Phase 3: 1981 - 1990

The Insurance Companies Act 1981 

240 The Insurance Companies Act 1981 (ICA 1981) and ICR 1981 made four months later were designed to put into effect the changes required by the First Life Directive and to incorporate the various changes made as modifications to the ICA 1974 by statutory instruments during 1977 to implement the First NonLife Directive¹⁴⁸.

241 Section 21 of the ICA 1981 inserted new sections 26A26D into the ICA 1974 to provide for the margin of solvency requirements arising from the EEC Directives.

242 The new section 26A of the ICA 1974 required insurance companies which had their head office in the UK (or whose UK business was restricted to reinsurance) to maintain a margin of solvency ‘of such amount as may be prescribed or determined in accordance with regulations made for the purpose of this section’. (Provision was also made for the margin of solvency for companies based in other countries which operated in the UK.)

243 The margin of solvency for the purpose of the ICA 1981 for a company with a UK head office was defined as the excess of the value of its assets over the amount of its liabilities, with the value and amount being determined in accordance with any applicable valuation regulations. If the company failed to maintain the required margin of solvency, the Secretary of State was to request the company to submit a plan to him for the restoration of a sound financial basis.

244 Section 26B dealt with the maintenance of a ‘minimum margin’ and required the company, at the request of the Secretary of State, to submit a shortterm financial scheme if its margin of solvency fell below the amount prescribed or determined in accordance with regulations made for this purpose (reflecting the ‘guarantee fund’ requirements of the Directives).

245 Section 26C made provision for the requirements in relation to companies supervised in other member states. Section 26D gave power for regulations to be made regarding the situation and form of assets, having regard to the currency in which liabilities might be required to be met.

246 Section 17 of the ICA 1981 amended section 14 of the ICA 1974, reducing the interval between the required actuarial investigations from three years to twelve months.

247 The Insurance Companies Act 1982 (the ICA 1982) received Royal Assent in the following year, consolidating the ICA 1974, the ICA 1980 and the ICA 1981. Since the section numbers in the ICA 1982 are of longerterm significance, the provisions of the legislation as revised in the ICA 1981 are not further described here. However, a table showing the main derivations of relevant provisions of the ICA 1982 is attached as Appendix A.

The Insurance Companies Regulations 1981

248 Most of the provisions of ICR 1981 came into effect on 1 January 1982, with certain regulations coming into operation on later dates during 1982¹⁴⁹. ICR 1981 continued in force after the commencement of the ICA 1982 and was subsequently amended under that Act.

249 ICR 1981 was primarily made in connection with the amendments introduced under the ICA 1981 in relation to the EEC Directives, but they also consolidated with amendments the earlier regulations made under the ICA 1974, other than those dealing with accounts and statements (which had been provided for in the ICAS Regulations 1980) and those dealing with Lloyd’s.

250 Parts II and III and Regulations 25 to 30 implemented the provisions of the First NonLife Directive and the First Life Directive. Part II dealt with the margin of solvency requirements (and Part III regulated the making of deposits by companies whose head office was not in a member state).

251 Part VI included, for the first time, provisions on the determination of the amount of long term liabilities. These regulations followed on from a very long period of negotiation and consultation between the DoT, GAD and the F&IA, based on proposals initially put forward by the DTI in 1974¹⁵⁰, which in turn were based on six principles for a good standard of conduct outlined in a paper submitted to the Institute of Actuaries by RS Skerman in 1973¹⁵¹; eventually they were the subject of the joint actuarial working party formed in 1981 referred to below.

252 It has been noted¹⁵² that until 1981, responsibility for ensuring that a prudent value was placed on the liabilities of longterm insurance business was left to the appointed actuary. Prior to the introduction of the solvency margin requirements of the First Life Directive, there were no requirements in the UK legislation regarding the level of free assets held by life insurance companies¹⁵³ .

253 As the solvency margin was based on the excess of assets held over the amount of the technical reserves, it has been suggested that the solvency margin requirements created an incentive for insurance companies to keep the technical reserves to a minimum in order to demonstrate a healthy margin of solvency. In addition, the exercise of certain of the Secretary of State’s powers of intervention became linked to a breach of the new margin of solvency requirements.

254 For these reasons, a more clearly defined minimum standard for the valuation of liabilities was needed. It has been said that providing for this (in Part VI of ICR 1981) strengthened the position of the appointed actuary, who might otherwise have come under increasing pressure from shareholders to weaken the valuation basis.

Margin of solvency

255 Regulations 4 to 8 were made for the purpose of the new section 26A of the ICA 1974¹⁵⁴ in connection with the margin of solvency requirements, in order to prescribe how the margin was to be determined. (Regulations 5 to 8 dealt with the required calculations in respect of various classes of long term business.)

256 Regulation 9 set out the minimum margin for the purpose of section 26B of the ICA 1974¹⁵⁵ and created the concepts of a ‘guarantee fund’ of one third of the required margin of solvency as well as a ‘minimum guarantee fund’ calculated in accordance with Schedule 3 to the Regulations.

257 Regulations 10(4) and 11 to 13 made provision for the valuation of implicit items in respect of:

1. future profits;
2. zillmerising; and
3. hidden reserves.
     

Implicit items were amounts which were not assets available to meet a company’s liabilities, but which Article 18.3 of the First Life Directive permitted to be counted towards meeting the required margin of solvency with the agreement of the supervisory authority, up to specified limits (see paragraph 227).

258 In the UK, implicit items were to have no value except in accordance with an order made by the Secretary of State under section 57 of the ICA 1974. In the event of such an order being made, as regards longterm business, implicit items were to be valued in accordance with Regulations 1113 (Regulation 10(4)).

259 Under Regulations 11-13:

1. an implicit item relating to future profits was to be valued at not more than 50% of the full amount of the future profits calculated in a prescribed manner (Regulation 11);
2. an implicit item in respect of zillmerising was to be valued at no more than a maximum amount calculated in accordance with Regulation 12. Zillmerising was defined in Regulation 3 as meaning the method known by that name for modifying the net premium reserve method of valuing a long term policy by increasing the part of the future premiums for which credit is taken so as to allow for initial expenses; and
3. hidden reserves resulting from the underestimation of assets and overestimation of liabilities (other than mathematical reserves) might, in so far as the reserves were not of an exceptional nature, be given their full value (Regulation 13).

Valuation of assets and determination of liabilities

260 Regulations 3749 (Part V) made provision for the valuation of companies’ assets and reproduced, with amendments¹⁵⁶, the law previously in force (see paragraph 167). Essentially, assets were to be valued at their current market value, although there were limits on the extent to which certain assets could be taken into account in demonstrating that the technical reserves and margin of solvency were covered¹⁵⁷ .

261 Regulations 5064 (Part VI) which set out principles for the determination of liabilities were new. Those Regulations were of particular importance in relation to the required annual actuarial valuation¹⁵⁸ and the determination of the solvency margin¹⁵⁹ .

262 Subject to the detailed requirements of subsequent regulations in Part VI of ICR 1981, the basic requirement in Regulation 52 was that the amount of the liabilities of a company conducting either long term or general business should be determined ‘in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate for insurance companies’, taking account of all contingent and prospective liabilities (other than liabilities in relation to share capital).

263 Regulation 54 required that actuarial principles be used for the determination of the amount of the long term liabilities other than those which had fallen due for payment before the valuation date (and, where Regulation 54 applied, actuarial principles would, in the event of any inconsistency, take precedence over the generally accepted accounting and other methods).

264 There were no financial reporting standards specifically for insurance contracts until 2004. An International Financial Reporting Standard for Insurance Contracts (IFRS 4) was issued in March 2004 and the (UK) Accounting Standards Board issued a Financial Reporting Standard for life assurance business (FRS 27) in December 2004, the latter in response to criticisms made in the Penrose Report. These standards still left certain aspects for further consideration.

265 ‘Long term liabilities’ were defined in Regulation 50 as meaning ‘liabilities of an insurance company arising under or in connection with contracts for long term business’. The term ‘mathematical reserves’ was defined in Regulation 2 as meaning ‘the provision made by an insurer to cover liabilities (excluding liabilities which have fallen due) arising under or in connection with contracts for long term business’. The latter definition was not explicitly linked to the required calculations under Part VI of ICR 1981, although for certain purposes the figure for the mathematical reserves was to be ‘not less than those required by Part VI’¹⁶⁰, and it appears to have been intended that this should generally be the case¹⁶¹ .

266 Regulation 54 specified that the determination of the amount of long term liabilities (other than those due for payment before the valuation date) should be made on actuarial principles and make proper provision for all liabilities on prudent assumptions in regard to the relevant factors, and that the aggregate amount should be no less than that calculated in accordance with Regulations 5564, which made specific provision for the calculation of long term liabilities. Thus, if any alternative methods of valuation were used to those stipulated in Regulations 5564, the resulting figure was to be tested against the amount produced by following those regulations. At this stage the Regulations did not state that the determination of the liabilities should take account of PRE¹⁶² .

267 The determination of the amount of the liabilities was required, by regulation 55, to take account of the nature and term of the assets which represented the long term fund and the value placed upon them was required to include ‘appropriate provision against the effects of possible future changes in the value of the assets on their adequacy to meet the liabilities’.

268 The process of establishing whether a life company’s reserves were sufficient to meet the liabilities after a change in external conditions e.g. a change in returns on investments or in rates of mortality, became known as ‘resilience testing’, with monies set aside to address such changes being known as a ‘resilience reserve’.

269 The method of valuation of future premiums in regulation 57 was referred to as being a netpremium method of valuation¹⁶³ for certain contracts, although that expression was not used in the regulation itself. Regulation 57 provided:

1. Where further specified premiums are payable by the policy holder under a contract (not being a linked long term contract) under which benefits (other than benefits arising from a distribution of profits) are determined from the outset in relation to the total premiums payable thereunder, then, subject to regulation 58 below–
  
    
1. where the premiums under the contract are at a uniform rate throughout the period for which they are payable, the premiums to be valued shall be not greater than such level premiums as, if payable for the same period as the actual premiums under the contract and calculated according to the rates of interest and rates of mortality or disability which are to be employed in calculating the liability under the contract, would have been sufficient at the outset to provide for the benefits under the contract according to the contingencies upon which they are payable, exclusive of any additions for profits, expenses or other charges;
    
2. where the premiums under the contract are not at a uniform rate throughout the period for which they are payable, the premiums to be valued shall be not greater than such premiums as would be determined on the principles set out in subparagraph (a) above modified as appropriate to take account of the variations in the premiums payable by the policy holder in each year;
    

save that a premium to be valued shall in no year be greater than the amount of the premium payable by the policy holder.    

2. Where the terms of the contract have changed since the contract was first made (the terms of the contract being taken to change for the purposes of this paragraph if the change is indicated in an endorsement on the policy but not if a new policy is issued), then, for the purposes of paragraph (1) above it shall be assumed that those changes from the time they occurred were provided for in the contract at the time it was made.
    
3. Where under a contract (not being a linked long term contract)–
    
      
1. each premium paid increases the benefits (other than benefits arising from a distribution of profits) provided under the contract, or
      
2. the amount of a premium payable in future is not determinable until it comes to be paid¹⁶⁴,
    

future premiums and the corresponding liability may be left out of account so long as adequate provision is made against any risk that the increase in the liabilities of the company resulting from the payment of future premiums might exceed the amount of the premiums.

270 Regulation 59(1) specified that in determining the rates of interest to be used in calculating the present value of future payments or receipts regard should be had to the yields on existing assets attributed to long term business and, to the extent appropriate, to the expected yields on sums to be invested in the future.

271 Regulation 59(2) specified that the assumed yield on an asset should not exceed the actual yield, calculated in the prescribed way and reduced by 7.5%. Zillmerisation was permitted, but not required, under Regulation 58, allowing the maximum annual premium valued under Regulation 57 to be increased by no more than 3.5% of the relevant capital sum under the contract. In making provision for expenses under Regulation 61, some credit could be taken for the difference between the fraction of future premiums left out of account pursuant to Regulation 57(1).

272 Regulation 62 required provision to be made to cover any increase in liabilities caused by policyholders exercising options under their contracts.

The intended relationship between the IC Regulations 1981 and the professional guidance (and the DAA letters issued by GAD)

273 The development of the regulations relating to the determination of liabilities contained in Part VI of ICR 1981 had been the subject of a Joint Actuarial Working Party (JAWP) established in 1981 consisting of representatives of the F&IA and GAD and attended by officials from the DoT¹⁶⁵.

274 In October 1983, the F&IA issued for the first time an additional guidance note for appointed actuaries on the determination of liabilities and solvency margins under ICR 1981 known as ‘Guidance Note 8’ or ‘GN8’.

275 Speaking at a meeting of the Faculty of Actuaries in 1982 to discuss an exposure draft of the additional guidance notes for appointed actuaries¹⁶⁶, a directing actuary at GAD, who had been involved in the development of ICR 1981, highlighted the extent to which government departments depended upon the support of the actuarial profession in the function of supervision.

276 He noted that it would be impossible to operate the ‘uniquely liberal system of supervision’ in the UK, which had no controls over premium rates, policy conditions and almost total freedom of choice of investments ‘without the existence of a tightly knit actuarial profession maintaining high accepted standards of professional conduct laid down in part in the specific Guidance Notes.’ Later in his speech, the directing actuary commented that the valuation regulations had been, essentially, a compromise.

277 He also noted that ICR 1981 could not have existed in the form in which it was enacted, ‘which in critical respects specify requirements in terms of ‘actuarial principles’ not defined or with phrases such as ‘where appropriate’ or ‘to the extent appropriate’ unless their interpretation was to be spelt out in guidance.’ He considered the guidance notes and the Regulations taken together¹⁶⁷; explaining that the guidance notes must be:

…capable of being justified as flowing from the requirements, even though they may be in general terms, of the Regulations themselves and if the desired standard is felt to go beyond what can properly be required under professional guidance on this basis, it may well be necessary to amend the Regulations. Inevitably however, the more the standards have to be spelt out in detail in the Regulations, the less flexibility that can be achieved.

Thus, it appears to have been intended that the detail of the standards should be set by guidance notes produced by the profession, provided that the guidance did result in ‘the desired standard’¹⁶⁸ .

278 The GAD directing actuary noted that the regulator’s powers of intervention hinged on the solvency margin, which in turn depended on an assessment of the minimum basis for the calculation of liabilities in accordance with ICR 1981: ‘It is here that the need for the standard to be spelt out as precisely as possible, albeit in actuarial terms, most strongly arises’.

279 In relation to Regulation 54, concerning the fundamental principles for the determination of the amount of the long term liabilities, the directing actuary explained that it was intended to fulfil two distinct functions, the first of which was as a longstop provision for topping up reserves calculated on minimum standards prescribed in other regulations:

In the first place the regulation unequivocally leaves the responsibility for ensuring an adequate level of appropriate reserves on prudent assumptions with the Appointed Actuary. The regulation thus requires the actuary, where appropriate, to strengthen the reserves calculated in accordance with the minimum standards laid down in the other Regulations and also provides justification for him doing so, ... An obvious area where Regulation 54 might result in the strengthening of reserves … is in regard to withprofits business where the requirement for a net premium valuation, criticised though it has been, goes some way to protecting the interests of withprofits policyholders but may still not result in sufficient provision for future bonus.

He explained that the second function of Regulation 54 was to ensure that prudent standards were applied for each class of business and to each of the elements of the basis of calculations without going into elaborate detail to prescribe how this should be done in each case.

280 As was acknowledged by the Government Actuary in a paper presented to the Groupe Consultatif summer school in 1990¹⁶⁹, notwithstanding the existence of the regulations concerning the valuation of liabilities and the professional guidance issued to actuaries by the F&IA, there were still considerable areas in which the appointed actuary was expected to exercise his or her judgment. He noted that:

This is not done in isolation, since the DTI has to be satisfied that what has been done is in accordance with the regulations. On this the DTI accepts the advice of GAD.

The Government Actuary went on to explain that, as a matter of practice, GAD laid down working standards for the interpretation of the regulations which were, in some cases, promulgated to appointed actuaries in a letter from the Government Actuary (i.e. through the series of DAA letters issued from 1985 onwards referred to in paragraph 76 and in subsequent sections of this Part of the report). He explained:

The intention is not to impose particular methods or assumptions on actuaries but to require them to demonstrate that what they are doing is prudent, should it produce lower technical reserves than would be implied by the GAD working standard. In forming its views GAD plays an active role in professional affairs and draws widely on research work being carried out within the profession.

281 ICR 1981 was amended in 1982¹⁷⁰ to enlarge the descriptions of property by reference to which benefits under linked long term contracts could be determined and, in 1983, in relation to insurance advertising¹⁷¹. Further amendments are noted below.

The Insurance Companies Act 1982

Introduction and overview

282 As noted, the ICA 1982 consolidated the ICA 1974, the ICA 1980 and the ICA 1981 (the ICA 1981 having been made in order to implement the First Life Directive and to incorporate the changes introduced to implement the First NonLife Directive¹⁷²). The 1982 Act came into force on 28 January 1983, subject to transitional and saving provisions in Schedule 4.

283 The five parts of the ICA 1982 dealt with the following:

Part I Restrictions on carrying on insurance business and conditions for authorisation of insurance companies

Part II Regulation of insurance companies which had authorisation, including the new margin of solvency requirements,
transfers and winding up

Part III Conduct of business regulation

Part IV Special classes of insurers

Part V Supplementary provisions, including powers to make regulations and orders, criminal offences and interpretation.

284 Schedule 1 set out the classes of business to be treated as ‘long term business’ for the purpose of the ICA 1982. It included:

Class I Life and annuity

Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life, but excluding (in each case) contracts within Class III below.

Class III Linked long term

Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified).

Class IV Permanent health

Effecting and carrying out contracts of insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity, being contracts that –

1. are expressed to be in effect for a period of not less than five years, or until normal retirement age for the persons concerned, or without limit of time, and
2. either are not expressed to be terminable by the insurer, or are expressed to be so terminable only in special circumstances mentioned in the contract.

285. The main functions in relation to prudential regulation under the ICA 1982 continued to be vested in the Secretary of State, administered by the Insurance Division of the DoT/DTI173 with advice from GAD. As under earlier Acts, many of the provisions were dependent upon subordinate legislation being made by the Secretary of State. The ICAS Regulations 1980 and IC Regulations 1981 (each of which had by then been amended) were continued in force as if made under the ICA 1982.

286 The following concentrates on the provisions of Part II of the ICA 1982 in relation to prudential regulation. Reference is also made to Part I which included the power of the Secretary of State to withdraw authorisation and illustrates the range of change effected by the First Life and First NonLife Directives. The following centres on provisions of particular significance to insurance companies which conducted longterm business and which were mutual companies (for example, provisions exclusively concerned with general business are not described).

Classification and authorisation of insurance companies

287 For the purpose of the ICA 1982, insurance business was divided into long term business (covering the classes specified in Schedule 1, which included Classes I (life and annuity), III (linked long term) and IV (permanent health)) or general business (the classes specified in Schedule 2).

288 The classes of business specified in the two Schedules to the ICA 1982 reflected those required to be adopted under the First Life Directive and First NonLife Directive and were intended to cover the entire field of insurance business. The expression ‘insurance business’ had been defined for the first time in the ICA 1981, section 34.

289 That definition was consolidated in section 95 of the 1982 Act. It did not provide an exhaustive definition of ‘insurance business’ but rather dealt with ‘borderline cases’ in order to make it clear that they were within the meaning of the term. Among the specified activities ‘the effecting and carrying out of contracts to pay annuities on human life’ was referred to (in section 95(d)).

Authorisation by the Secretary of State

290 The basic rule that only those authorised under the legislation could carry on insurance business in the UK was preserved. Companies authorised to conduct insurance business in the UK of a particular class or classes under the former legislation were to continue to be so authorised. Separate requirements were established for authorisation by the Secretary of State of UK companies, those from other EEC states and for companies from outside the EEC¹⁷⁴, in order to comply with the requirements of the two EEC Directives. Under the Directives, a nonEEC company which maintained its solvency margin in one EEC state could obtain exemption from certain requirements in another and this was reflected in the drafting of the requirements for authorisation of such companies in the UK. The detailed procedures for obtaining authorisation were left to be dealt with in regulations¹⁷⁵ .

291 The Secretary of State was required to give written reasons for any refusal of authorisation¹⁷⁶ (implicitly providing a basis for an application to the courts for an aggrieved applicant by way of judicial review), thereby fulfilling the requirements of the two Directives that precise grounds should be given for any refusal of authorisation and that there should be a right to apply to the courts in the event of a refusal¹⁷⁷. In relation to the involvement of unfit persons in specified positions in the company as a bar to authorisation, the preexisting category of persons (director, controller, manager) was extended to include ‘main agents’ (sections 210).

Withdrawal of authorisation

292 The power of the Secretary of State to terminate authorisation to carry on insurance business of a particular class where the company ceased to carry on that class of business or did not commence to conduct it having been issued with authorisation (under section 9 of the ICA 1974) was replaced with more elaborate provisions contained in sections 1113 of the 1982 Act.

293 On specified grounds, the Secretary of State was empowered to issue a direction withdrawing authorisation in respect of new business. This would allow a company to continue paying claims and only after all its business had been runoff would its authorisation be finally withdrawn under section 13 (the company having ceased to carry on insurance business or business of the particular class).

294 The power to withdraw authorisation arose either where the company requested it or where one of the three grounds in section 11(2) applied. These comprised:

1. that it appeared to the Secretary of State that the company had failed to satisfy an obligation under the ICA 1982;
2. that a ground existed which would pose a bar to issuing authorisation; or
3. that the company had ceased to be authorised in the member state where its head office was located or where it had made a financial deposit under section 9(2).

295 Prior to giving a direction under section 11 (otherwise than at the request of the company) the Secretary of State was required to serve notice on the company stating that he was considering doing so and inviting the company to make written representations to him within one month, with the opportunity for the company to make oral representations to an officer of the DoT (section 12). After giving a direction under section 11, the Secretary of State was required to give written reasons for doing so (again, providing a basis for an application to the courts by way of judicial review)¹⁷⁸ .

General effect of Part II of the ICA 1982

296 Part II provided for the regulation of insurance companies and included requirements imposed on insurance companies and powers for the Secretary of State to intervene. The general effect of Part II was to consolidate the amendments and modifications to Part II of the ICA 1974 in respect of the Secretary of State’s powers of intervention (described in paragraphs 76 et seq in relation to the predecessor provisions of the ICAA 1973), in order to implement the First NonLife Directive and the First Life Directive, including new financial requirements, limitations on the Secretary of State’s intervention powers and provisions to strengthen to some degree the protection afforded to policyholders.

Application of Part II of the ICA 1982

297 All insurance companies which carried on insurance business in the UK, whether established within or outside the UK, were subject to Part II, other than four categories of entity which were wholly or partly excluded from its ambit, or excluded in respect of certain activities (friendly societies, trade unions or employers’ associations, members of Lloyd’s and those conducting banking business). General business contracts of prescribed descriptions under which benefits in kind were provided by the insurer could also be excluded by regulations made under the ICA 1982.

Restriction of business to insurance

298 In response to requirements of the two Directives a new restriction was introduced, prohibiting insurance companies subject to Part II from carrying on any activities otherwise than in connection with or for the purpose of insurance business, whether in the UK or elsewhere. Contravention of this requirement could provide grounds for intervention by the Secretary of State under section 37 of the ICA 1982, but did not constitute a criminal offence (section 16).

Accounts and statements and the appointed actuary

299 Sections 17 to 26 of the ICA 1982 reenacted the following provisions originally introduced by the ICAA 1973, which had been consolidated in ICA 1974, in respect of insurance companies subject to Part II of the ICA 1982, with modifications in relation to the required frequency of the actuarial investigations and to take account of the position of non-EEC companies:

1. annual accounts: the requirements regarding deposit of annual accounts and balance sheets (and other supporting documents) in prescribed forms¹⁷⁹ were reenacted (section 17 of the ICA 1982¹⁸⁰);
2. annual actuarial investigation: the frequency of the compulsory actuarial investigation of the financial condition of a company carrying on long term business was increased from triennially to annually. In addition, where any rights of withprofits policyholders related to particular parts of the company’s longterm fund, the actuary was required to determine the excess of assets over liabilities for each part. As under the former provisions, a statement of long term business was to be prepared at least once in every five years and the value of assets and the amount of any liabilities was to be assessed in accordance with any applicable valuation regulations¹⁸¹ (section 18¹⁸²);
3. appointed actuary: the requirements were reenacted for the appointment of an actuary by a company carrying on long term business, with written notification to be given to the Secretary of State of the name and qualifications of the appointee (section 19¹⁸³);
4. annual statement of business: the requirement for annual preparation of a statement of business in a prescribed form by companies conducting prescribed classes of insurance business¹⁸⁴ was reenacted (section 20¹⁸⁵);
5. audit of accounts: the requirement for the accounts and balance sheet of insurance companies to be audited in the prescribed manner by a person of the prescribed description¹⁸⁶ was reenacted (section 21¹⁸⁷);
6. deposit of documents with the Secretary of State: the detailed requirements for the deposit of documents (normally within six months after the close of the period to which the account related), numbers of copies, signature etc., were reenacted and extended to enable regulations to be made about the signatories of documents deposited with the Secretary of State¹⁸⁸ (section 22¹⁸⁹);
7. rights of shareholders and policyholders: their rights to receive copies of deposited documents on application to the company were reenacted (section 23¹⁹⁰);
8. periodic statement of business: the power to prescribe classes or descriptions of business for which statements of business should be made at such intervals and for such period as might be prescribed¹⁹¹ was reenacted (section 25¹⁹²);
9. undesirable transactions: power to prescribe classes or descriptions of agreements or arrangements which appeared to the Secretary of State as ‘likely to be undesirable in the interests of policyholders’, with a requirement that the company (or any ‘subordinate company’¹⁹³) which entered into such an agreement or arrangement furnish the Secretary of State with a statement of the terms of the agreement or arrangement within a prescribed time limit (section 26¹⁹⁴); and
10. proper accounts and records by nonEEC companies: section 27 of the ICA 1982 contained a new requirement¹⁹⁵ under which companies with a head office outside the Community were required to keep proper accounts and records of their insurance business carried on in the UK.

300 Detailed requirements for the contents of accounts and statements prepared under sections 17, 18 and 20 were prescribed in the ICAS Regulations 1980 as amended¹⁹⁶, and in respect of the valuations specified in section 18(4), in ICR 1981.

Assets and liabilities attributable to longterm business

301 Sections 28 to 31 of the ICA 1982 reenacted provisions of the ICA 1974 which had been revised and strengthened by the ICA 1981. They were primarily of relevance to proprietary companies or those which conducted general business in addition to long term business.

302 The basic rule was maintained that the assets and liabilities attributable to longterm business were to be separately accounted for, with the assets constituting a fund separated from any general business (section 28). Assets of this separate fund were to be used exclusively to meet liabilities on long term business, protected from transfers within the company, mortgages and charges or use for dividends, unless the funds were adequate to meet the long term business liabilities (section 29).

303 As amended by the ICA 1981, the provisions in relation to allocations to policyholders required that where policyholders were entitled to share in any surpluses (as under withprofits policies), the share of the surplus allocated to policyholders from one year to the next could not be reduced beyond a specified percentage unless notice was first given to the Secretary of State and an approved statement was published in the London, Edinburgh and Belfast Gazettes (section 30). The preexisting restriction was maintained on the proportion of long term funds invested in shares in subordinate companies, loans to such companies and shares in and loans to connected persons¹⁹⁷ , made by the insurance company or a subordinate company. In aggregate such investments etc. could not exceed five per cent of the amount of the long term fund (section 31).

Financial resources and the margin of solvency

304 Sections 32 to 35 dealt with the system of solvency margins required under the First NonLife Directive and the First Life Directive, which had initially been embodied in primary legislation by amendments to the ICA 1974 as sections 26A26D, introduced by the ICA 1981 (see paragraphs 240 et seq above).

305 The margin of solvency: under section 32, every insurance company subject to Part II of the ICA 1982 with its head office in the UK or whose UK business was restricted to reinsurance¹⁹⁸ was to maintain a margin of solvency of such an amount as was prescribed or determined in accordance with regulations (those regulations being designed, in turn, to give effect to the requirements of the two EEC Directives¹⁹⁹).

306 The relevant regulations continued to be ICR 1981 (Regulations 313 and Schedules 1 and 2; Regulations 5 to 8 related specifically to the determination of the margin of solvency for the various classes of long term business). This margin was known as the ‘required minimum margin’ or RMM. It is to be noted that section 32 created a continuing obligation to ‘maintain’ the margin, rather than to demonstrate that it was available at particular times. If the solvency margin was not maintained, the Secretary of State could request the company to submit to him a plan for the restoration of a sound financial position, which was to be modified if the Secretary of State considered it to be inadequate, and then put into effect by the company (section 32(4)).

307 Further provision for failure to maintain a minimum margin was made in section 33. It has been suggested²⁰⁰ that in the event of failure to maintain the solvency margin, the powers of the Secretary of State under sections 32(4) and 33 were to be used before his more general powers of intervention under sections 3745 could be relied upon, although there was no express requirement to this effect. For companies carrying on longterm business before 1 January 1982 which did not thereafter obtain authorisation for any other class of long term business, section 32 (and section 33) did not apply until 15 March 1984 (section 99(1) and Schedule 4).

308 Failure to maintain the minimum margin: The ‘minimum margin’ in section 33 corresponded to the ‘guarantee fund’ in the EEC Directives²⁰¹ (and was described as the ‘guarantee fund’ in regulation 9 of ICR 1981). Where the margin of solvency fell below the prescribed minimum level, at the request of the Secretary of State, the company was required to submit a shortterm financial scheme to him, to which he could propose modifications if he considered it inadequate; the company was then required to give effect to the scheme.

309 Form and situation of assets: A basic principle of the EEC Directives was that the assets representing the reserves which an insurance company required to meet its liabilities should be localised in the country where business was conducted and should be in the same currency as the liabilities²⁰² . Regulations made for the purpose of section 35 gave effect to that principle. The relevant provisions were regulations 2527 of ICR 1981.

Unlimited liabilities

310 The provisions of the earlier legislation which rendered void any contract entered into by an insurance company under which it assumed liabilities of an uncertain maximum amount unless the contract was exempted by regulations, was maintained in section 36. However, commencement of this provision was postponed until regulations were made under it²⁰³. It appears that no such regulations were ever made and section 36 was eventually repealed without ever having been commenced.

Secretary of State’s powers of intervention

311 Sections 3748 consolidated the intervention powers of the Secretary of State under sections 2841 of the ICA 1974²⁰⁴, which had been amended by sections 2224 of the ICA 1981. The basic structure of the intervention powers was maintained (i.e. the grounds for exercise, followed by the measures themselves), although the grounds for exercise were made more elaborate to create distinct grounds for intervention by way of certain of the powers, particularly in the light of the restrictions on member states’ powers to intervene by way of restricting free disposal of assets other than in exceptional circumstances.

312 The power for the Secretary of State to intervene by imposing restrictions on new business²⁰⁵ had been repealed by the ICA 1981²⁰⁶, which had consequential effects for the remaining intervention provisions.

Section 37 – grounds for intervention under sections 3845

313 Section 37 consolidated the grounds for intervention under section 28 of the ICA 1974²⁰⁷ , with the following changes which had been introduced by sections 22, 36 of and Schedules 4 and 5 to the ICA 1981.

314 Limitation on exercise of certain intervention powers: in order to conform with the Directives²⁰⁸, limitations were placed on the Secretary of State’s powers to intervene by way of imposing requirements for the maintenance of assets in the UK and the custody of assets by a trustee (under sections 39 and 40 of the ICA 1982). By virtue of section 37(3), those forms of intervention could only be exercised where:

1. the Secretary of State had given a direction under section 11 to withdraw authorisation in respect of new business;
2. it appeared to the Secretary of State that the company had failed to satisfy the new ‘minimum margin’ requirements or provisions concerning the value of assets to be maintained in the UK or regarding the form and situation of assets under sections 3335 ²⁰⁹; or
3. an account or statement submitted to the Secretary of State showed that the company’s liabilities had been calculated otherwise than in accordance with the valuation regulations (or accepted accounting concepts if no such regulations applied).

315 Two new grounds for intervention: under section 37(2), the five grounds for intervention listed in section 18(1) of the ICA 1974²¹⁰ were supplemented by two new grounds. The additional grounds comprised:

1. that it appeared to the Secretary of State that there had been a substantial departure from a proposal or forecast submitted to the Secretary of State under section 5 of the ICA 1982 when the company applied for authorisation; and
2. that the company had ceased to be authorised to effect contracts of insurance generally or of a particular description in a member state where it had its head office or had made a financial deposit under section 9(2).

316 The seven grounds for intervention under section 37(2) applied to the powers under section 38 (requirements about investments); section 41 (limitation of premium income); section 42 (special actuarial investigations); section 43 (acceleration of provision of accounting information); section 44 (power to obtain information and production of documents) and section 45 (the residual power to intervene on solvency or PRE grounds)²¹¹.

317 Section 37(5) of the 1982 Act preserved the provisions of section 12(4) of the ICAA 1973²¹², giving the Secretary of State greater flexibility to intervene²¹³ in relation to recently authorised companies. The additional ground on which the Secretary of State might require a company to produce documents²¹⁴, namely where he considered it desirable in the general interests of those who were or might become policyholders, was preserved in section 37(4)²¹⁵.

318 Repeal of ground for intervention: section 28(2) of the ICA 1974²¹⁶ had given a general ground for intervention in respect of concerns regarding solvency, in the case of companies conducting long term business, in circumstances where the Secretary of State was not satisfied that the value of the assets exceeded the amount of the liabilities. Section 28(2) had been repealed by section 22(2)(e) and Schedule 5 to the ICA 1981.

319 Policyholders’ reasonable expectations: the first ground for intervention, under section 37(2)(a), where the Secretary of State considered the exercise of the intervention power to be desirable for protecting policyholders or potential policyholders 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’, was repeated from the earlier legislation without amendment (and, as before, no explanation was given of the meaning of ‘policyholders’ reasonable expectations’). The wide (but residual) power of intervention based on PRE then included as section 45 of the ICA 1982²¹⁷ continued to be subject to the general restriction that it could only be relied upon where the intended purposes of intervention could not be appropriately achieved by reliance on other specific intervention powers or by reliance on those powers alone (section 37(6)). (The residual intervention power was made subject to an additional limitation under section 45(2) as described below.)

Repeal of power of intervention by way of restrictions on new business

320 The first of the Secretary of State’s powers of intervention under the former legislation, enabling him to require the company not to effect new contracts of insurance²¹⁸, had been repealed by the ICA 1981²¹⁹.

Section 38 – requirements about investments

321 A new limitation was placed on the Secretary of State’s power to intervene by way of requiring a company not to invest in or to realise certain investments. In order to conform with the requirements of the two EEC Directives that state control over insurance companies’ investments should only extend to the reserves required to meet liabilities and not to ‘free reserves’²²⁰, section 38(3) specified that this intervention power would not apply to any surplus of assets over liabilities determined in accordance with the relevant regulations.

Section 39 – maintenance of assets in the UK

322 The provisions enabling the Secretary of State to require that assets of an equal value to the whole or a specified proportion of the company’s domestic liabilities was preserved (with the definition of ‘domestic liabilities’ being slightly revised). As noted above, the grounds on which the Secretary of State was entitled to rely on this power were restricted to those set out in section 37(3).

Section 40 – custody of assets

323 The power of the Secretary of State to require, in conjunction with the exercise of the power under section 39, that assets be placed in the custody of a trustee was also preserved, but subject to restricted grounds for exercise under section 37(3).

Section 41 – limitation of premium income

324 The power to intervene by way of restricting the aggregate amount of premiums to be received by the company in a specified period (thereby placing a limit on new business) was preserved.

Section 42 – actuarial investigation

325 The Secretary of State’s power to require a company which carried on long term business to cause a special actuarial investigation²²¹ to be undertaken by the appointed actuary in respect of all or any specified part of that business was reenacted with minor revisions.

Sections 43 and 44 – accelerated accounting information and provision of information of documents

326 The powers of the Secretary of State to require a company to deposit accounts and statements (under sections 22 and 25) earlier than their normally required times or to provide specified information or documents were repeated from the earlier legislation²²² .

Section 45 – residual power to protect policyholders

327 Section 45(1) repeated the original drafting of the wide power of the Secretary of State 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’²²³; a power which was to be employed only where other powers of intervention (under section 3844) could not ‘appropriately achieve’ those aims (section 37(6)).

328 In order to conform with the prohibition in the EEC Directives²²⁴ on restraining the free disposal of assets by a company, a new limitation was placed on this residual power by section 45(2). The power conferred by section 45(1) could only be exercised in such a way as to restrict the company’s freedom to dispose of it assets in three specified circumstances:

1. after the Secretary of State had given a direction under section 11 to withdraw authorisation in respect of new business;
2. where it appeared to the Secretary of State that the company had failed to satisfy the new ‘minimum margin’ requirements or provisions concerning the value of assets to be maintained in the UK or regarding the form and situation of assets under sections 3335²²⁵; or
3. where an account or statement submitted to the Secretary of State showed that the company’s liabilities had been calculated otherwise than in accordance with the valuation regulations (or accepted accounting concepts if no such regulations applied).

(These circumstances were equivalent to the limited grounds on which, by virtue of section 37(3), the intervention powers under sections 39 and 40 (regarding maintenance of assets in the UK and custody of assets) could be exercised.)

Prior notice in cases of involvement of unfit persons

329 Section 46 of the 1982 Act preserved the requirements²²⁶ for the Secretary of State to give written notification to the person concerned and to allow that person to make representations, followed by an equivalent notice served on the company and invitation to make representations, before exercising an intervention power under sections 3845 based on the ground of the unfitness of a person for the position he or she held²²⁷ .

Power to bring civil proceedings on behalf of an insurance company

330 The Secretary of State’s power to bring civil proceedings in the public interest was preserved²²⁸ in section 48 with minor consequential amendments.

Transfers of long term business

331 Sections 49 and 50 reenacted with minor revisions the provisions of the former legislation (described in paragraph 95 in relation to sections 26 and 27 of the ICAA 1973) enabling a transferor or transferee company to apply to the court to sanction a scheme for the transfer of longterm business, without obtaining the consent of all the affected policyholders. This was seen as providing one potential means of averting the worst effects of the liquidation of a business. The provisions were also relied on when an insurance company wished to sell its long term business to another company.

Insolvency and winding up

332 Sections 5359 reenacted the provisions of the former legislation on winding up of insurance companies with minor revisions. They came into force in 1985 when rules were made under section 59²²⁹. They included provisions (in addition to those for the winding up of companies generally under the Companies Acts):

1. for ten or more policyholders to present a petition for the winding up of an insurance company;
2. for the Secretary of State to petition for the winding up of an insurance company on three specified grounds²³⁰, namely that:
1. the company was unable to pay its debts within the meaning of specified sections of the Companies Act 1948;
2. the company had failed to satisfy an obligation to which it was subject by virtue of the ICA 1982 or predecessor legislation; and
3. the company had failed to keep proper accounts or to produce records as required under section 12 of the Companies Act 1976 and the Secretary of State was unable to ascertain its financial position;
3. making special provision in respect of the winding up of insurance companies with longterm business, prohibiting voluntary winding up and ensuring that the required separation of assets relating to the long term fund and any general business continued into the winding up arrangements;
4. requiring the liquidator to carry on the longterm business unless the court ordered otherwise, with a view to that business being transferred as a going concern to another company; with powers for the court to appoint a special manager of the business, to reduce the amount of the contracts made by the company in the course of its long term business and to appoint an independent actuary to investigate and report on that business;
5. for the winding up of a company from which business had been transferred in conjunction with the winding up of the transferee company, where the transferor (or its creditors) had claims against the transferee; and
6. in place of winding up in the case of a company unable to pay its debts, the court was empowered to reduce the amount of the contracts of the company on such terms and conditions as the Court thought fit.

Secretary of State approval of managing director or chief executive of an insurance company and of a controller of a company

333 Sections 60 and 61 reenacted the requirements²³¹ for the Secretary of State to be notified of the proposed appointment of a managing director or chief executive or of a prospective new controller²³² of an insurance company.

334 This enabled the Secretary of State to object if necessary on the grounds that the person was not a ‘fit and proper person’ to take up the appointment or become a controller, and potentially provided grounds for intervention under section 37(2)(e)²³³ .

335 Notice of change of controller, director or manager was also to be given to the company by the person concerned; the company was then required to givewritten notice to the Secretary of State under section 62²³⁴. ICR 1981 contained prescribed forms for the notices to be given under these requirements. Sections 63 and 64 made provision for the Secretary of State to be notified of changes of managing director and chief executive of companies from outside the UK and of changes of main agents.

Miscellaneous provisions, section 68 orders and offences

336 Minor ancillary provisions in relation to the obligations of the Secretary of State to deposit documents with the registrar of companies were preserved (section 65). He continued to be empowered to direct, by order, that certain business should be treated as being or not being ordinary long term business (section 67). The Secretary of State was also empowered to extend or shorten any financial year of an insurance company (section 69).

337 Section 68 reenacted the power of the Secretary of State to modify, by order, certain of the provisions of the primary legislation and related regulations concerning regulation of insurance companies (a section 68 order). This power was important to insurance companies as it provided a mechanism by which the Secretary of State could authorise implicit items, such as the present value of future profits, to be used (to a limited extent) in demonstrating that the required minimum margin was satisfied.

338 Section 71 provided for a number of offences in relation to default in compliance with specified provisions of Part II and was mainly derived from the ICAA 1973 (and ICA 1974).

Part V of the ICA 1982

339 Part V included provisions related to the Secretary of State’s wide ranging powers to make subordinate legislation in relation to various provisions of the ICA 1982 (section 97); his power to make valuation regulations (section 90); detailed provisions in relation to criminal proceedings including the criminal liability of directors (section 91); and a number of new defined terms in the general interpretation provision (section 96). As noted, ‘policyholders’ reasonable expectations’ was not defined.

The practical application of the ICA 1982 in later years and the fate of the Act

340 Information about the practical application of the regulatory regime under the ICA 1982 during the early 1990s is included in the first section of Phase 4. Following successive amendments (certain of which are referred to below), the ICA 1982 was repealed with effect from 1 December 2001 by the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001²³⁵, which was made by the Treasury in exercise of its powers under the FSMA 2000.

The Insurance Companies (Accounts and Statements) Regulations 1983

341 The ICAS Regulations 1980 were amended by a series of statutory instruments between 1981 and 1983 to update the requirements for accounts and statements in the light of changes introduced by the ICA 1981 and the EEC Directives, in relation to such matters as the prescribed signatories of deposited documents²³⁶, to introduce new definitions, to make provision for returns by non-UK companies²³⁷ and in relation to the margin of solvency requirements²³⁸.

342 The Insurance Companies (Accounts and Statements) Regulations 1983²³⁹ (the ICAS Regulations 1983) came into operation in March 1984 to replace, with modifications, the ICAS Regulations 1980.

343 The principal new requirements under the ICAS Regulations 1983 for deposited documents related to companies carrying on long term business and included a statement of benefits enjoyed by the appointed actuary (such as shares in the company and pecuniary interests in company transactions) and a statement of any arrangements by which management services were received from or provided to another company. In relation to long term business, these Regulations incorporated changes concerning such matters as the margin of solvency, requirements for further analyses of premium income, expenses, assets and new business and a new form for the abstract of the actuary’s report. The prescribed qualifications for appointed actuaries and auditors²⁴⁰ were unchanged.

Guidance for appointed actuaries – revisions to GN1 19791985

344 The guidance for appointed actuaries in GN1 was reissued as versions 1.2 (in 1979), 1.3 (1983), 1.4 (1984) and 1.5 (1985). Few significant changes were made other than to update references to the legislation in the light of the enactment of the ICA 1982 and to revise the name of the responsible government department (to refer to the ‘Department of Trade and Industry’) in the 1983 version. In the version issued in 1985 (1.5), the reference to the failure by an appointed actuary to work within the framework indicated in the guide being regarded as prima facie evidence of unprofessional conduct was removed from the text of the document²⁴¹ .

Guidance for Appointed Actuaries – the first version of GN8

345 Whilst GN1 dealt with the appointed actuary’s general responsibilities in relation to long term business, GN8 focused on the determination of liability regulations in Part VI of ICR 1981 and the actuary’s role in relation to solvency margins.

346 As noted above, a number of new requirements had been imposed which had implications for the work of the appointed actuary. Part VI of ICR 1981 had made provision for the determination of longterm liabilities of insurance companies and governed the required valuations when an actuarial investigation was undertaken pursuant to the ICA 1982.

347 One of the required outcomes of such an investigation was for the actuary to provide a certificate that the longterm liabilities of the company did not exceed the value of its liabilities²⁴². Part VI of ICR 1981 had introduced a statutory requirement for ‘resilience testing’ in Regulation 55, that in determining the amount of the company’s long term liabilities account was to be taken of ‘the nature and term of the assets representing the long term fund and the value placed upon them and shall include appropriate provision against the effects of possible future changes in the value of the assets on their adequacy to meet the liabilities’. In addition, the ICA 1982 and Part II of ICR 1981 had made provision for the maintenance of margins of solvency by insurance companies.

348 GN8 was issued by the F&IA in October 1983 to give additional guidance to appointed actuaries in relation to certain aspects of their professional responsibilities when undertaking the required valuations; giving guidance on dealing with the determination of liabilities and solvency margins and in relation to ‘resilience testing’ under Regulation 55.

349 By the time GN8 was first published, the DTI had indicated that it would require a certificate from the appointed actuary in relation to applications from companies for orders under section 68 (enabling implicit items to count towards the solvency margin), although the form of the certificate had not been announced.

350 The stated aim of GN8 was to draw actuaries’ attention to their professional responsibilities relevant to the required valuations, rather than to interpret ICR 1981. The comments made by the GAD directing actuary to a meeting of the Faculty of Actuaries in 1982 suggest that this professional guidance was intended to fulfil a key function in the overall regulatory regime (see paragraphs 273 et seq).

351 The guidance emphasised that the paramount requirement was that in regulation 54 (see paragraph 266 The appointed actuary should use prudent bases determined according to actuarial principles and professional considerations as set out in earlier guidance notes.

352 Paragraph 2.1.3 stated:

Actuarial principles require the actuary to pay due regard in his valuation to the future interests of withprofits policyholders notwithstanding the fact that Regulations 5564 do not specify the point. This may well necessitate his making other investigations to satisfy himself as to the pace of emergence of surplus.

Thus from 1983 the future interests of policyholders, if not their ‘reasonable expectations’, were built into the professional guidance for appointed actuaries regarding the required valuations. However, no reference was made to the ‘reasonable expectations of policyholders’ in the subordinate legislation on valuations until some time later²⁴³ .

353 The requirements of Regulations 5564 were described as ‘minimum criteria’ and the actuary was to interpret them in a prudent way, individually and as a whole. Guidance on resilience testing was given only in very general terms: that it was necessary for the actuary to use ‘professional judgment’ when applying Regulation 55, cross referring to the guidance in GN1 paragraphs 6.66.9 (which again related to general factors), rather than providing any specific hypothetical situations, or potential adverse investment conditions, which the actuary should consider.

354 Whilst there was no statutory requirement for the actuary to do so, the guidance in GN8 required the actuary to advise the company of the action required of it to maintain the margins of solvency prescribed in Part II of ICR 1981, and the action the company should take in the event that it was reasonably foreseeable that it would be unable to meet its long term liabilities.

1984 Service Level Agreement between the DTI and GAD and supervision in practice

The 1984 Service Level Agreement

355 In 1984, the arrangements between the DTI and GAD in relation to GAD’s role in scrutinising returns submitted by companies carrying on long term business and providing the DTI with related advice were formalised in a ‘service level agreement’ (SLA) which came into effect on 1 July 1984. The agreement outlined the division of tasks between the DTI and GAD and the basic requirements for the methodology to be used and required progress reports to be given in relation to the scrutiny process. The outcome of the process was for GAD to provide the DTI with a scrutiny report intended to enable the DTI to assess the need for action by the Secretary of State as prudential regulator.

356 The underlying approach stated in the agreement was that formal action on behalf of the Secretary of State should always be taken by the DTI. GAD was permitted to make direct enquiries of companies, but it was not to make enquiries of auditors, nor in the first instance, of appointed actuaries.

357 GAD was given the major share of the responsibility for the examination of returns relating to long term business and pursuing technical questions arising from them with the companies.

358 The DTI was clearly to remain the point of contact for insurance companies under the regulatory regime, covering such matters as new authorisations, directions, notices of requirements, concessionary orders, notifications of change of control and of the appointed actuary and receipt of the statutory returns, and it retained responsibility for scrutinising annual reports and accounts in relation to shareholder matters.

359 Under the 1984 SLA it was agreed that:

1. the DTI would pass on to GAD copies of returns from the company, reports to policyholders and other relevant documentation and supporting information such as business plans and policies;
2. on receipt of the annual returns the DTI was to carry out an initial check of the main documents to ensure that they were complete;
3. some of the forms were then to be computer processed and passed on to GAD;
4. the DTI was to advise GAD of significant errors and omissions (and GAD was to notify the DTI if it found any such matters in the returns which needed to be taken up urgently) and the DTI was to be responsible for pursuing these with the company concerned;
5. the DTI was also to pass on the quarterly returns and supporting documents; and
6. the DTI was to notify GAD if in its view the company should be given a higher priority rating or there were other matters which appeared relevant to the examination of the return in relation to longterm business.

360 The main obligations of GAD under the 1984 SLA included:

Initial scrutiny

1. as soon as possible after receipt of the annual return from the DTI, GAD was to carry out an initial scrutiny in order to advise the DTI of any serious solvency or compliance problems and to allocate a priority to the case in the range 14 as described in Annex A to the agreement, with 1 being the most urgent and those in category 4 seen as a low priority for whom detailed examination would be undertaken at least once in every three years;
2. GAD was to notify the DTI immediately if it appeared that the company had failed to meet its long term business solvency margin or was otherwise in financial difficulty;
3. GAD was to examine the various certificates in the returns and notify the DTI of serious cases of noncompliance; examine the noncomputerised parts of the returns and notify the DTI of significant errors or omissions; and make an initial examination of the form showing the valuation result and distribution of surplus to ensure that the requirements of section 30 on allocation of surpluses to withprofits policyholders had not been breached;
4. GAD was to provide the DTI with a quarterly list showing current and previous priority ratings of all companies;

Detailed examination and report to DTI

5. GAD was to undertake a detailed examination of the annual returns, reporting to the DTI on significant matters arising from the returns or from correspondence or discussion with the companies or their actuaries; the main objective of each examination was to form a view on the company’s solvency and margin of solvency as at the date of the return and compliance with statutory requirements and any undertakings given by the company; for ‘priority 1’ cases the detailed examination was to be carried out ‘within days’ of GAD’s receipt of the return, for ‘priority 3’ cases it was ‘normally’ to be carried out within ten months;
6. on completion of the detailed examination GAD was to provide a scrutiny report to the DTI on significant matters which had emerged or been raised by the company, advising the DTI if GAD was of the view that any formal action was required; the SLA gave details of the matters to be addressed in the report to the DTI aimed at identifying major issues, developments or weaknesses which might require some form of action or intervention;
7. GAD was to provide the DTI with a monthly progress report on the examination of annual returns, completion of initial checks and final reports on outstanding issues.

361 At the stage of the detailed examination, GAD was permitted to contact the company or (with its agreement) the company’s appointed actuary to obtain clarification of points relating to the longterm business.

362 However, if the DTI had already been in correspondence with the company following its initial examination of the company’s return, GAD was to agree with the DTI which department should pursue matters further with the company. Any correspondence between GAD and the company or its advisers or notes of meetings were to be copied to the DTI. GAD was to make recommendations to the DTI about any action which should be taken in relation to matters arising from the returns. The SLA made it clear that GAD was not to initiate any such action or commit the DTI to any particular decision in the course of its discussions with companies. Nor was GAD to approach any company’s auditors.

363 The 1984 Agreement (clause 45) stated that it was to be reviewed in early 1986 (other sources suggest that this review may not have taken place). A new SLA was agreed between the DTI and GAD in 1995 (see paragraphs 744 et seq below).

Supervision in practice as at 1988

364 A paper presented by the Government Actuary, E.A. Johnston, to the Institute of Actuaries in 1988²⁴⁴ described the role of GAD in the daytoday supervision of insurance companies at that time, the relationship between GAD and appointed actuaries and GAD’s relationship with the F&IA.

365 In 1988 just over 80 people in the DTI and GAD were working on life and nonlife work, including six and a half full time equivalent qualified actuaries dealing with life assurance matters²⁴⁵. The costs were recovered through fees charged to insurance companies. At the end of 1987 there were 281 companies writing longterm business and 168 different appointed actuaries (as some were appointed to more than one company).

366 The then Government Actuary explained that a full examination of the returns in a complex case could take more than a week. The objective of the full examination was to monitor that the legislation had been complied with, which entailed checking that the returns had been made out correctly, that the appointed actuary’s valuation accorded with the regulations and guidance notes²⁴⁶, that the solvency margin was held and that other statutory requirements had been met.

367 A further aim of the detailed examination was to look at the company ‘dynamically’, using the returns and any other available information to assess how the financial state of the company was developing²⁴⁷ and to seek to identify potential problems or dangerous trends. At the time the paper was written, withprofit companies had been receiving increased attention in order to identify cases where overdistribution might be occurring. It was explained that this work paralleled rather than duplicated the work of the appointed actuary in terms of the actuary’s valuation and the financial condition report²⁴⁸ which the actuary was presumed to make to the board of the company, but which the supervisory authorities did not see.

368 Where the detailed examination and any followup queries revealed matters of concern, the procedure moved to a second stage during which ‘DTI and GAD work[ed] as a team’. The first step would normally be to seek further information; there might then be discussion with the company, especially if its plans seemed unsuitable or matters were moving in a direction likely to cause difficulty.

369 Ultimately, it might be necessary to consider whether there were grounds for formal intervention. The Government Actuary explained that GAD played a major part at this stage, in terms of internal discussions with the DTI, assisting with correspondence and attending meetings and dealing with the actuary on actuarial issues. Often this type of work arose from events between valuations, such as major restructurings.

370 As regards the relationship between GAD and appointed actuaries, the then Government Actuary said:

Contact between GAD and actuaries is crucial to the smooth functioning of the Appointed Actuary system. It is not GAD’s function to second-guess the company actuary. That Department’s responsibility is to advise the DTI on the state of the company in relation to the legislation. For this purpose, the input to GAD is the finished work of the Appointed Actuary. It would be very unusual for GAD to investigate the condition of an office itself.

371 He went on to explain that the normal aim of the supervisors was that the management of a company should address any problem. The company’s actuary would be expected to carry out any necessary investigation and advise management as required. The DTI expected management to take ‘full note’ of the results of any actuarial investigations and of the appointed actuary’s advice and act accordingly.

372 The then Government Actuary described the F&IA as providing professional backup essential to the system, with responsibility for education, qualification standards, research and professional discipline. He stated that the appointed actuary system called for close cooperation between the supervisors (represented by GAD) and the profession (through the F&IA) and explained that this was achieved both informally and formally through such means as the JAWP²⁴⁹ .

The Financial Services Act 1986

373 The Financial Services Act 1986 (the FS Act 1986) is relevant to conduct of business regulation and is not described here other than by way of background, to explain the extent to which it applied to life assurance business and in order to refer to some of the amendments it made to the ICA 1982.

General background and effects of Part I of the FS Act 1986

374 The FS Act 1986 effected a complete overhaul of the statutory framework for the regulation of investment business. It was enacted some ten years after it had first been proposed that the previous legislation (the Prevention of Fraud (Investments) Act 1958) should be revised to bring it into line with modern conditions.

375 In the wake of the collapse of four licensed dealers in securities in 1981, Professor Gower was appointed by the Secretary of State to undertake a review of the protection needed by investors and to advise on the need for new legislation. Professor Gower recommended²⁵⁰ the replacement of the former legislation with a comprehensive statutory regime for the regulation of investment business ‘based so far as possible on selfregulation subject to government surveillance’.

376 Much of the Government White Paper which preceded the Act and eventually the FS Act 1986 itself, followed Professor Gower’s recommendations. The basic model was for the establishment of a practitionerbased body matching criteria specified in the legislation, which would in part operate through a number of selfregulating organisations (SROs) recognised by the new body.

377 The FS Act 1986 provided for the establishment of a new regulatory authority ‘the Securities and Investments Board Limited’ (SIB). Under section 114, the Secretary of State was empowered to delegate to the SIB (as a ‘designated agency’²⁵¹), by order, specified functions under the Act in relation to the regulation of investment business. The SIB began to ‘recognise’ the SROs with effect from 17 May 1987, when the SIB assumed responsibility for the functions listed in a delegation order²⁵² . Most of the relevant provisions of the Act came into force on 29 April 1988 (known as ‘A Day’).

378 Section 4 of the FS Act 1986 made it an offence to carry on investment business without authorisation or exemption under the Act. There were two means of obtaining authorisation: either directly from the SIB or through membership of an SRO²⁵³ .

379 Chapter V of Part I of the FS Act 1986 dealt with conduct of business regulation. Criminal offences were created in relation to the making of misleading statements, market manipulation and investment advertising by unauthorised persons.

380 The SIB (following the delegation arrangements) was empowered to make rules and regulations to regulate conduct of business. The provisions included civil remedies by way of actions for damages by those who suffered loss on account of a contravention of the requirements (section 62). Part VI included a number of intervention powers which were to be exercisable by the SIB under the delegation arrangements. Chapter IX provided for the creation of a Financial Services Tribunal to which an appeal against the exercise of those powers could be made.

Impact on the ICA 1982

381 Part II of the FS Act 1986 and Schedule 10 to the Act adapted the investment business regime to life assurance in a way which took account of the regulation of insurance companies under the ICA 1982. The broad effect was that only the life assurance marketing and pension fund management activities fell within the scope of the investment business regime²⁵⁴.

382 The opportunity was taken within Part II to make a number of amendments to the ICA 1982, including an amendment to the definition of ‘controller’ in section 7(4)(c)(ii) of the 1982 Act to reduce the specified percentage of voting power controlled from one third to 15 per cent (section 134). This ensured that the definitions of ‘controller’ in ICA 1982 and the FS Act 1986 were consistent.

383 A new section 21A was inserted in the 1982 Act, designed to facilitate communication between auditors of insurance companies subject to Part II of the ICA 1982 and the Secretary of State. Section 21A provided that no duty to which such an auditor might be subject should be regarded as contravened by reason of the auditor communicating in good faith to the Secretary of State any information or opinion on a matter of which the auditor had become aware in his or her capacity as company auditor and which was relevant to the functions of the Secretary of State under the 1982 Act (section 135). The regulations which were later made by the Secretary of State under section 21A(2) and (3) to impose duties on auditors to communicate certain information are referred to below²⁵⁵.

384 A new section 31A was also added to the ICA 1982 requiring insurance companies to secure that they had adequate arrangements in force to avoid unfairness between separate insurance funds, said to enshrine in the legislation the ‘single most important principle of investment management of dealing fairly between different clients’²⁵⁶ (section 136).

385 The funds which were relevant for this purpose were those required to be maintained under section 28 (separating assets relating to the long term business from any relating to general business) and ‘identified funds’. ‘Identified funds’ were defined as assets representing receipts from a particular part of a company’s long term business which could be identified as such by virtue of accounting or other records maintained by the company.

386 Section 78(2) of the ICA 1982, relating to linked long term policies and the property and indices to which they could be linked was also amended to allow the Secretary of State to prescribe quantitative limits, expressed in terms of the proportion of the benefits under such policies which could be determined by reference to property of a specified description or a specified index (section 137). It was said that this would enable the range of permitted links to be extended.

Transfer of functions under and repeal of the FS Act 1986

387 On 7 June 1992, many of the functions of the Secretary of State under the FS Act 1986 were transferred to the Treasury, although some were to be exercisable by the Secretary of State and the Treasury acting jointly or concurrently. The relevant transfer order contained express provisions²⁵⁷ to ensure that the delegations which had been made to the SIB as a designated agency were preserved and that the Treasury could assume the powers from the designated agency in circumstances where the Secretary of State would have been entitled to resume them. The FS Act 1986 was repealed (with minor savings) as from 1 December 2001 by the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001²⁵⁸.

Policyholders’ reasonable expectations for taxation purposes: the Finance Act 1989

388 An allowance was made for the costs of meeting policyholders’ reasonable expectations within section 82 of the Finance Act 1989, which related to the calculation of profits of insurance companies for the purposes of the Income and Corporation Taxes Act 1988. Section 82 permitted so much of any surplus as was held by the company to meet the reasonable expectations of policyholders²⁵⁹ to be treated as a liability of the company for the purpose of the calculation of its profits for tax purposes (thereby reducing the amount of the profits subject to taxation), subject to limited exceptions. Section 82(1)(a) specified that:

… if, at the end of the period, the company has an unappropriated surplus on valuation, as shown in its return for the purposes of the [ICA 1982], then, subject to subsection (3) below, the closing liabilities of the period may include such amount, forming part of that surplus, as is required to meet the reasonable expectations of policy holders or annuitants with regard to bonuses or other additions to benefit of a discretionary nature.

389 The exception in subsection (3) related to amounts which had been reserved for policyholders or annuitants before 14 March 1989 but had not been allocated to them or expended on their behalf before that date.

390 Section 82 of the Finance Act 1989 remained in force in this form until it was substituted in respect of accounting periods beginning on or after 1 January 2003 by the Finance Act 2003²⁶⁰ .

Guidance for Appointed Actuaries – revisions to GN1 and GN8 19871990 and guidance on resilience testing from GAD (DAA1)

GN1

391 Further versions of GN1 were issued in 1987 (version 1.6), 1988 (version 2.0) and 1990 (version 2.1).

392 Of the changes to GN1 introduced during this period the most significant appear to be those made in 1988 when the new version 2.0 was produced, in which a new section 8 was added giving guidance on the written reports the appointed actuary was required to prepare following an actuarial investigation under section 18 of the ICA 1982.

393 The guidance stated that it was the professional duty of the appointed actuary to report in writing to the directors on the results and implications of the investigation, whether or not any allocation of profits was involved, before providing the statutory report to the DTI. Section 8 went on to give guidance on the approach to be adopted and the matters to be covered in the appointed actuary’s report to the company directors, including requirements for the actuary:

1. (a) to take all reasonable steps to ensure that the directors were in a position to consider a suitable written report from the actuary if there was reason to believe that the company planned to announce a specific allocation of profits in anticipation of the results of the results of an actuarial investigation (paragraph 8.2);
2. (b) in reporting on and making recommendations in respect of any proposed allocation of profits, to consider specified matters affecting the company’s financial position, carry out appropriate financial investigations and provide directors with the necessary information to enable them to judge the appropriateness of the allocation and understand its implications for the future conduct of long term business (paragraph 8.3); and in particular (without prejudice to the generality of this requirement) the actuary was required:
• if the report anticipated the results of an annual actuarial investigation under section 18 of the ICA 1982, to ‘indicate and discuss how in the context of the statutory requirements, the allocation will be financed’ (paragraph 8.3.1);
• to discuss the relationship between the proposed allocation and the relevant experience and indicate whether, in the actuary’s opinion, the continuance of a distribution policy which (in its relationship to relevant experience) was consistent with the allocation proposed, could lead in due course to an unsatisfactory position and, if so, to explain how this could appropriately be avoided (8.3.2); in the case of withprofit business, the actuary’s comments were required to cover ‘bonus prospects, with particular reference to the projected development of outgo on and asset cover for unreserved terminal bonus and the like in different investment scenarios’ (8.3.3); and
• to justify his or her recommendations regarding the allocation of profits and its consequences for the conduct of the company’s long term business by reference as appropriate to the actuary’s appraisal or assessment of (a) relevant experience, (b) the company’s financial and business objectives, and (c) the company’s continuing ability to meet its statutory solvency requirement, and:

… his interpretation of the reasonable expectations of the company’s policyholders having regard to [(a), (b) and (c)]. He should assume that among the conditions for the fulfilment of those expectations are:

1. that, in the recognition and allocation of profits in accordance with the company’s terms of participation in its policy in respect of [the nature and timing of allocation of profits to policyholders and/or shareholders], groups of participating policies are appropriately and equitably distinguished having regard inter alia to the terms of the policies, their duration and their relevant pooled experience; and
2. that the company conducts its affairs, including its new business and investment strategies, with due regard for its financial resources [Paragraph 8.3.4].

GN8

394 Versions of GN8 were issued for 198485 (version 1.1), 198586 (version 1.2), in 1988 (version 2.0) and in 1990 (version 2.1).

395 In version 1.2 two paragraphs were added. The first (paragraph 1.4) specified that it was the appointed actuary’s duty to report in writing to the company, at the appropriate level of authority, on the results and implications of any valuation carried out for statutory purposes and to advise on the conditions in which the company might reasonably be expected to be able to maintain current rates of bonus for any withprofits policies, allowing for any changes in rates envisaged as a result of the valuation (this paragraph was removed in version 2.0).

396 The second new paragraph (1.5) stated that it was the actuary’s professional duty to make timely and reasoned disclosure to the company and to the DTI if, for some exceptional reason, the actuary was unable to comply fully with the additional guidance notes (in GN8).

Government Actuary’s letter to Appointed Actuaries on his ‘working rule’ for resilience testing (DAA1) and Temporary Practice Note from the F&IA

397 On 13 November 1985 the then Government Actuary wrote to the appointed actuaries of insurance companies indicating the standard or ‘working rule’ he would be applying for resilience testing when considering the suitability of the actuary’s statutory valuations and advising the DTI on the solvency position of each insurance company (DAA1).

398 This entailed comparing the company’s reserves with the ability to meet the requirements of ICR 1981 (other than Regulation 55) given an immediate rise or fall of 3% in the rate of interest and a fall of 25% in equity prices (and a similar fall in property values). This working rule was later said²⁶¹ to have been ‘effectively endorsed’ in Temporary Practice Note No. 2 (TPN2, issued by the F&IA to actuaries in May 1986).

399 Over the years up to 2000 a number of further DAA letters were issued by the Government Actuary to appointed actuaries on the subject of resilience testing in which the tests and hypothetical scenarios evolved and became considerably more complex²⁶², as mentioned below. The guidelines contained in the DAA letters had no statutory force, but were considered to set a benchmark for a minimum acceptable standard²⁶³ for resilience testing.

400 Resilience testing was considered to play an important part in securing prudent provision for the liabilities of insurance companies. A later working party of the F&IA which investigated resilience reserves²⁶⁴ noted that numerous working parties had looked at the fundamental valuation regime and most had concluded that their results were heavily dependent upon the resilience regime which was applied to them.

Proposals to strengthen the appointed actuary system and a view of the role of the actuary in the UK supervisory regime as at 1990

Consultation paper on proposals to strengthen the system

401 In March 1990 the DTI consulted on proposals to strengthen the appointed actuary system²⁶⁵. Whilst it was noted that generally the system had worked well it was open to question whether ‘such an important part of the UK’s insurance supervision should continue to rest so largely on nonstatutory professional rules and custom and practice, without any backing of law’.

402 The DTI had considered whether, in the circumstances, it should take legislative action in relation to the appointed actuary system and set out the essential elements of the professional rules in regulations, but the view had been reached that it was not desirable to take over the role of the profession in this way and that it would destroy the flexibility of the system which was seen as one of its main strengths. The DTI did, however, conclude that ‘some reinforcement is necessary to prevent serious problems arising in the future’.

403 The paper proposed two means to strengthen the system: the first was to introduce into the Regulations a requirement for the appointed actuary to certify compliance with the Guidance Notes issued by the professional bodies, or to identify any departures²⁶⁶. The second was that an actuary should not be appointed as an ‘appointed actuary’ without a practising certificate issued by one of the two professional bodies²⁶⁷ .

Programme of visits to appointed actuaries

404 On 7 November 1990 the Government Actuary wrote to appointed actuaries to inform them that officials from the DTI and GAD were beginning a rolling programme of visits to life insurance companies, intended to cover all authorised life insurance companies in the UK over a three year period. The letter stated that the aims of the visits were:

1. to strengthen the appointed actuary system by achieving closer contacts between appointed actuaries and senior officials of GAD and the DTI, explaining that GAD wished to be satisfied that the role of the appointed actuary was well understood within the company and that the appointed actuary was well placed to perform his or her professional duties; and
2. to improve the supervisory process by looking at the company’s plans prospectively rather than relying on the retrospective view given in the returns to the DTI made under the ICAS Regulations 1983, indicating that officials would wish to discuss with appointed actuaries and senior management the company’s business plans over the next five years with particular reference to solvency aspects and any requirements for additional capital.

405 Although discussion at the meetings was mainly to be about actuarial matters, it was indicated that wider issues would be discussed. The letter explained that in order to maintain effective supervision it was becoming increasingly necessary to understand aspects which were not covered in the DTI returns, for example any group corporate structure, any service agreements between the insurance company and any other companies in a group and the sources of the company’s business. It was suggested that it would be necessary for the company’s senior management, including its chief executive, to be present for at least part of the visit, particularly when business plans and group structure were to be discussed. (The DTI wrote simultaneously to the chief executives of insurance companies enclosing a copy of this letter.)

The Government Actuary’s view of the role of the appointed actuary in 1990

406 Speaking at a summer school attended by European actuaries in 1990²⁶⁸, the Government Actuary placed considerable emphasis on the professional role of the appointed actuary in the system of supervision in the UK. In considering the distinctions between the regimes which applied in the UK and in other parts of Europe he said that in the UK there was ‘emphasis generally on certification by professionals rather than prescription of rules by the supervisor and detailed checking to see that they were satisfied’. He noted that the actuary was responsible for determining the mathematical reserves for life business, for ensuring the continuing financial viability of the company, and that the actuary had a major part to play in safeguarding the reasonable expectations of policyholders. He went on to observe that:

The Actuary’s responsibilities are seen as going well beyond a simple requirement to report in the annual returns to the supervisory authority on his regular investigations into the financial condition of the company. Clearly the Actuary has responsibilities to the company as his principal, but he is also regarded by his profession as having an overriding obligation to the supervisory authority, by reason of his position, which gives him a clear responsibility to safeguard the rights and interests of policyholders. The Guidance Notes envisage that there could be occasions on which the Appointed Actuary might need to advise the DTI directly of a situation where the company is following a course of action which would lead him to qualify a subsequent actuarial certificate. In practice this has happened only rarely but the threat is important in ensuring that company management takes notice of what the Appointed Actuary says.

The Second Life Directive 90/619/EEC

407 The Second Life Directive of 8 November 1990 (the Second Life Directive) built on the right of establishment in the First Life Directive and was described as supplementary to it²⁶⁹. It was primarily concerned with the next stage in the EEC’s programme in relation to the freedom to render services, allowing companies based in one member state to offer their services to customers in other member states.

408 In essence, this Directive permitted an insurer to accept unsolicited business (or ‘own initiative business’) from residents of another EEC state even though the insurer did not hold authorisation in that country. The Directive’s description of ‘own initiative business’ in article 13 included unsolicited intermediary business, but contained an option which allowed the member state to restrict ‘own initiative business’ to cases where there had been no contact with the prospective policyholder, even via an intermediary.

409 Article 5 of the Second Life Directive amended article 23 of the First Life Directive. It required member states to ensure that their supervisory authorities had the power to supervise crossborder activities of companies within their country, including the power to carry out ‘on the spot’ investigations at the premises of the company and to take any measures appropriate and necessary to ensure that the company was in conformity with the laws and regulations relevant to it.

410 The limited ability provided by the Second Life Directive for insurance companies throughout the Community to accept business from policyholders in other member states was superseded by the implementation of the Third Life Directive which was issued in 1992. However, provisions of the Second Life Directive regarding the law of contract²⁷⁰ and cancellation²⁷¹ were carried over into the Third Life Directive regime.

411 The Second Life Directive was implemented in the UK mainly through amendments to the ICA 1982 introduced by the Insurance Companies (Amendment) Regulations 1993²⁷² which came into force on 20 May 1993.

Further amendments to ICR 1981 and other subordinate legislation 19851990

412 Miscellaneous amendments were made to ICR 1981 in 1985²⁷³. Those of substance primarily related to the margin of solvency and valuation provisions and introduced a number of refinements, for example to clarify the relationship between the required margin of solvency and the minimum guarantee fund, to amend the calculation of future profits to enable the average number of years remaining on policies to be weighted by reference to the actuarial value of their benefits, as well as dealing with certain reinsurance issues.

413 In 1988²⁷⁴, consequential amendments were made to ICR 1981 in relation to references to unit trust schemes in the light of repeals and replacement provisions introduced by the FS Act 1986. Amendments were also made to the ICAS Regulations 1983 for this reason²⁷⁵. In 1991²⁷⁶ ICR 1981 was amended in relation to longterm contracts linked to unit trusts, to prohibit the linking of benefits to anything other than authorised unit trust schemes or recognised schemes within the meaning of the FS Act 1986. Schedule 13 to ICR 1981 was also amended in relation to the securities by reference to which benefits under linked long term contracts could be determined²⁷⁷ .

414 Specific rules for the winding up of insurance companies were made in 1985²⁷⁸ under section 365(1) of the Companies Act 1948 and section 59 of the ICA 1982, to provide for such matters as the identification of assets and liabilities of the long term business and methods of valuation. In 1986 the rules were amended²⁷⁹ in the light of the enactment of the Insolvency Act of that year.

415 Section 49 of the ICA 1982 regarding sanction of the court for transfer schemes relating to long term business was amended through subordinate legislation with effect from January 1988²⁸⁰ in order to implement the Directives²⁸¹ on mergers and divisions of public limited liability companies in so far as they applied to life insurance companies. The effect was to make certain mergers or divisions where the transferor was a public company subject to Companies Act provisions on compromises and arrangements, in addition to the provisions of the ICA 1982.

416 The Insurance Companies (Amendment) Regulations 1990²⁸² implemented the Non Life Directive 88/357/EEC by introducing amendments to the ICA 1982, ICR 1981 and the ICAS Regulations 1983.

Consideration of PRE 19811990 and the first report of the F&IA joint working party on PRE

417 As noted above, there appears to have been only limited debate on the meaning and effects of the phrase ‘reasonable expectations of policyholders or potential policyholders’ before it was introduced into the legislation in 1973. However, that debate got under way very shortly after the ICAA 1973 was introduced, as illustrated by a note prepared by the DTI on the policy issues arising from the 1973 Act which explained that the reference to PRE ‘may present difficulties of interpretation and policy is likely to evolve from cases’²⁸³ .

418 Nonetheless, it was considered that the reference to ‘potential policyholders’ was important as it demonstrated ‘the forward looking use of the powers which is contemplated and implying the desirability of early intervention to secure recovery rather than merely minimising the effects of expected deterioration’. Notes prepared by GAD in the period leading up to the preparation of the Bill which preceded the ICA 1982 on the need for amendments to then existing legislation confirmed the view that, in interpreting the PRE ground for intervention in relation to longterm business, the Secretary of State was required to look beyond the fulfilment of contractual liabilities to the satisfaction of the additional expectations of participating policyholders. The note then suggested that ‘thinking on the issues of policyholders’ reasonable expectations has developed further’²⁸⁴.

419 Nonetheless, in sections 37(2)(a), 37(6) and 45 of the ICA 1982 the earlier provisions of the legislation on PRE were simply repeated, subject to the new restriction in section 45(2), arising from the requirements of the First Life Directive, in relation to the prohibition on the exercise of the residual PRE intervention power in a manner which would restrict free disposal of assets by the company (subject to limited exceptions).

420 During the 1980s extensive consideration was given by the DTI to the origins and meaning of the term PRE, most commonly in the context of the balance to be struck between the interests of shareholders and policyholders. For example, in 1986 a major insurance company was proposing to change its articles of association to omit the reference to a 90:10 split between policyholders and shareholders. This led DTI officials to undertake research into what the term meant and its origins, although this failed to produce any precise definition and the simple conclusion was reached that the powers were wide ranging and could be used in a variety of circumstances²⁸⁵ .

421 Counsels’ opinions were obtained by the DTI in the latter part of the 1980s, generally in connection with PRE in the context of a proposed restructuring by a proprietary life company and concerns about the balance of interests between policyholders and shareholders.

422 Those opinions confirmed what appeared to be the commonsense reading of the PRE provisions, that they were directed at something wider than enforceable legal or equitable rights and that such matters as the company’s statements of previous practice could give rise to expectations which were, objectively assessed, ‘reasonable’. It was indicated that one matter which a policyholder might reasonably expect was that the balance between policyholders of different classes (and not just the balance between shareholders and policyholders) would not in any substantial respect be altered in a manner adverse to any class²⁸⁶ .

423 Correspondence between officials in the DTI, GAD and the Solicitor’s Office during 1988²⁸⁷ in connection with a draft submission which was being prepared for the then Parliamentary Under Secretary of State for Corporate and Consumer Affairs, shows that an issue had arisen about whether or not section 45(2) of the ICA 1982 (the prohibition on the use of the PRE intervention power in a manner which would restrict the company’s freedom to dispose of its assets save in specified exceptional cases) posed an obstacle to the Secretary of State intervening²⁸⁸ in cases where a proprietary company was increasing significantly the proportion of profits distributed to shareholders.

424 The officials appear to have concluded that section 45(2) should not be interpreted as presenting such an obstacle (although the issue did not appear in the final version of the submissions to the Parliamentary UnderSecretary of State). A number of arguments were put forward to support this conclusion, mainly based on the officials’ understanding of the intended effects of article 21.2 of the First Life Directive (from which section 45(2) was derived) and the way in which that provision had been applied in other parts of Europe. A directing actuary at GAD noted²⁸⁹ that:

1. he had always considered that article 21 was concerned solely with investments;
2. like much of the First Life Directive, article 21 was ‘a straight carryover’ from the NonLife Directive, but the issue of appropriation of profits did not normally arise with nonlife business;
3. ‘[c]ertainly, the existence of article 21.2 has not prevented other Member States from prescribing limits to the share of profits that may be allocated to shareholders’.

An adviser in the DTI’s Solicitor’s Office considered that it ‘seemed both legitimate and necessary, in order to give proper effect to the Directives, to interpret the word “assets” in a reasonably restricted way, that is, so as not to include surplus profits available for distribution’²⁹⁰. He was of the view that a very wide interpretation of section 45(2) would ‘all but emasculate the section 45(1) power’²⁹¹. It appears that the DTI did, on occasion, rely on section 45 to prevent the payment of a dividend by an insurance company²⁹², but it is not known whether or not any of the exceptional circumstances specified in section 45(2) existed when it did so.

425 By 1988 consideration was being given by the DTI, with advice from GAD, to the need for guidelines to be issued on the policy to be applied by the Secretary of State in using the powers of intervention on PRE grounds, what the criteria for their use should be and what should be said publicly.

426 GAD recognised the need for guidelines but considered that there was also a need for flexibility in the exercise of powers and this could be endangered by ‘saying too much in public’. GAD presumed that, in practice, the DTI would only wish to intervene in extreme cases. GAD suggested that in some cases the powers could only be exercised effectively if more formal responsibilities were placed on appointed actuaries²⁹³ .

427 GAD later drew attention to the need for issues relating to fairness between different classes of policyholders to be addressed (and not just those between shareholders and policyholders) and predicted that this could be an area in which there would be an increase in the number of cases where the DTI would be asked to intervene on PRE grounds²⁹⁴ .

428 Those deliberations culminated in a memorandum produced by DTI officials for the then Parliamentary UnderSecretary of State, dated 9 September 1988, concerning the criteria for the use of PRE powers (and whether they should be announced). This memorandum included the following points:

1. the DTI’s powers should be used to ensure that policyholder funds were properly managed in accordance with the interests of policyholders (with an equitable balance between policyholders and any shareholders) and that funds were administered prudently and with the level of skill and competence that did not depart significantly from the range which it would be reasonable to expect from the company in the circumstances of the case;
2. the DTI did not consider, as a matter of law, that policyholders can or should have reasonable expectations of any particular rate of return as such;
3. the DTI’s powers should be used to ensure insurance companies did not engage in practices which are obviously unfair. The position as between various classes of policyholders was mentioned and the example was given of the concern expressed by the supervisory authorities in Australia at the habit of some companies to gear the generosity of their bonuses to the fierceness of the competition for new types of policy. It was suggested that greater financial awareness among consumers could lead to an increased volume of complaints about ‘unfairness’ and that the Department should not be overzealous in the pursuit of possible unfairness. It was said that ‘there is a large margin of appreciation between fairness and unfairness and we should only consider intervening when the unfairness is obvious and blatant’;
4. no comprehensive statement on the criteria for use of the PRE powers should be made but there might be advantage in speaking selectively on certain aspects. It was suggested that if companies were led to believe that certain areas of conduct were not, as a matter of policy, to be patrolled closely this might be considered to give them licence. However, it was noted that there could be advantages in making it clear to policyholders that they could not expect a particular rate of return, that it could fall as well as rise in the light of the general investment climate;
5. a perceived gap in the legislation should be closed. This related to the situation where the company was demonstrably ‘able’ to meet PRE but chose not to do so; a problem which was described as arising from faulty drafting in the ICA 1982. The memorandum suggested that the legislation be amended to delete the reference to the company being ‘unable’ to fulfil PRE, and that this point might join other proposals for inclusion in the Companies Bill which was then contemplated. However, it was acknowledged that this change was not urgent (and it appears that it was never made).

No legislation was pursued as a result of the memorandum to the Minister; nor does it appear that any ministerial announcement on PRE was made at this time.

429 In his presidential address to the Institute of Actuaries in 1986, M.H. Field considered the justifiable expectations of policyholders as an objective of actuarial valuation (JIA 114 (1987) 114). He commented on issues surrounding four ‘important and justifiable’ expectations of policyholders:

1. that the company was operated soundly and competently, conformed to proper standards of practice, was free of conflicts of interest and had a negligible risk of fraud;
2. that the company was financially sound, noting that no regulatory system could be absolutely secure and that imposing high standards of financial soundness entailed a cost to policyholders; that maintaining the required solvency margins, for example, could result in a reduction in investment income to the company;
3. expectations about what the policyholder would receive in terms of a lump sum or pension, observing that those expectations were shaped by companies and their intermediaries, and noting how far products had moved from their origins (of enabling individuals to cope with risk) and closer towards investment products, questioning whether that was really in the interests of the broad mass of the public; and
4. that risks would be shared by the general body of policyholders and not borne by individual savers (which was important for the general mass of the public who required the protection which life assurance could bring, but were not generally ‘sophisticated investors’). He observed that:
   I regard the withprofits policy as having the potential to be of continuing valuable service to the community, but with so much of the benefit now being subject to discretionary judgements its simplicity and, perhaps its integrity is in jeopardy. I believe we need to restore the balance.

As far as the monetary expectations of policyholders were concerned, the President concluded that the concept only had meaning at a given point in time. A number of the other comments in his address showed foresight about issues which were to be considered more extensively much later, including the way in which the costs of meeting guaranteed surrender values should be met in financially deteriorating conditions and his observation that the changes in withprofit policies which had then commenced some 25 years earlier had not been tested in ‘violently different economic environments’.

430 In September 1989 the F&IA set up a joint working party of the Faculty and Institute to consider the issue of PRE at the suggestion of the chairman of the Life Assurance Joint Committee²⁹⁵. It was said that the issue of PRE had been especially topical in the preceding few months and it seemed likely to be of continuing general interest and of special interest to companies that demutualised or restructured.

First report of the F&IA joint working party on PRE – 25 April 1990

431 The first of the three reports produced by the Working Party between 1990 and 1993 entitled ‘Policyholders’ Reasonable Expectations’ was dated 25 April 1990²⁹⁶. The Working Party had set its own terms of reference which related to how PRE had been used in practice, with recommendations to be made on how PRE should be regarded within the UK actuarial profession and whether or not there should be professional guidance as to its interpretation.

432 Rather than deciding what the expression ought to mean, the Working Party conducted interviews and sought opinions from members of the actuarial profession on how PRE had been interpreted in practice. The interviews were conducted on the basis of complete confidentiality. The Working Party also met with officials from the DTI and from GAD. The first report summarised the results of those interviews and appended a history of PRE, a list of references to PRE in legislation and in actuarial literature and a checklist of matters to be considered in respect of PRE.

433 An issue which emerged repeatedly from the interviews was the level of sophistication which it was appropriate to attribute to policyholders in respect of PRE, it being said that the policyholder generally had ‘little understanding of the kinds of technical issue raised by PRE’.

434 The general view was that PRE should be interpreted in the context of the professional advisers acting for policyholders, the courts, the press and ‘similarly well informed observers of the life insurance industry’. The strong view was expressed that PRE was not exclusively of relevance to withprofit offices but arose, for example, in relation to a decision to increase charges for nonprofit policies. It was noted that proprietary offices raised particular issues with PRE because of the potential for conflict between shareholders and policyholders.

435 No instances were found of the Secretary of State invoking his powers to intervene on grounds of PRE²⁹⁷, but the Working Party understood that there were a number of occasions on which the DTI had advised companies of the steps to be taken to avoid such intervention. The appointed actuaries involved in these cases were interviewed by the Working Party and seven brief examples were given of situations in which PRE considerations had arisen, mainly relating to some form of transfer, merger or restructuring and issues concerning the allocation of surpluses or compensation on a demutualisation. One case related to the closure to new business of a mutual company which was considered to be unable to maintain its current level of bonuses due to inadequate financial resources and entailed consideration of whether, prior to closing for new business, the company had been giving new policyholders reasonable expectations concerning their bonuses.

436 In relation to the concepts and principles that emerged from the interviews, the points made included the following:

1. many life assurance contracts included at least one discretionary element; policyholders might reasonably expect that a life company would behave fairly and reasonably in exercising any discretion which was available to it;
2. asset shares²⁹⁸ should provide the starting point for determining maturity benefits;
3. it was reasonable to expect that a company would change its policies only gradually in relation to matters which affect the returns to policyholders such as the degree to which returns are smoothed²⁹⁹ over time or the extent to which part of the asset share is retained to finance future expansion;
4. the Working Party concluded that PRE for withprofit policyholders extended beyond the relationship between maturity payments and asset shares, to the factors which determined the asset shares. Unusual investment policies or acceptance of high risk policyholders at ordinary rates would risk failing to meet PRE unless the company published its intention to do so;
5. policyholders and their advisers normally expected continuity in all areas of a company’s operations including its bonus philosophy;
6. in general, gradual changes were more likely to be acceptable to policyholders than major discrete changes; communication with policyholders during the currency of their policies played an important part in shaping expectations and might help to avoid problems;
7. for withprofits policyholders gradual change was acceptable, particularly if it was communicated to policyholders, whereas sudden change was not;
8. the consensus among actuaries interviewed was that policyholders should be consulted about any proposed radical change in the way in which the company operated (for example following a major downturn in the company’s prospects) and that they should be provided with clear information about the available options, such as closure to new business or operating as a closed fund; and
9. any major change in the level of discretionary charges or benefits should be regarded as a break in continuity which would warrant consultation with policyholders (as an example, a reduction in the level of bonuses in excess of that justifiable on grounds of deterioration in investment conditions would amount to a major change).

437 The Working Party stated that ‘in the final analysis’³⁰⁰ it was for the Secretary of State to decide whether a company might be unable to fulfil policyholders’ reasonable expectations. Interviews with the DTI and GAD confirmed that there was no predetermined view of where the line between reasonable and unreasonable behaviour lay; each case was considered on its individual facts and circumstances.

438 The report suggested that lower prominence was given to the issue of PRE by appointed actuaries where no ‘special circumstances’ applied. In their conclusions, the Working Party noted that in normal daytoday management of a life office, PRE was ‘virtually synonymous with equity’ and the almost universal method of measuring it was in asset share calculations, and that it was ‘naturally, widely accepted that there are different ways of calculating assetshares’.

439 The checklist of factors to be considered in relation to PRE, set out in Appendix 2 to the first report, referred to such matters as:

1. the contents of sales literature, policy documents, illustrations and quotations;
2. maturity values in comparison with the industry as a whole and the past record of the company;
3. the consistency of a proposed course of action with the practice and performance of the industry as a whole and the past practice of the company;
4. the company’s memorandum and articles of association;
5. the question of whether appropriate importance was being attached to expectations of a ‘minimal or non contractual kind’, such as options to extend or convert and surrender values; and
6. whether the proposed course of action was sound and prudent by the normal standards of the insurance business and fair to different classes of policyholders (and how fairness was to be defined, for example, whether asset shares should be used).

440 The Working Party recommended that the subject did not warrant a ‘full professional paper’, but that a Guidance Note of an advisory kind would be helpful, comprising a summary of part of the first report³⁰¹ and the checklist of factors to consider in relation to PRE. As some form of guidance to actuaries on the interpretation of PRE was considered desirable, it was recommended that it could be provided by publication of the first report after discussion by the profession and amendment as necessary.

Footnotes

¹⁴⁸ The Insurance Companies (Classes of General Business) Regulations 1977 SI No. 1552 and the Insurance Companies (Solvency: General Business) Regulations 1977 SI No. 1553, made under section 2(2) of the ECA 1972.

¹⁴⁹ For companies authorised to transact longterm business on 31 December 1981, the margin of solvency provisions did not apply until 15 March 1984 (section 99(1) and paragraph 4 of Schedule 4 to the Insurance Companies Act 1982).

¹⁵⁰ According to a paper entitled ‘Statutory Regulation of Long Term Insurance Business’ prepared for the F&IA by William M Abbott and revised by Nick C. Dexter in 2000.

¹⁵¹ JIA 100 (1973) 3569 at paragraph 18. The principles proposed by Skerman included a net premium method of valuation (or some other method producing reserves at least as strong); partial allowance to be made for the expenses of new business; and actuarial reserves of no less than the guaranteed surrender values or the values of other options available under the policy (paragraphs 18.1–18.6).

¹⁵² Observations made by the Government Actuary in paragraphs 6.17.3 of the paper prepared for Le Groupe Consultatif summer school referred to in footnote 91.

¹⁵³ Although there had been requirements for an initial minimum margin of solvency as a prerequisite to authorisation under, for example, section 62 of the CA 1967 and section 1 of the ICAA 1973.

¹⁵⁴ See paragraph 242 above.

¹⁵⁵ See paragraph 244 above.

¹⁵⁶ The amendments included changes in relation to the valuation of dependants of life companies so as to increase their liabilities by an amount approximating to the solvency margin (Regulation 40(2)); to allow debentures or shares which were suspended at the valuation date to be included in the valuation within limits (Regulation 46(2)); amendment to the definition of ‘long term business amount’, to bring it into line with the definition of ‘general business amount’ (Regulation 49) and to apply limits on the extent to which all assets of a proprietary life company could be taken into account in the valuation (only the life fund had previously been subject to such limits) (Regulation 49).

¹⁵⁷ In practice, those rules were considered to have a significant impact on insurance companies’ investment policies (paragraph 10.1 of the paper prepared by the Government Actuary referred to in footnote 91).

¹⁵⁸ Under section 14 of the ICA 1974 as amended by section 17 of the ICA 1981. 

¹⁵⁹ Under section 26A of the ICA 1974 inserted by section 21 of the ICA 1981. 

¹⁶⁰ Regulation 12(1)(b) on zillmerisation. 

¹⁶¹ C.D. Daykin: JIA 119 (1992) 313 –343 at paragraph 15.2.

 ¹⁶² Reference to PRE was included later: see regulation 64 of the Insurance Companies Regulation 1994 SI No. 1516, which specified that the actuarial principles used to determine liabilities must have ‘due regard to the reasonable expectations of policy holders’. It has been suggested that, even before this change was made, the requirement to use (as a minimum) a net premium valuation method for certain long term contracts amounted to an implicit requirement to take account of PRE in respect of those contracts.

¹⁶³ Regulation 57(1) provided for a net premium method of valuation in cases where further specified premiums were payable under the contract and benefits were determined from the outset in relation to the total premiums payable. Regulation 57(3) related to contracts under which each premium paid increased benefits or the amount of a premium payable in the future was not determinable until it was paid, and in this case allowed both the future premiums and the corresponding liability to be left out of account so long as adequate provision was made against any risk that the increase in the company’s liabilities resulting from payment of future premiums might exceed the amount of those premiums. By virtue of Regulation 54, if any alternative method of valuation to that in Regulation 57 was used (or if any alternative methods of calculation to those in Regulations 55, 56 or 5864 were used) to determine the amount of the long term liabilities, it was required that the alternative method should result in liabilities (or provision for liabilities) of no lesser amount, in aggregate, than the amount calculated in accordance with Regulations 5564. See also footnote 24 regarding the aims of a net premium method of valuation in terms of providing for more than contractual liabilities.

¹⁶⁴ Certain of the contracts entered into by Equitable came within subparagraphs (a) and (b) of paragraph (3) of regulation 57.

¹⁶⁵ The then Government Actuary stated in 1988 that the JAWP was chaired by the Government Actuary, with representatives of the F&IA and GAD and ‘an observer’ from the DTI. The JAWP was supported by a ‘Valuation Research Working Party’ which developed valuation methods and assumptions and reported on technical questions. The then Government Actuary indicated that the JAWP offered a means of close cooperation between the supervisors (represented by GAD) and the profession (through the F&IA). The JAWP had been set up as a means of formal consultation with the F&IA when the valuation regulations were first drafted, but was ‘retained as a permanency’, which (in addition to developing and amending the regulations) considered such matters as methods of valuation and tests to be applied by GAD, for example, to mismatching reserves (JIA 116 (1989) 27100 at paragraph 2.15).

¹⁶⁶ TFA 38 (19811983) 219243 at pages 235238.

¹⁶⁷ A similar point was made by the Government Actuary in 1990 when describing the UK supervisory regime to a summer school for European actuaries (paragraph 8.2 of the paper referred to in footnote 91).

¹⁶⁸ Another actuary present at the meeting expressed concern that a proliferation of professional standards might lead to a reduction in reliance on the professional judgment of actuaries (although he was comforted that the Exposure Draft emphasised judgment) ‘I think that we must restrict guidance to the minimum necessary to give comfort to the laity and the authorities and, where possible, rely on professional discussion in this Hall and in Staple Inn, duly reported in our transactions and journals’ (D.D. McKinnon at page 242 ibid).

¹⁶⁹ Paragraphs 9.1 and 9.2 of the paper referred to in footnote 91.

¹⁷⁰ By the Insurance Companies (Amendment) Regulations 1982 SI No. 675.

¹⁷¹ By the Insurance Companies (Advertisements) (Amendment) (No. 2) Regulations 1983 SI No. 396.

¹⁷² Which had been implemented in 1977 by means of regulations made under section 2(2) of the ECA 1972, making modifications to the ICA 1974.

¹⁷³ The DTI became the responsible government department from 1983 onwards.

¹⁷⁴ Sections 79 of the ICA 1982.

¹⁷⁵ The information to be submitted by applicants was prescribed in regulation 29 of ICR 1981 and Schedules 4 and 5 for longterm and general business respectively. 

¹⁷⁶ Section 5(2) of the ICA 1982. An application for authorisation was to be determined within six months of the applicant’s proposals being submitted. A DTI briefing paper for new ministers dated April 1992 indicated that authorisation was almost never refused by the Secretary of State under section 5(2). Instead, companies were persuaded to modify or withdraw their applications.

¹⁷⁷ See article 12 of the First Life Directive.

¹⁷⁸ Section 11(3) of the ICA 1982 and article 26.3 of the First Life Directive.

¹⁷⁹ At the time of enactment of the ICA 1982, these were contained in the ICAS Regulations 1980.

¹⁸⁰ Derived from section 13 of the ICA 1974.

¹⁸¹ The applicable regulations at this time were ICR 1981, Parts V (assets) and VI (liabilities), which continued in force by virtue of section 17 of the Interpretation Act 1978.

¹⁸² Derived from section 14 of the ICA 1974 (section 3 of the ICAA 1973) and consolidating amendments made to section 14 of the 1974 Act by section 17 of the ICA 1981.

¹⁸³ Derived from section 15 of the ICA 1974 (section 3 of the ICAA 1973).

¹⁸⁴ The ICAS Regulations 1980 (Regulation 15 and Forms 4151 related to longterm business).

¹⁸⁵ Derived from section 16 of the ICA 1974.

¹⁸⁶ Regulation 21 of the ICAS Regulations 1980 (as amended).

¹⁸⁷ Derived from section 17 of the ICA 1974.

¹⁸⁸ The relevant regulations were SI 1980 No. 6 (see paragraphs 235 et seq) as amended by the Insurance Companies (Accounts and Statements) (Amendment) Regulations 1981 SI No. 1656 in relation to the prescribed signatories, subsequently replaced as described in paragraph 341.

¹⁸⁹ Derived from section 18 of the ICA 1974 as amended by section 18(1) of the ICA 1981.

¹⁹⁰ Derived from section 19 of the ICA 1974.

¹⁹¹ ‘Prescribed’ was defined in section 96(1) as meaning prescribed by regulations made under the ICA 1982.

¹⁹² Derived from section 21 of the ICA 1974 (section 5 of the ICAA 1973).

¹⁹³ As defined in section 31(4) of the ICA 1982.

¹⁹⁴ Derived from section 22 of the ICA 1974.

¹⁹⁵ Derived from section 22A of the ICA 1974, introduced by section 18(2) of the ICA 1981.

¹⁹⁶ By the Insurance Companies (Accounts and Statements) (Amendment) Regulations 1982 SI No. 305.

¹⁹⁷ ‘Connected person’ was defined for this purpose in section 31(5) as being a person (other than a subordinate company) who or which controlled, or was the partner of someone who controlled, the insurance company; was a company controlled by the insurance company; or a director of an insurance company (or a director’s husband, wife or child).

¹⁹⁸ The Directives did not deal with those conducting only reinsurance business, but the UK legislators chose to provide for them. ¹⁹⁹ See article 19 of the First Life Directive in relation to the ‘minimum solvency margin’ and its determination. 

²⁰⁰ This submission is made in the annotations to section 32(4) of the ICA 1982 published in the Current Year Law Book. The notes compare section 32(4) with section 45(2)(b). Section 45(2)(b) contained one of the three exceptions to the general rule in section 45(2) that the residual power under section 45(1) should not be exercised in such a way as to restrict the company’s freedom to dispose of its assets (see paragraph 328). Section 45(2)(b) permitted the section 45(1) intervention power to be used to restrain free disposal of assets in circumstances where the company had failed to satisfy an obligation to which it was subject by virtue of sections 3335 of 1982 Act (or the equivalent provisions of the ICA 1974). Under section 45(2) as originally enacted, in cases where the only default by a company related to its solvency margin, it was implicit that section 45(1) could not be relied upon in a way which would restrict asset disposal unless the company’s solvency margin had fallen below the minimum required under section 33 (and possibly, unless it had also failed to provide or implement a shortterm financial scheme requested by the Secretary of State under that section). Further, section 45 could not be relied on if its purposes could be achieved by reliance on sections 38 to 44 (section 37(6)). However any wider limitation on reliance on section 45(1) or on sections 3744 by virtue of sections 32(4) and 33 is not apparent. (The exceptional grounds in section 45(2) were later expanded to include cases where a company had failed to satisfy the solvency margin requirements of section 32, see paragraph 603.)

²⁰¹ Articles 20.1 and 21.2 of the First Life Directive: the ‘guarantee fund’ was to consist of one third of the minimum solvency margin, subject to a specified minimum amount.

²⁰² See article 17.2 of the First Life Directive and the definition in article 5(b) of ‘matching assets’.

²⁰³ Schedule 4, paragraph 6.

²⁰⁴ Initially introduced as sections 1225 of the ICAA 1973. See paragraphs 114 et seq above.

²⁰⁵ Section 13 of the ICAA 1973, consolidated in section 29 ICA 1974. See paragraph 120 above.

²⁰⁶ Section 23(1) of the ICA 1981 and Schedule 5 to that Act.

²⁰⁷ Derived from section 12 of the ICAA 1973, summarised in paragraph 114 above.

²⁰⁸ See article 21.2 of the First Life Directive, which contained a prohibition on restraining the free disposal of assets of authorised undertakings.

²⁰⁹ Or under the equivalent earlier provisions of sections 26B, 26C or 26D of the ICA 1974 which had been inserted in that Act by the ICA 1981.

²¹⁰ Derived from section 12(1) of the ICAA 1973 summarised in paragraph 114 above. The original grounds related to: (a) policyholders’ reasonable expectations; (b) failure to fulfil obligations under the relevant legislation; (c) furnishing misleading information; (d) inadequate reinsurance arrangements; and (e) existence of a ground which would amount to a bar to authorisation being issued.

²¹¹ Section 37(2) did not apply to the intervention powers under sections 39 or 40, for which special provision was made in section 37(3) (as described in paragraph 314).

²¹² Paragraph 117 above.

²¹³ By way of his powers under sections 38, 41, 42, 44(1) or 45, whether or not any of the grounds in 37(2) or (4) existed.

²¹⁴ Under section 44(2)(4) of the ICA 1982.

²¹⁵ Section 12(3) of the ICAA 1973, see paragraph 116 above.

²¹⁶ Section 12(2) of the ICAA 1973, see paragraph 115 above.

²¹⁷ Which had been revised so as to limit the use of the power in such a way as to restrict the company’s freedom to dispose of its assets in the light of the EEC requirements, as explained below.

²¹⁸ Under section 29 of the ICA 1974 (section 13 of the ICAA 1973).

²¹⁹ Section 23(1) of the 1981 Act.

²²⁰ See article 21.1

 ²²¹ See paragraphs 125 and 126 regarding section 18 of the ICAA 1973 (consolidated in section 34 of the ICA 1974 and later slightly amended by section 36 of and Schedules 4 and 5 to the ICA 1981). 

²²² See paragraphs 127 and 128 regarding sections 19 and 20 of the ICAA 1973 (consolidated in sections 35 and 36 of the ICA 1974). 

²²³ See paragraphs 129 and 130 regarding section 21 of the ICAA 1973, consolidated in section 37 of the ICA 1974.

 ²²⁴ See article 21.2 of the First Life Directive. 

²²⁵ Or under the equivalent earlier provisions of sections 26B, 26C or 26D of the ICA 1974 which had been inserted in that Act by the ICA 1981.

²²⁶ The former provisions of section 23 of the ICAA 1973 (section 39 of the ICA 1974) are noted in paragraphs 133 and 134 above.

²²⁷ Other than as ‘controller’ of the company.

²²⁸ Section 25 of the ICAA 1973; section 41 of the ICA 1974.

²²⁹ See section 99 of and paragraph 15 of Schedule 4 to the ICA 1982, which postponed commencement of these provisions until rules under section 59 had come into operation. The Insurance Companies (Windingup) Rules 1985 SI No. 95 were made for this purpose. Those Rules included a form of reference to PRE in relation to the valuation of nonlinked life policies in Schedule 2. Under paragraph 1(2) of that Schedule, the court was to make an allowance in the calculations for the situation where, on the basis of the company’s established practice, the policyholder had an expectation of receiving benefits additional to the minimum guaranteed under the contract.

²³⁰ Section 54(1) of the ICA 1982. 

²³¹ See paragraphs 149 to 154 regarding sections 33 and 34 of the ICAA 1973 (consolidated in sections 52 and 53 of the ICA 1974). 

²³² Originally defined in section 7(4) of the ICA 1982 (from 1 July 1994 defined in a new section 96C of that Act, see footnote 413). 

²³³ See paragraphs 313 et seq regarding section 37 of the ICA 1982 and paragraphs 114 and 170 regarding the predecessor provisions, in particular, of section 12(1)(e) of the ICAA 1973 (consolidated in section 28(1)(e) of the ICA 1974).

²³⁴ Reenacting the provisions of section 35 of the ICAA 1973 (section 54 of the ICA 1974), see paragraph 104.

²³⁵ SI 2001 No. 3649. ²³⁶ SI 1981 No. 1656, referred to in footnote 188.

²³⁷ SI 1982 No. 305, see footnote 196.

²³⁸ The Insurance Companies (Accounts and Statements) (Amendment) Regulations 1983 SI No. 1192.

²³⁹ SI 1983 No. 1811.

²⁴⁰ In Regulations 28 and 30 respectively. Regulation 29 required the company to annex a statement to the accounts giving prescribed information about the actuary, including particulars of any shares held in the company, any pecuniary interest in company transactions, his or her remuneration and any emoluments as a director.

²⁴¹ From January 1990, this principle was set out in the general guidance on professional conduct standards issued to actuaries by the F&IA (as it is in the current professional conduct standards for actuaries). See the additional note of Advice on Professional Conduct (APC3) issued by the Institute of Actuaries in January 1990.

²⁴² Regulation 18 and Part II of Schedule 6 to the ICAS Regulations 1980.

²⁴³ Such a reference was included in regulation 64 of the Insurance Companies Regulations 1994 SI No. 1516 on the determination of long term liabilities, in relation to the actuarial principles to be used (which were to have ‘due regard to the reasonable expectations of policy holders’ (with no reference to potential policyholders)). From 1992 onwards, GN1 referred to the need for the actuary to have regard to policyholders’ reasonable expectations in his or her assessment of the company’s longterm liabilities (paragraph 6.3 of GN1 version 3.0, see paragraph 514(g) below).

²⁴⁴ JIA 116 (1989) 27100 at paragraphs 2.12.17.

²⁴⁵ By 1990, the total staff employed by GAD comprised some 30 qualified actuaries, 12 trainee actuaries and about 25 support staff (according to paragraph 5.1 of the paper referred to in footnote 91).

²⁴⁶ Apparently a reference to GNI and GN8.

²⁴⁷ See further below (paragraphs 825 et seq) regarding the practice of ‘dynamic solvency testing’ and financial condition reports aimed at assessing the ability of longterm insurance businesses to withstand changes in the economic environment.

²⁴⁸ There was no statutory requirement for such a report to be prepared or considered by the company, but from 1996 onwards it was recommended practice under GN2 that such a report, addressed to the board of the company, should be prepared by the appointed actuary (paragraphs 825 et seq).

²⁴⁹ See paragraph 273 and the footnote thereto.

 ²⁵⁰ Review of Investor Protection, Cmnd 9125 (January 1984). 

²⁵¹ By virtue of the Financial Services Act 1986 (Delegation) Order 1987 SI No. 942.

²⁵² Articles 3,5,6,7 and 8 and Schedule 3 to SI 1987 No. 942. Certain functions were subject to the reservation that they were to be exercisable concurrently by the Secretary of State and the SIB. Schedule 1 listed functions which were not to be transferred to the SIB.

²⁵³ Equitable was a member of two SROs: the Life Assurance and Unit Trust Regulatory Organisation Limited (LAUTRO), in relation to its sales activities, and the Investment Management Regulatory Organisation Limited (IMRO) in relation to its fund management. The general manager of Equitable was appointed as the first chairman of LAUTRO.

²⁵⁴ Equitable’s accounts for 1988 stated that the management report included more information than in the past and that the Society supported ‘the general thrust of the regulations stemming from the Financial Services Act to require more openness from the life assurance industry’.

²⁵⁵ The Auditors (Insurance Companies Act 1982) Regulations 1994 SI No. 449, referred to at paragraph 697. 

²⁵⁶ Hansard Debates, House of Lords 28 July 1986 Vol 479, col 663. 

²⁵⁷ Article 6 of the Transfer of Functions (Financial Services) Order 1992 SI No. 1315. 

²⁵⁸ SI 2001 No. 3649 (articles 3(1)(c) and 292). 

²⁵⁹ No reference was made in the Finance Act 1989 to ‘potential policyholders’, suggesting that it was not considered necessary to reserve sums in order to meet the expectations of prospective policyholders.

²⁶⁰ The replacement provision in section 82B(2) of the Finance Act 1989 now refers to so much of the unappropriated surplus as is required to meet the ‘duty of fairness’ (to treat its policyholders and annuitants fairly with regard to terminal bonus) being treated as a deduction from profits.

²⁶¹ In a ‘Dear Appointed Actuary’ letter sent to appointed actuaries by the Government Actuary dated 31 July 1992 (DAA4).

²⁶² Eventually reverting to more straightforward tests in 2001, at least on a temporary basis, in guidance issued by the FSA shortly after the transfer to it of functions in relation to prudential regulation of insurance companies.

²⁶³ As noted above, the memorandum produced by the F&IA for the House of Commons Treasury Committee Inquiry into Equitable and the Life Assurance Industry, dated February 2001, states (at paragraph 8.2) that, in practice, DAA letters set a minimum acceptable standard for appointed actuaries in determining provisions for particular risks in the valuation of liabilities.

²⁶⁴ The Resilience Reserves Working Party report of October 2000 (paragraph 2.10), referred to in paragraphs 995 et seq. ²⁶⁵ Consultation Paper: ‘Strengthening the Appointed Actuary System’, Insurance Division of the DTI, 13 March 1990. 

²⁶⁶ With effect from 1 January 1994, the certificate to be given by the appointed actuary under Schedule 6 to the ICAS Regulations 1983 was required to include a statement (if it was the case) that guidance notes GN1 and GN8 had been complied with, following an amendment made by the Insurance Companies (Accounts and Statements) (Amendment) Regulations 1993 SI No. 946.

²⁶⁷ This proposal was accepted by the actuarial profession and a system for issuing certificates was introduced at the end of 1992. The requirement for an appointed actuary to possess a practising certificate was first referred to in version 4.0 of GN1 issued in 1994 (at paragraph 2.1).

²⁶⁸ See paragraphs 1.6, 3.2, 4.3 and 4.5 of the paper referred to in footnote 91.

²⁶⁹ Although it had a slightly narrower ambit; for example it did not apply to pension fund management. 

²⁷⁰ As regards the law of contract, article 4 of the Directive included a default provision that the law of any insurance contract entered into by parties in different member states was to be the law of the member state in which the policyholder had his or her habitual residence (known as the ‘law of the member state of the commitment’ and defined in article 2(e)), unless the law of the member state permitted the choice of law of another country or the policyholder was an individual and a national of another member state and the parties agreed to choose the law of another country. In the UK this was put into effect by amendments to the ICA 1982 and the Contracts (Applicable Law) Act 1990.

²⁷¹ Member states were to ensure that policyholders who entered into own initiative contracts were given a period of between 14 and 30 days to cancel unless the contract was for a period of six months or less (article 15). These provisions were implemented in the UK by SI 1993 Nos. 1327 and 1092.

²⁷² SI 1993 No. 174.

²⁷³ By the Insurance Companies (Amendment) Regulations 1985 SI No. 1419.

²⁷⁴ The Insurance Companies (Amendment) Regulations 1988 SI No. 673.

²⁷⁵ By the Insurance Companies (Accounts and Statements) (Amendment) Regulations 1988 SI No. 672.

²⁷⁶ By the Insurance Companies (Linked Contracts) (Amendment) Regulations 1991 SI No. 2511.

²⁷⁷ The Insurance Companies Regulations 1981 (Amendment) Regulations 1991 SI No. 1999.

²⁷⁸ The Insurance Companies (WindingUp) Rules 1985 SI No. 95.

²⁷⁹ The Insurance Companies (WindingUp) (Amendment) Rules 1986 SI No. 2002.

²⁸⁰ By the Insurance Companies (Mergers and Divisions) Regulations 1987 SI No. 2118.

²⁸¹ 78/855/EEC and 82/891/EEC.

²⁸² SI 1990 No. 1333.

²⁸³ Quotation from the policy note prepared following the passing of the ICAA 1973 included in an internal DTI memorandum dated 18 April 1986.

²⁸⁴ Note prepared by GAD dated 11 January 1980.

²⁸⁵ Internal DTI memorandum dated 18 April 1986. A later covering note from the then Head of Insurance at the DTI, dated 21 June 1988, recirculating the 1986 memorandum to other officials who had wished to know what had been said publicly about PRE in the past stated that it would enable the recipients to ‘share equally in the poverty of past reference’ to reasonable expectations. A more informative view about the justifiable expectations of policyholders as an objective of actuarial valuation, rather in terms of the statutory meaning of PRE, was contained in the presidential address given by M.H. Field to the Institute of Actuaries in 1986 (JIA 114 (1987) 114) referred to in paragraph 429.

²⁸⁶ Joint Opinion of Counsel, 8 January 1987, paragraph 8(6), page 8.

²⁸⁷ Dated 21 June 1988; 27 June 1988; 6 July 1988 and 8 July 1988.

²⁸⁸ For example by way of issuing a direction to the company as to the allocation of surplus between policyholders and shareholders.

²⁸⁹ In a note dated 21 September 1987 circulated with the memorandum of 6 July 1988 to the DTI.

²⁹⁰ Memorandum dated 8 July 1988.

²⁹¹ A further issue raised in the officials’ correspondence regarding the proposed contents of the draft submissions to the Parliamentary Under Secretary of State was whether it would be worthwhile exploring with the SIB and LAUTRO the extent to which those bodies would use powers under the FS Act 1986 to prohibit misleading advertising by insurance companies, rather than the DTI attempting to stop such advertising by giving directions under section 45. In a memorandum of 21 June 1988 a DTI official said that he ‘would hope that we can leave this role to the SIB/LAUTRO’.

²⁹² See paragraph 6 of the Treasury’s evidence to a House of Commons Treasury Select Committee on Pension Misselling in 1998 referred to in footnote 304.

²⁹³ Memorandum from GAD to DTI dated 8 July 1988.

²⁹⁴ Memorandum from GAD to DTI dated 8 September 1988.

²⁹⁵ A steering group overseeing the work of a number of working parties, a role undertaken by the Life Board of the F&IA in more recent years.

²⁹⁶ The 1990 report was published together with the two subsequent reports in a document dated June 1993 (it is not apparent from that document whether the first two reports were published individually before 1993).

²⁹⁷ See paragraph 444 regarding the contents of a draft briefing note for ministers dated April 1992 which indicated that intervention under the residual power to impose requirements to protect policyholders against the risks of failure to meet liabilities or PRE under section 45 of the ICA 1982 had taken place on 19 occasions during 1990 in relation to change of control or financial difficulties of companies (and a further 28 times on authorisation).

²⁹⁸ The conclusions in the joint report suggested that the use of asset shares was ‘almost universal’ and implied a link between the use of asset shares and providing equity and meeting PRE. The working party report on annuity guarantees (paragraphs 857 et seq) confirmed that by the time that report was written in 1997, the use of asset shares by life offices as a means of calculating maturity payments was ‘almost universal’. However, other comments in this and the later joint reports on PRE and in other documents suggest that there was no single or accepted means of calculating ‘asset shares’. A letter sent by GAD to appointed actuaries dated 9 July 1993 indicated that at that time GAD considered ‘asset shares’ to be an undefined term of imprecise meaning (see paragraph 531). An explanation of ‘asset shares’ in a more recent actuarial paper was ‘the accumulation of premiums less expenses incurred, allowing for the investment return earned for a group of similar policies. In making the calculations, the asset share would normally be charged for the cost of accruing guarantees, life cover and any capital charges. The asset share is a guideline or benchmark rather than an absolute constraint. In practice, there may be good reasons why a particular group of policyholders should be entitled to more than just asset shares, or in some circumstances less, for example because of the effect of smoothing.’ (Paper presented to the Institute of Actuaries on 25 February 2002 by M. Shelley, M. Arnold and P.D. Needleman). That paper suggests (at paragraph 4.4.5) that, even by 2002, the systems in some offices to calculate asset shares were ‘only rudimentary’.

²⁹⁹ A ‘smoothing adjustment’ would normally be made to ‘smooth out’ peaks and troughs in investment returns, or where the value of the asset share was significantly different from the actual value of the underlying assets.

³⁰⁰ This, of course, disregarded the role of the courts, for example, on judicial review.

³⁰¹ Section 3 of the report, parts of which are summarised in paragraph 436 above.