certain assets was to be reduced or disregarded in the asset valuation. These regulations were revoked and replaced in 1976 and the replacement regulations were then amended to introduce various refinements, for example to impose limitations on the extent to which the value of certain descriptions of asset could be brought into account⁸³ .

169 In relation to the determination of the amount of liabilities, it appears that despite attempts to draft such regulations⁸⁴, no such regulations were made under the 1973 or 1974 Acts. As noted, valuation regulations in relation to liabilities were eventually included in ICR 1981.

Changes of Director, Controller or Manager

170 In 1975, regulations were made under the ICA 1974 to prescribe the information to be supplied to the Secretary of State regarding any person proposing to become a ‘controller’, director or manager of an insurance company and when any person ceased to be in such a position⁸⁵. The 1975 Regulations were superseded in 1978⁸⁶, to require additional information to be provided and in the light of exceptions to the legislation on rehabilitation of offenders, which required spent convictions to be disclosed.

Amendments to the Insurance Companies (Accounts and Forms) Regulations 1968

171 The ICAF Regulations 1968 were amended in 1975⁸⁷ to take account of the requirements for the separate identification of assets and liabilities attributable to long term business (by that time, included in section 23 of the ICA 1974) and for assets to be valued in accordance with any applicable valuation regulations, such regulations having by then been made at least in relation to the valuation of assets⁸⁸. The ICAF Regulations 1968 were amended on four further occasions to take account of updated valuation regulations and other changes in the related legislation⁸⁹ before they were revoked⁹⁰ with effect from 1 January 1981.

Guidance for Appointed Actuaries – the first version of GN1

Introduction

172 Actuaries had played an important part in the management of life assurance companies in the UK long before the enactment of the ICAA 1973⁹¹. It has been noted that the underlying approach of the legislation, that insurance companies should be free to manage and develop their businesses as they thought fit provided that the financial condition of the company satisfied certain financial standards, placed considerable reliance on the work of actuaries, since those standards had largely to be actuarially determined⁹² .

173 It has been said that the regulatory system in the UK was not fully codified in legislation, but instead it relied, in significant part, on the professional responsibilities of actuaries. It has been suggested that in doing so it could be ‘more flexible, less onerous on management, and cheap to run’⁹³ .

174 The status of the appointed actuary within a life office varied considerably between individual companies⁹⁴. There was no requirement that the appointed actuary should or should not hold any particular post in the company⁹⁵ and some appointed actuaries were consultants rather than company employees. Later, the appointed actuary might also have been the ‘reporting actuary’ for the purpose of the company’s accounts prepared to comply with the Companies Acts when the relevant requirements were introduced in 1993⁹⁶ .

175 It appears that GAD’s initial reservations about the resource implications for GAD of introducing such a wide ranging test for intervention as that in relation to PRE were at least partially resolved in practice by leaving the detailed ongoing responsibility for considering PRE with the appointed actuary (eventually as an explicit matter to be taken into account in preparing valuations), with GAD continuing to base its scrutiny (undertaken on behalf of the DTI) on the regulatory returns and identifying issues relating to PRE in that way.

176 Prior to the enactment of section 3 of the ICAA 1973 (which required insurance companies to appoint an actuary and to notify the DTI of the appointment), companies had only to produce actuarial valuations at three yearly intervals⁹⁷. Even under the 1973 Act there was no requirement for the continuous involvement of an actuary.

177 However, following the insolvency or threatened insolvency of several life offices during 1974⁹⁸ despite the introduction of the ICAA 1973, further action was considered necessary. In part, this took the form of the Policyholders Protection Act 1975. But as far as supervision of insurance companies was concerned, no new primary legislation was implemented at this stage. Instead, following discussion within the actuarial profession, the F&IA agreed to issue additional guidance to actuaries on the role of the appointed actuary in relation to long-term insurance business.

178 The guidance in GN1 (which described the general duties and responsibilities of the appointed actuary) and the later guidance in GN8 (on the technical basis of actuarial valuations) were seen as key elements in the regulatory framework which ‘buttressed’ the regulations⁹⁹ made under the various Acts, albeit that they did not amount to ‘statutory guidance’. In later years, the appointed actuary was required to certify, as part of the annual returns, whether the practice standard guidance notes had been fully complied with¹⁰⁰. Compliance with GN1 (and in later years GN8) was ‘mandatory’ which meant that departure from the guidance without good reason could lead to disciplinary action against the actuary, including dismissal from the profession¹⁰¹.

Guidance Note 1: Actuaries and long-term Insurance Business

179 The first version of this guidance note, known as ‘GN1’, was issued by the F&IA on 1 May 1975. It stressed the importance of the role of the appointed actuary in ensuring the financial soundness of a company ‘and the reputation of the profession’. Whilst stating that it was ‘no more than a guide’, it was made plain that it outlined a framework within which the appointed actuary was expected to work at all times and that failure to do so without justification would be regarded as prima facie evidence of unprofessional conduct.

Roles of the person appointed as actuary

180 The contents of GN1 illustrate the complex position in which an appointed actuary must have found himself¹⁰²: owing duties to his profession (‘upholding its standards… in the public interest’), to the company which appointed and paid him, and as the guidance put it, to the DoT¹⁰³ ‘by reason of his statutory duties, which arise from the Department’s supervisory functions aimed at the protection of policyholders’.

181 The guidance accepted that the appointed actuary might have a separate, executive, role within the company, but indicated that in his capacity as appointed actuary he would have no executive authority. The appointed actuary would, however, have an advisory role and should have direct access to the board of directors ‘having regard to the paramount importance of his advice in the context of long-term business’.

182 If the appointed actuary was concerned at a course of action being pursued by the company which was likely to lead to him withholding a certificate in a normal form, he was first obliged to advise the company; but if the company persisted notwithstanding his advice, he was then required to advise the DoT, having so informed the company¹⁰⁴ . It is implicit that the appointed actuary’s position would become more complex and difficult in a situation where the company was running into difficulties¹⁰⁵.

Creation of a continual duty of the appointed actuary

183 Under section 14 of the ICA 1974 the appointed actuary’s responsibility was to carry out and report upon the financial condition of the life office (including a valuation of its liabilities) at specified intervals, but the guidance imposed a greater obligation on the actuary. It stated that it was the appointed actuary’s duty ‘to take all reasonable steps to ensure that he is, at all times, satisfied that if he were to carry out such an investigation, the position would be satisfactory’ (emphasis added).

Obtaining information and data from the company and issues to be considered

184 The guidance in GN1 dealt with the information the appointed actuary would need to fulfil his task and stressed the need for him to ensure that the company provided him with correct and complete data, including obtaining written assurances from the company if necessary. It noted that the company’s financial position was particularly affected by:

1. the premium rates on which existing business had been, and current business was being, written;
2. the nature of the contracts in force and currently being sold, with particular reference to all guarantees;
3. the existing investments and the continuing investment policy;
4. the marketing plans, in particular the expected volumes and costs of sales;
5. the current and likely future level of expenses; and
6. the extent of the company’s free estate¹⁰⁶ .

185 A reference to reinsurance arrangements was added to the above list of factors particularly affecting a company’s financial position in paragraph 4.2 of version 1.1 of the Guidance Note issued for the period 19781979.

Premium rates and terms of contracts

186 A ‘prime responsibility’ of the appointed actuary was to satisfy himself that the premium rates being charged for new business were appropriate in terms of being sufficient to enable the company in due course to meet its emerging liabilities¹⁰⁷ .

187 It was stated that the appointed actuary ‘may need to have regard to the provisions of section 28(1)(a) of the Insurance Companies Act, 1974¹⁰⁸’, a reference to the first ground on which the Secretary of State’s intervention powers under the legislation would be exercisable, namely where he considered it desirable for protecting policy holders or potential policyholders against the risk that the company may, in the case of long-term business, be unable to fulfil the reasonable expectations of policyholders or potential policyholders (the PRE ground).

188 It was acknowledged that a statement that a premium rate would be sufficient could not be an absolute statement as it would inevitably be dependent on future events. However, it was stated that the required judgment would need to be based on the use of sound techniques and that attention should be specially drawn to (among other things) ‘contracts involving various options’.

Actuarial investigations

189 In relation to actuarial investigations, the appointed actuary was to satisfy himself as to the existing business by considering the liabilities, the corresponding assets and their interrelationship. He was to use liability valuation methods that were appropriate to the contract in question taking into account not only the principal benefits, but any ancillary guaranteed benefits such as surrender and paidup values and any options.

Role in respect of investment policy (and balance sheet)

190 The guidance made clear that the responsibility for investment policy rested with directors of the company, as did the decision as to the value to be placed on the assets in the balance sheet (GN1 version 1, paragraph 6.4). However, the appointed actuary was to decide whether, in his judgment, the investment policy pursued by the directors was, or could become, inappropriate having regard to the nature and term of the company’s liabilities. If that was the case, the actuary was required to advise the company of the constraints on investment policy necessary to protect the position of policyholders.

Insolvency

191 In relation to insolvency, whilst noting that the problems with which the appointed actuary was to be concerned were again matters of judgment rather than being capable of precise assessment, the guidance stressed that in issues which affected the solvency of the company much more rigorous standards should be applied when exercising that judgment.

192 The guidance noted that the possibilities of insolvency or intervention by the Secretary of State on PRE grounds could arise either from factors within the control of the company or those which were not. If within the control of the company, the appointed actuary’s duty was to assess the limits within which the company must act and advise the company of the necessity for these limits. In relation to external factors which might lead to insolvency, the actuary was required to consider all external factors outside the control of the company and then take whatever action he considered appropriate. It was noted that ‘[t]he profession requires that any appointed actuary should pay the most scrupulous regard to prudent judgment in these matters’.

Appointed actuaries as directors of their company

193 The final section of GN1 dealt with the situation where the appointed actuary was also a director of the insurance company (version 1, paragraph 8). In describing the position of appointed actuaries who were also company directors, GN1 stated (version 1, paragraph 8.0):

It is clearly in the public interest that actuaries should be available to act as directors of insurance companies, particularly those transacting long-term insurance, where by their professional training they are especially fitted to make a useful contribution. The actuary should, however, recognise that the public, and his fellow directors, will assume that he is satisfied as to the way in which the affairs of the company are likely to be conducted whilst he is a member of the Board.

194 GN1 did not comment on the possibility that the appointed actuary might also be the chief executive of an insurance company. This combination of roles was addressed in a paper on the appointed actuary presented to the Institute of Actuaries on 28 November 1988 by the Government Actuary at that time¹⁰⁹. He noted that in ‘small proprietary offices’ this combination of roles was more common than combining the roles of actuary and marketing executive.

195 The then Government Actuary considered that the combination had a number of obvious disadvantages, observing that ‘[t]he Actuary is needed as a check and balance; these functions cannot be combined in one person’ and that all the problems of combining the actuarial function with that of marketing would be present¹¹⁰, but more strongly.

196 The then Government Actuary suggested that it might be supportable to combine the positions of chief executive and appointed actuary while an office was at level (i)¹¹¹ and all seemed to be going well, but the strains inherent in this double role would show up at level (ii). He considered it would seem to become almost impossible and certainly profoundly unsatisfactory at level (iii). He suggested that the combination of these roles should be regarded as a last resort and the use of consultants should always be carefully considered¹¹². He noted that this combination of the roles of chief executive and actuary was also found in a number of leading mutual offices, but indicated that whilst his remarks might still apply in theory:

… the practical situation contains important safeguards. These offices have a well established tradition of actuarial involvement in management at the highest level. The Deputy Actuary, on whom much of the Actuary’s responsibilities will fall, is usually an important figure in the management. While there are of course marketing pressures, the extreme pressure from shareholders for results which may be found in a small and (hopefully) expanding office is not present. The ultimate purpose of supervision, and hence of the Appointed Actuary system, is to protect policyholders, and in a mutual office the Board to which management answers is itself responsible to with-profit policyholders. In spite of these points, though, I feel that the arguments against the combination is strong, and the responsibilities have in fact been separated in several cases in recent years.

197 In the debate which followed the presentation of this paper it was suggested that (in relation to the then Government Actuary’s comments regarding small proprietary companies) a combination of these roles was preferable to the situation where the appointed actuary was well down the pecking order¹¹³.

198 Another member noted that the author had expressed more concern about the situation where the two roles were combined in a small proprietary office rather than in a mutual office. He observed:

Although no mutual office which has its Chief Executive as its Appointed Actuary has got into difficulties it is a less than satisfactory situation. This concentration of power in the hands of one person is akin to the situation where the Chief Executive is also the chairman of the board. The relationship between the Appointed Actuary and the investment management is referred to [in paragraph 3.3.8 of the paper]. It would be preferable to have regular, frequent and documented meetings between these two. This is perhaps an area where GN1 could be expanded.¹¹⁴

Subsequent revisions of GN1

199 During the period under consideration, which runs until December 2001, twelve further versions of GN1 came into force. The revisions to GN1, where relevant, are referred to in chronological sequence below.

The role of the Government Actuary’s Department

200 The then Government Actuary had been actively involved in discussions with the DTI when the Bill which preceded the ICAA 1973 was being prepared, notably in relation to the resource implications of the PRE provisions.

201 One of the effects of the collapse or threatened collapse of a number of insurance companies in 1974 was to highlight the need for effective supervision by the DTI with support from GAD. The size of the team involved in insurance work at GAD began to expand at this time and it has been suggested that a more active approach to supervision began¹¹⁵.

202 Following the introduction of the appointed actuary system under the ICAA 1973, each new appointed actuary was invited for an informal discussion with the Government Actuary once the DTI had been notified of the appointment. This was said to provide an opportunity to establish personal contact and discuss the appointed actuary’s relationship with the company’s board and senior executives.

203 Issues discussed included GN1 and the arrangements in place to ensure compliance, product design, premium setting, investment policy, valuation, data systems and the influence the appointed actuary brought to bear on these matters. It was also said that appointed actuaries were encouraged to get to know the individuals at GAD who would be examining returns and to contact them informally to sound them out or give advance warning of developments¹¹⁶ .

204 Speaking about the role of GAD¹¹⁷ (many years after the introduction of the appointed actuary system) the Government Actuary said:

The most important item in a life insurance company’s returns to the DTI is the report by the Appointed Actuary. Only another actuary can form a proper appreciation of what is going on in the company and whether there are developments which could become serious. The process of examining the returns of life insurance companies is, therefore, delegated¹¹⁸ to GAD. This delegation extends to entering into a dialogue with the company and the Appointed Actuary over any points which need to be clarified in order to understand fully the valuation report and the returns.

205 According to the Government Actuary, although the DTI did not approve individual contracts or products written by insurance companies, the DTI or GAD was sometimes approached by an insurance company to give guidance on how a new form of contract should be classified or to establish whether GAD was satisfied with the way in which the appointed actuary proposed to value that contract. Once contracts had been written, GAD would scrutinise the valuation method and assumptions used by the actuary to ensure that they were prudent. GAD monitored the impact of certain products on the development of the company’s financial position and warned the DTI if it was likely that the company’s margin of solvency would be eroded in the near future¹¹⁹ .

206 There was no specific power within the statutory regime for the statutory regulator (or GAD) to object to the appointment of an appointed actuary (in that capacity) on grounds of fitness or otherwise. It was simply required that the actuary should hold prescribed minimum qualifications (or have been approved by the BT/DTI) and that the Secretary of State should be notified of the appointment and of the name and qualifications of the person concerned.

The Policyholders Protection Act 1975

207 The Policyholders Protection Act 1975 (the PPA 1975), although not part of the prudential regime, is relevant to its overall context. The Act was introduced following the failure or threatened failure of several insurance companies during 1974. Its introduction entailed an acknowledgment that the principle of caveat emptor was not appropriate in relation to decisions concerning the purchase of insurance policies because the information needed to make an informed choice simply was not available to the public¹²⁰ .

208 The PPA 1975 was designed to make provision to protect policyholders in the event that an insurance company carrying on business in the UK was unable to meet its liabilities under an insurance policy. The Act established the Policyholders Protection Board (the PPB) whose functions were to indemnify or otherwise assist policyholders in such circumstances. The PPB was empowered to impose levies on insurance companies and others engaged in the insurance industry¹²¹ in order to finance its expenditure (section 1). The five members of the PPB (and five alternate members) were appointed by the Secretary of State¹²² (Schedule 1), who was empowered to give guidance to the PPB from time to time (section 2).

209 The main powers of the PPB applied to companies permitted to carry on insurance business under the ICA 1974 (‘authorised insurance companies’) and came into play when a windingup order was made by the court or when a resolution for voluntary winding up was passed in relation to an authorised insurance company, provided either such event occurred after 29 October 1974 (section 5).

210 Sections 1012 dealt with the protection of long-term policyholders on a liquidation (for this purpose, ‘policyholders’ included annuitants: see section 32(2)(a) of the PPA 1975 and section 85(1) of the ICA 1974.) The PPB was under a duty to secure that a sum equal to ninety per cent of the amount of any liability to a long-term policyholder of a company in liquidation was paid to the policyholder as soon as reasonably practicable after the beginning of the liquidation.

211 The PPB was also under a duty to make arrangements for securing continuity of future benefits under long-term policies, either by transferring the insolvent company’s long-term business to another authorised insurance company or by arranging for substitute policies to be issued by another authorised insurer. Where it was not reasonably practicable for the PPB to make arrangements to secure continuity, it was under a duty to pay the policyholder ninety per cent of the value attributed to the person’s policy for the purpose of any claim under the winding up as soon as reasonably practicable after the claim was admitted. Where the benefits under the policy appeared to the PPB to be excessive, the matter was to be referred to an independent actuary.

212 As well as intervening in the case of insolvency, the PPB was given powers to assist authorised companies which were in financial difficulties. The PPB could assist by taking measures to secure the transfer of all or any part of the company’s business to another authorised insurer. The PPB also had power to give the company assistance to enable it to carry on business, with power to impose conditions requiring future liabilities and premiums due under a long-term policy to be reduced to ninety per cent of their former amounts (sections 16 and 17).

213 The amount of the levy payable by an insurance company was calculated by reference to its net premium income and was subject to a maximum of one per cent of the income for the previous financial year. The levy (and income in respect of) general business and long-term business were dealt with separately (section 21 and Schedule 3). The levy began to be payable with effect from the financial year commencing on 1 April 1976.

214 The PPA 1975 was amended by the Policyholders Protection Act 1997, although many of the amendments were not brought into force before the 1975 Act was repealed on 1 December 2001¹²³ (and the revisions were instead embodied in the Financial Services and Markets Act 2000 (the FSMA 2000)).

Guidance for actuaries – GN1 version 1.1: 1978

215 Amendments and additions were made to the guidance for actuaries on long-term business in 1978.

216 A comment was included in the introductory section advising appointed actuaries to seek help and advice from their professional body by approaching the Honorary Secretary¹²⁴ if the actuary became doubtful as to the proper course to adopt in relation to a potentially significant problem.

217 A paragraph regarding conflicts of interest was added in the context of considerations affecting an actuary’s decision as to whether to accept an appointment, making it plain that an appointment should not be accepted if the actuary’s financial interests in the company were such that a conflict would arise. However, it was indicated that if ‘temporarily in a special situation’ a conflict of interest arose, the appointed actuary should ask the company to obtain a report from another actuary (who had no such conflict of interest) before the actuary made his or her own report.

218 References to reinsurance arrangements were added to the list of matters to which the appointed actuary would need to have regard in assessing the financial position of the company and in conducting actuarial investigations. The actuary was to advise the company on any necessary modifications to such arrangements to protect the position of policyholders.

219 In relation to the actuary’s required assessment of premium rates and policy conditions, mention was made of the need for the actuary to be satisfied that if a premium basis involved a significant new business strain, the company was able to set up the necessary reserve and the actuary should indicate any limit on new business which might prudently be accepted.

First Life Directive 79/267/EEC 

220 In 1979 the First Life Directive (79/267/EEC of 5 March 1979: the First Life Directive) was issued. Although many of the requirements under the Directive were already reflected in some form in the UK legislation, certain aspects were entirely new to the UK. This Directive was also known as the ‘Establishment Directive’. In essence it was aimed at facilitating freedom of establishment and the harmonisation of rules across the EEC. In particular, it sought to coordinate the financial requirements imposed on companies¹²⁵ carrying on long term business under the prudential regulation regimes of member states. The Directive contained a definition of the long-term insurance business to which it applied¹²⁶, which included life assurance (as further defined) and annuities. long-term and general business were to be separately managed and the authorisation of new composite companies was prohibited.

221 The Directive permitted insurance companies incorporated anywhere in the EEC to establish a head office, branches or agencies in respect of their long term business in any other EEC country, provided that the company obtained ‘official authorisation’ from the member state in question¹²⁷.

222 In the UK legislation, this requirement was provided by means of authorisation issued by the Secretary of State (and eventually required more detailed provision to be included in the legislation to deal with authorisation of insurers from other EEC countries and those from outside the EEC). A company which wished to operate in several member states would require authorisation from each country. Withdrawal of authorisation by the state in which the company’s head office was based would lead to withdrawal of authorisation in other countries.

223 The requirements for an undertaking which was seeking authorisation were set out in article 8. One requirement for authorisation which was new to the UK was that the company should limit its activities to the business of insurance and operations arising directly therefrom. A company seeking authorisation was required to show that it possessed the minimum of the guarantee fund and to submit a scheme of operations (and in some cases, provide proof that it possessed the minimum solvency margin).

224 The Directive required that precise reasons should be given by the regulators in cases where authorisation was refused or withdrawn and there was an explicit requirement that there should be an opportunity for an aggrieved company to apply to the Court¹²⁸ .

225 One important feature of the Directive was that companies were required to maintain specified reserves and margins of solvency calculated in accordance with the Directive.

226 Technical reserves (sufficient to meet the company’s underwriting liabilities), including mathematical reserves¹²⁹, were required to be covered by equivalent matching assets¹³⁰ localised in the country where the activities were carried on, subject to the power of a member state to relax the rules on matching and localisation¹³¹. Regulations made by the member state in which the activities were carried on were to determine the nature of the assets which could be used to cover the technical reserves (including the mathematical reserves) and where appropriate, the extent to which those assets could be so used. Domestic regulations were also to deal with the valuation of assets. Member states could choose to provide for ‘on the spot’ verification of whether the assets representing the reserves complied with their regulations.

227 The required solvency margin could be represented by explicit items, such as capital, free reserves and surpluses in the company’s balance sheet or (to a specified degree and with the consent of the prudential regulator) by implicit items such as a percentage of the present value of future profits, zillmerising and other hidden reserves¹³². In the UK, the regulator was to give consent to reliance on implicit items by means of an order made by the Secretary of State under section 57 of the ICA 1974¹³³ .

228 Articles 19 and 20 provided for, respectively, the calculation of the ‘minimum solvency margin’ and the ‘guarantee fund’ (one third of the minimum solvency margin, at least half of which was to be represented by explicit items).

229 Where a company was unable to cover its required minimum solvency margin, the prudential regulator was to require the submission of a plan for restoration of a sound financial position for its approval¹³⁴. If the margin fell below the level of the guarantee fund, the regulator was to require the submission of a shortterm finance scheme for its approval (and could also restrict or prevent free disposal of assets by the company) ¹³⁵.

230 Article 21.2 of the Directive prohibited member states from restraining the free disposal of assets by an insurance company except in limited specified circumstances. Exceptions applied in relation to the requirement to establish technical reserves covered by matching assets and the localisation of those assets¹³⁶, where the company had failed to comply with provisions envisaged in article 17 (which included rules and regulations made by member states in connection with the establishment of technical reserves, including mathematical reserves)¹³⁷; in the event that the solvency margin fell below the ‘guarantee fund’¹³⁸; and in the event that authorisation of the company was withdrawn¹³⁹. (The extension of these exceptions by the Third Life Directive is referred to in paragraph 497 below.)

231 Article 23 obliged member states to require insurance companies with a head office in their territory to produce an annual account of their financial situation and solvency, covering all types of operation.

232 The First Life Directive harmonised some aspects of insurance regulation and kept them under the control of the member state in which the company’s head office was based¹⁴⁰, whilst other aspects were to be dealt with in every member state in which the company wished to do business¹⁴¹. Certain aspects of insurance regulation were not harmonised, or were not completely harmonised, by this Directive. The amount of the technical reserves (including mathematical reserves) were to be determined according to rules fixed by the member state and regulations made by the country in which the activities were carried on were to determine the nature and value of assets¹⁴² . Member states were to continue to have power to enforce provisions of their ‘domestic’ legislation regarding approval by their supervisory authorities of policy conditions and to prescribe the technical bases for calculating premium rates and technical reserves (including mathematical reserves) and to apply provisions such as those requiring approval by the supervisory authorities of the technical qualifications of directors and the memorandum and articles of companies seeking to become established in their country¹⁴³. (As noted elsewhere, the legislation in the United Kingdom did not impose direct controls on premium rates).

233 Member states were given a period of 18 months from notification of the First Life Directive to amend their national provisions in order to comply, and the amended national provisions were to be applied within 30 months of notification (article 40). As noted below, the provisions of the Directive were implemented in the UK by the Insurance Companies Act 1981 by means of amendments to the ICA 1974 and those amended provisions were subsequently consolidated within the Insurance Companies Act 1982.

Insurance Companies Act 1980

234 The Insurance Companies Act 1980 (the ICA 1980) was enacted to extend the provisions of the ICA 1974 to Northern Ireland, where similar but separate legislation had formerly applied. In order to achieve this, various consequential amendments were made to the ICA 1974 and to other legislation (including the PPA 1975) listed in Schedule 3 to the ICA 1980. The statutory instruments made under the ICA 1974 and earlier legislation listed in Part I of Schedule 2 to the ICA 1980 were also extended to Northern Ireland.

The Insurance Companies (Accounts and Statements) Regulations 1980

235 The Insurance Companies (Accounts and Statements) Regulations 1980¹⁴⁴ (the ICAS Regulations 1980) came into force on 1 January 1981 and applied to accounting years which commenced after that date. Those Regulations substantially revised the format and content of the accounts and returns to be made annually to the DoT¹⁴⁵ pursuant to section 13(1) of the ICA 1974 by insurance companies operating in the UK. They amounted to a full scale revision of the earlier regulations and prescribed some 65 forms for life and nonlife business. The objectives of the changes included:

1. to consolidate the numerous amendments made to the ICAF Regulations 1968;
2. to correct inadequacies in the ICAF Regulations 1968 and to incorporate the margin of solvency requirements for nonlife business arising from the EEC requirements on solvency in the First NonLife Directive;
3. to take account of new thinking on the forms required by long-term business;
4. to increase the information to be provided by the actuary in his or her valuation summary for long-term business; and
5. to add a number of new items of information considered likely to be of use in arriving at an assessment of a company’s position.

236 The ICAS Regulations 1980 prescribed the form and content of the statement of long-term business to be prepared by a company under section 14(3) of the ICA 1974 and of the abstract of the appointed actuary’s report prepared following an investigation under section 14(1). They also made provision for audit, and specified that the auditor must be a person qualified to audit accounts for the purpose of the Companies Acts 1948 to 1976. However, the auditor was not required to audit or report on the abstract of the appointed actuary’s report or related prescribed forms (regulation 19 and paragraph 8 of Schedule 6 to the ICAS Regulations 1980).

237 The appointed actuary was required to give a certificate, to be annexed to the accounts, stating (if it was the case) that in the opinion of the actuary the company had kept proper records, adequate for the purpose of valuing the long-term liabilities; that the actuary was satisfied that the aggregate long-term liabilities did not exceed the value of the assets identified as representing the long-term business; and that the actuary had taken due account of the nature and term of assets and the nature and term of the liabilities in making the statement (regulation 18(b) and Schedule 6, Part II.)

238 Regulation 20 of the ICAS Regulations 1980 prescribed the qualifications required of an ‘actuary’ for the purpose of the ICA 1974¹⁴⁶ and of an appointed actuary under section 15 of that Act. An appointed actuary was required to be a Fellow of the Institute of Actuaries or of the Faculty of Actuaries and to be at least 30 years old. Actuaries who immediately before the ICAS Regulations 1980 came into force held an appointment by virtue of Regulation 15 of the ICAF Regulations 1968 were permitted to continue in their appointment (this applied to any actuary who was not a Fellow of the Faculty or Institute but who came within the former category of ‘such other person having actuarial knowledge as the [BT] may, on the application of the company, approve’).

239 The ICAS Regulations 1980 revoked the ICAF Regulations 1968 and other regulations relating to insurance company accounts and forms (Regulation 23 and Schedule 7). At the time the ICAS Regulations 1980 were made it was known that further revision would be necessary once the First Life Directive was implemented in the UK. The ICAS Regulations 1980 were treated as continuing in force after the enactment of the Insurance Companies Act 1982¹⁴⁷ and were later amended under that Act.

Footnotes

⁴⁵ Notes of a Sessional Meeting of the Institute of Actuaries held on 24 April 1972: JIA 98 (1972) 233250.

⁴⁶ A paper presented to the Institute of Actuaries in 1988 by the then Government Actuary suggested that some 20% of ‘appointed actuaries’ were appointed as consultants rather than as employees of the insurance company: JIA 116 (1989) 27–100 (paragraph 5.1).

⁴⁷ Discussion on the Report of the Committee on Property Bonds and EquityLinked Life Assurance: Transactions of the Faculty of Actuaries (TFA) 34 (1973–1975) 23–48 (page 28).

⁴⁸ The exception was the Committee’s recommendation that, to enable the DTI to act in urgent cases, the one month minimum period of delay whilst representations from the company were considered under the CA 1967, section 68 should be repealed.

⁴⁹ Hansard Debates, House of Lords 8 February 1973, column 1158.

⁵⁰ Under the UK system, in the main, these matters were to be considered by the ‘appointed actuary’. See further below in relation to the guidance given to actuaries of long-term insurance businesses in GN1 as from 1975 (paragraphs 172 et seq) and the role of GAD in scrutinising the valuation methods and assumptions being used, once policies had been written (paragraph 205).

⁵¹ Hansard Debates, House of Lords 8 February 1973, column 1156.

⁵² Hansard Debates, House of Commons 21 May 1973, column 118.

⁵³ In the ICAA 1973 and subsequent legislation, in most cases, the hyphen in ‘long term’ was dropped, other than in the expression ‘ordinary long-term business’.

⁵⁴ For the purpose of the ICAA 1973, ‘policy holder’ was defined by section 33 (1) of the ICA 1958 to mean the legal holder of the policy and in relation to life assurance business, included an annuitant. ‘Policy holder’ was defined in similar terms in the primary legislation up to and including the Insurance Companies Act 1982. Although the legislation mainly refers to ‘policy holders’ as two words, I have not followed this elsewhere in the text except where quoting from the legislation.

⁵⁵ The Secretary of State for Trade and Industry Order 1970 SI No. 1537.

⁵⁶ Section 32 provided for regulations to be made in relation to the valuation of assets and the determination of liabilities. In relation to the valuation of assets, the initial regulations made under the equivalent provision of the ICA 1974 were the Insurance Companies (Valuation of Assets) Regulations 1974 SI No. 2203.

⁵⁷ The Insurance Companies (Changes of Director, Controller or Manager) Regulations 1975 SI No. 959 (made under the regulation making powers of the Insurance Companies Act 1974) prescribed the information to be supplied when a person ceased to be or became a director, controller or manager.

⁵⁸ See the paper by the then Government Actuary on ‘The Appointed Actuary’: JIA 116 (1989) 27100 (paragraph 1.1). During the discussion which followed the presentation of the paper other actuaries challenged this analogy. The view was expressed that the F&IA ‘are not, and never should be, SROs regulating insurance companies’ and that ‘[a]ny attempt to use the profession to regulate insurance companies is unacceptable’ (F.B. Corby at page 82). Concern was expressed about extending the Institute’s guidance as a selfregulating authority if this led to a downgrading of the responsibility of the board (R. Brimblecombe and F.B. Corby at page 90). One actuary described the analogy as ‘not altogether happy’; whilst accepting that in extremis the appointed actuary would have a duty to report concerns about the company to the DTI he stressed the responsibilities of a company’s management team as a whole and not solely those of the appointed actuary in the normal operations of a company, ‘ … the ‘big stick’ of statutory responsibility and the requirements of the Guidance Notes are simply part of the framework of good practice within which the team as a whole operates’ (T.J. Palmer at page 94). See further, footnote 92 regarding a later Government Actuary’s view of the historical role of the appointed actuary and footnote 539 regarding his view of the actuary’s role as at 1994.

⁵⁹ The Insurance Companies (Identification of Long Term Assets and Liabilities) Regulations 1973 SI No. 2064 were made for the purpose of this provision.

⁶⁰ Part of the debate in the lead up to the ICAA 1973 had surrounded the balance of interests between shareholders and policyholders. ⁶¹ Defined in section 10(4) of the ICAA 1973. ⁶² Defined in section 10(5) of the ICAA 1973.

⁶³ See the quotations from the internal paper prepared for the Secretary of State to send to other ministers in December 1972, set out in the Penrose Report, Chapter 13, paragraphs 16 and 17.

⁶⁴ See paragraph 27 above regarding the paper by RS Skerman published in 1966 on a solvency standard for life business and the underlying valuation basis to be used.

⁶⁵ See paragraph 27.

⁶⁶ In the course of the ‘clause stand part’ debate on what was by then clause 12 of the Bill, one Member (Dr John Gilbert MP), drew attention to the lack of any definition of PRE in the drafting, but it does not appear that he received any response on behalf of the government. Some time after enactment, at a Sessional Meeting of the Faculty of Actuaries in 1976, the UnderSecretary of State stated that what expectations might be reasonable in any particular case would have to be determined in the light of the circumstances, but it was the government’s expectation that companies that charged large premiums, loaded for bonuses, would in fact make profits to be shared with their policyholders. However, the government did not envisage general intervention in the amount of surplus to be disclosed by companies or the manner in which it was distributed between policyholders of different classes or of different generations, which would be left to the directors, acting on the advice of appointed actuaries: TFA 35 (19751977) 113 – 136 (at page 115).

⁶⁷ Earl of Limerick moving a drafting amendment to clause 20 during the Lords Committee stage. (The original drafting of ‘the reasonable expectations of policyholders and potential policyholders’ was changed to ‘… policyholders potential policyholders’.)

⁶⁸ DTI memorandum dated 3 November 1971; also referred to in the Penrose Report at chapter 13, paragraph 19.

⁶⁹ In a Presidential Address to the Institute of Actuaries made many years later, the Government Actuary expressed the view that ‘Part of the strength of the relevant DTI power lies in the uncertainty – the actuary can use this to good effect in adopting a professional approach to ensuring equity and value for money for the policyholders’ (BAJ 1, 536).

⁷⁰ Apparently a reference to proprietary life companies (rather than to mutual companies) for which it has been common, but not universal, practice to allocate surpluses in the proportion 90:10 as between policyholder and shareholder funds.

⁷¹ The various regulations made under these requirements are referred to below. In the event, only regulations relating to the valuation of assets and not in respect of the determination of the amount of liabilities were made under the ICAA 1973 or the ICA 1974.

⁷² This appears to be a reference to valuation regulations made for the purpose of section 32, first made under the equivalent provisions of the ICA 1974 in relation to the valuation of assets (but not liabilities) in the Insurance Companies (Valuation of Assets) Regulations 1974 SI 1974 No. 2203.

⁷³ The term ‘books and papers’ was to be construed in accordance with the Companies Act 1948. Section 455 of that Act (the interpretation provision) defined the term as including accounts, deeds, writings and documents (i.e. it was not intended to be an exhaustive definition).

⁷⁴ The High Court in England or the Court of Session in Scotland.

⁷⁵ The expression ‘the amount of the contracts made by the company’ which the court was empowered to reduce under section 31(5) of the ICAA 1974 was not defined in that Act. However, it was defined by the court in Re Capital Annuities Limited [1978] 3 All ER 704 as meaning ‘the sum or sums payable under the contract’. In essence, section 31(5) provided a means by which the court could reduce the magnitude of an insurance company’s liabilities. This provision was reenacted as section 48(5) of the ICA 1974 (and later, as section 56(5) of the ICA 1982). Under section 50 of the ICA 1974 (section 58 of the ICA 1982), the court was empowered to reduce the amount of the contracts of an insurance company which was unable to pay its debts as an alternative to making a winding up order. The extent of the court’s powers under section 50 of the ICA 1974 was considered in the Capital Annuities case, in which it was held that section 50 applied to sums prospectively payable under the company’s current policies as at the date of presentation of the winding up petition. Thus:

1. the court was empowered to reduce sums prospectively payable by the company under its insurance contracts as at the date of the order effecting the reduction;
2. the court could also reduce sums which had been prospectively payable under those contracts as at the date of presentation of the winding up petition, but which had ‘ripened’ into presently payable debts between the date of presentation of the petition and the date of the court order;
3. but the court did not have jurisdiction to reduce debts which had accrued due by the date on which the winding up petition had been presented.

⁷⁶ SI 1981 No. 1654 (see paragraphs 248 et seq).

⁷⁷ The Insurance Companies (Changes of Director, Controller or Manager) Regulations 1975 SI No. 959 were made later under the ICA 1974.

⁷⁸ Section 33(1) stipulated that no insurance company subject to the ICA 1958 should appoint a person as managing director or chief executive of the company unless (a) the company had served the required notice of its proposal on the Secretary of State containing prescribed particulars and (b) the Secretary of State had either given written notice to the company within three months that he had no objection to the person being appointed or the three month period had elapsed without the Secretary of State giving written notice of objection.

⁷⁹ Contracts of insurance were excluded from the application of the Prevention of Fraud (Investments) Act 1958 by section 48 of the ICAA 1973.

⁸⁰ Contained in section 89 of that Act, which preserved the effect of various requirements, directions and other forms of action under the legislation which was being repealed and provided for transition to the new primary legislation.

⁸¹ SI 1973 No. 2064.

⁸² SI 1974 No. 2203.

⁸³ See the Insurance Companies (Valuation of Assets) Regulations 1976 SI No. 87, the Insurance Companies (Valuation of Assets) (Amendment) Regulations 1976 SI No. 2039 and the Insurance Companies (Valuation of Assets) (Amendment) Regulations 1980 SI No. 5.

⁸⁴ It appears that draft regulations relating to long-term liabilities were prepared before those for assets, but the Institute of Actuaries (although not the Faculty) objected to them (letter from GAD to DTI dated 9 October 1973).

⁸⁵ The Insurance Companies (Changes of Director, Controller or Manager) Regulations 1975 SI No. 959.

⁸⁶ By the Insurance Companies (Changes of Director, (Controller or Manager) Regulations 1978 SI No. 722.

⁸⁷ By the Insurance Companies (Accounts and Forms) (Amendment) Regulations 1975 SI No. 1996.

⁸⁸ SI 1974 No. 2203, made for the purpose of section 78 of the ICA 1974, see paragraph 166.

⁸⁹ The further amendment regulations were the Insurance Companies (Accounts and Forms) (Amendment) Regulations 1976 SI No. 549, the Insurance Companies (Accounts and Forms) (Amendment) (No.2) Regulations 1976 SI No. 869, the Insurance Companies (Accounts and Forms) (Amendment) (No.3) Regulations 1976 SI No. 2040 and the Insurance Companies (Accounts and Forms) (Amendment) Regulations 1978 SI No. 721.

⁹⁰By the Insurance Companies (Accounts and Statements) Regulations 1980 SI No. 6: see paragraphs 235 et seq.

⁹¹ In a paper – ‘The Supervision of Life Insurance Business in the United Kingdom’– prepared for a summer school of Le Groupe Consultatif des Associations d’Actuaires des Pays des Communautés Européennes in 1990, the Government Actuary noted (at paragraphs 1.4 and 1.5) that, historically, actuaries had enjoyed a respected position in UK life assurance. Their technical ability, high standards of ethical behaviour, professional discipline and broad view of their responsibilities made them invaluable in the commercial environment. As a result, actuaries had become dominant in the management of life assurance companies; ‘the early attempts at supervisory legislation accepted a central role for the actuary, not just in valuing the liabilities but in monitoring the overall financial strength of the company’, paving the way for the much more recent introduction of their ‘formal position’ (under the ICAA 1973).

⁹² See the paper by the then Government Actuary for the Institute of Actuaries on ‘The Appointed Actuary’ at JIA 116 (1989) 27–100 (paragraph 1.3).

⁹³ The paper referred to in footnote 92, at paragraph 1.9.

⁹⁴ In the case of Equitable, the company’s chief executive was also the appointed actuary for the period 19911997. In December 2000, the Society’s Appointed Actuary was nominated by the company to act as chief executive, following the resignation of the incumbent chief executive. The roles were again split in January 2001, with the Society appointing a new appointed actuary.

⁹⁵ The Corley Report (at paragraph 68) recommended that Guidance Notes issued by the F&IA should require that an actuary resists holding the dual role of chief executive and appointed actuary or any role which compromises his or her ability to fulfil the duties of the appointed actuary.

⁹⁶ See paragraph 550. The expression ‘reporting actuary’ is used to refer to the actuary responsible for calculating the ‘long term business provision’ in respect of a company’s accounts prepared for the purposes of the Companies Acts pursuant to requirements introduced by the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993 SI No. 3246.

⁹⁷ Section 78 of the CA 1967.

⁹⁸ Nation Life became insolvent in 1974 and three other companies were at risk of insolvency during 1974.

⁹⁹ As later described in Annex 1 to the Insurance Division’s (internal) Policy Guidance Notes, Guideline 6.2. Paragraphs 6 and 7 of the Policy Guidance Note explained that regulations 5064 of ICR 1981 were couched in very broad terms requiring the appointed actuary, for example, to determine long-term liabilities on ‘actuarial principles’ and to make ‘proper provision for all liabilities on prudent assumptions’ and went on to explain that: ‘In other words, the regulations do not prescribe precise ways of valuing long term liabilities. The actual amounts to be placed on a company’s long term business, therefore, is for the judgement of the Appointed Actuary in the light of his professional skills, subject to the criteria set out in the 1981 Regulations and further guided by the professional guidance notes issued by [the F&IA in GN1 and GN8]’.

¹⁰⁰ Regarding the consultation paper issued by the DTI in 1990 on strengthening the role of the appointed actuary), see paragraphs 401 et seq.

¹⁰¹ The later versions of GN1 and GN8 were classified as ‘Practice Standards’ by the F&IA (see versions 6.2 and 7.1 respectively, the final versions of the guidance to be overseen by the F&IA). According to the F&IA’s Professional Conduct Standards (version 2.3, paragraph 4.2), a material breach of a practice standard is a ground for referral under disciplinary schemes and strong prima facie evidence of misconduct.

¹⁰² For simplicity I have referred to ‘him’ and ‘his’ in this section as stated in GN1.

¹⁰³ The relevant Government Department between 1974 and 1983.

¹⁰⁴ A footnote to the guidance stated that this duty applied to ‘Fellows of the Institute of Actuaries notwithstanding Basic Principle 2 of its Memorandum on Professional Conduct and Practice’. Other sources indicate that this Basic Principle was entitled ‘Relationship with the Principal’ and introduced a fundamental concept that an employed actuary should advise his or her employer, who might then pass on that advice to the ultimate client (JIA (1980) 107 441486 at page 475). In subsequent versions of GN1, updated references to professional conduct standards appear which, by 1998 (version 5.1), stated that the duty applied ‘notwithstanding the normal requirement of the Memorandum on Professional Conduct of the Faculty and Institute to maintain the confidentiality of the company’s affairs’.

¹⁰⁵ See further paragraphs 193 et seq in respect of the position of appointed actuaries who were also directors of their company.

¹⁰⁶ There is no universally agreed or statutory definition of the term ‘free estate’. In simple and general terms the ‘free estate’ is the company’s uncommitted reserves. One definition is the excess of assets held within the long-term fund over and above the amount required to meet liabilities. The liabilities, for this purpose, include the present value of amounts that are expected to be paid in respect of discretionary benefits, including terminal bonuses, consistent with policyholders’ reasonable expectations. The free estate, which will generally have accumulated over many years, acts as working capital of the business. It is used to support the business by, for example, providing investment flexibility and protection against adverse stock market conditions, facilitating the smoothing of bonuses, generally providing a cushion of extra security against unanticipated events, and supporting the sale of new business. If not required for such purposes, distributions can be made from the free estate and shared between policyholders and (in the case of proprietary life companies) shareholders.

¹⁰⁷ An area which was the subject of government regulation at this time in certain countries outside the UK.

¹⁰⁸ Which by then had reenacted section 12(1)(a) of the ICAA 1973.

¹⁰⁹ JIA 116 (1989) 27100 at paragraphs 4.2.64.2.8.

¹¹⁰ Paragraph 4.2.5 ibid referred to those problems as including underpricing, the inclusion of improper options or underreserving in order to attract high sales.

¹¹¹ These ‘levels’ are explained in paragraph 1.14 of the paper. Level (i) relates to what is needed when things are going reasonably well for a company; level (ii) when things are going badly; and level (iii) where there are really serious difficulties.

¹¹² Ibid, paragraph 4.2.7.

¹¹³ Ibid, R.E. Brimblecombe at page 80.

¹¹⁴ Ibid, A. Spedding at page 88. 

¹¹⁵ Paper by the Government Actuary: JIA 119 (1992) 313–343, paragraph 14.20.

¹¹⁶ Ibid, paragraph 14.21. It is to be noted that the 1984 service level agreement referred to in paragraphs 355 et seq indicates that (at the time of that agreement and ‘in relation to the scrutiny of returns’) there was intended to be a fairly structured approach to any direct contact with appointed actuaries which, ‘at least in the first instance’, was not to be made by GAD.

¹¹⁷ Paragraph 5.3 of the paper given in 1990 referred to in footnote 91.

¹¹⁸ See paragraphs 355 et seq regarding the first of the service level agreements entered into between the DTI and GAD.

¹¹⁹ Paragraphs 11.1 and 11.2 of the paper referred to in footnote 91.

¹²⁰ Statement by the then President of the Board of Trade, quoted in the notes referred to in footnote 12.

¹²¹ In particular, under section 19 of the PPA 1975, the PPB could impose levies on ‘accountable intermediaries’, i.e. those who had received income from a company in liquidation for procuring long-term business for that company.

¹²² Initially, the Secretary of State for Trade.

¹²³ By article 3(1)(a) of the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 SI No. 3649.

¹²⁴ Apparently a reference to the Honorary Secretary of the Faculty of Actuaries or of the Institute of Actuaries, dependent on the body to which the actuary belonged.

¹²⁵ The EEC Directives refer to ‘undertakings’ rather than ‘companies’.

¹²⁶ Article 1.

¹²⁷ Article 6.

¹²⁸ Articles 12 and 26.3.

¹²⁹ i.e. reserves in respect of long-term liabilities specially calculated for regulatory purposes, intended to be determined on a prudent basis (see paragraph 265 and footnote 431 regarding the definitions used in the UK regulations).

¹³⁰ ‘Matching assets’ was defined for this purpose as ‘the representation of underwriting liabilities which can be required to be met in a particular currency by assets expressed or realisable in the same currency’ (article 5(b)).

¹³¹ Article 17.2. Technical reserves were not defined in the Directive, but are taken to mean amounts an insurer must have in place to meet liabilities under policies.

¹³² Article 18. ¹³³ Or later, under the equivalent provisions of section 68 of the ICA 1982 (see paragraph 337).

¹³⁴ Article 24.2.

¹³⁵ Article 24.3.

¹³⁶ Article 17.2.

¹³⁷ Article 24.1.

¹³⁸ Article 24.3.

¹³⁹ Article 26.1.

¹⁴⁰ The ‘head office state’ was responsible for such matters as receipt of annual accounts; verifying that the company’s balance sheet showed the necessary technical reserves in respect of liabilities in all states in which the company operated; certifying matters to other member states in which the company sought authorisation (such as the existence of the guarantee fund or margin of solvency if higher); ensuring the adequacy of solvency margins in respect of the company’s entire business; responsibility for taking action in the event that the company’s solvency margins or guarantee fund did not comply with the minimum requirements; the power to restrict the free disposal of assets by the company where the technical reserves were not sufficient; and the duty to notify other member states in which the company operated if authorisation was withdrawn, leading to withdrawal of authorisation in other countries (articles 23, 17.4, 10.1(b), 18, 24 and 26.1).

¹⁴¹ Every member state in which the company operated (including the head office state) was responsible for giving and withdrawing authorisation to operate in its country; ensuring the sufficiency of the technical reserves localised in its country in respect of the business carried on there; receipt of periodic returns; and some supervisory responsibility in the form of the power to restrict free disposal of assets by the company if the technical reserves were not sufficient, but only after informing the supervisory authorities in the head office state (articles 612, 26, 17, 23.2 and 24).

¹⁴² Article 17.

¹⁴³ Articles 10.3 and 8.3.

¹⁴⁴ SI 1980 No. 6.

¹⁴⁵ The relevant government department between 1974 and 1983.

¹⁴⁶ Pursuant to the definition of ‘actuary’ in section 85(1) of that Act.

 ¹⁴⁷ By virtue of section 17 of the Interpretation Act 1978 and/or a general saving provision in paragraph 22 of Schedule 4 to the ICA 1982.