INSURANCE COMPANIES (ACCOUNTS AND FORMS)

HC Deb 14 November 1968 vol 773 cc734-47

9.31 p.m.

Mr. Michael Shaw (Scarborough and Whitby)

I beg to move, That an humble Address be presented to Her Majesty, praying that the Insurance Companies (Accounts and Forms) Regulations 1968 (S.I., 1968, No. 1408), dated 29th August 1968, a copy of which was laid before this House on 11th September, in the last session of Parliament, be annulled. Let me say at once that it is not our intention tonight to vote against the Regulations. Nevertheless, they are of some considerable size—47 pages—and of the utmost importance to the insurance industry. We believe that they fully merit a short debate, and the opportunity of putting certain points and queries to the Minister. Until the Regulations come into operation, all the hard work that was put into the preparation of Part II of the Companies Act, 1967 cannot be regarded as having been fulfilled, and it was because we considered that these matters were of such importance that we insisted—and I say at once that our insistence was granted immediately by the Minister's predecesor—that such Regulations should be capable of Parliamentary scrutiny.

The insurance industry has a very proud history, and an outstanding reputation throughout the world. However, in recent years, the safeguarding of that reputation has rested too greatly upon the high standards which those engaged in the industry have set themselves. This has resulted in the last few years in newcomers being attracted to the industry who, either from lack of resources, or of professional skill or of honourable intent, have been able to trade upon that reputation not only to the severe detriment of their customers but to the long-term detriment of the industry's standing.

Thus it was that the most urgently required Sections of the 1967 Act were those contained in Part II. Yet although Part II tightened up the law considerably, and desirably, in regard to such things as classification of business sufficiencies, of assets, and of capitals, the requirements relating to accounts and auditors were left to be defined later by Regulations. As a consequence, we are now discussing Regulations which set out the prescribed manner in which these documents shall be prepared and the accounts audited, and prescribing the types of people eligible to conduct the audit of these insurance companies within the classifications.

The Regions are detailed and are of some complexity. I assume that they were drawn up only after detailed discussions with the interested bodies. They are, the British Insurance Association, the Institute of Chartered Accountants and the Institute and Faculty of Actuaries. I am not sure whether those latter bodies are accustomed to speak through the Government Actuary. We should be glad to receive from the Minister of State, Board of Trade, who is to reply to the debate, confirmation that those bodies approve of these Regulations and have no serious legitimate reservations about them.

My own studies of these Regulations would have been greatly simplified—I mention this in the hope that possible further future consideration of this subject may be simplified—if the 1958 Act and amendments to the 1967 Act could be consolidated. Reading the two together make it considerably difficult. In Regulation 2, which deals with the accounts, we come straight away to a word which has a history in our debates—the word "accounts". During the passage of the 1967 Act I tried to persuade the hon. Gentleman's predecessor to accept an Amendment to give a definition of that word. When discussing the Insurance Companies Act, I put to him, as reported in column 1115 of the OFFICIAL REPORT—

Mr. Speaker

Order. We cannot go back to an Amendment to the parent Act. These Regulations come out of the Act as it now is, despite the hon. Member's attempt to amend it.

Mr. Shaw

I am much obliged, Mr. Speaker.

The point I wish to make, which I shall put in a form which I hope will be in order, is that so far there has been no definition of the word "accounts". In spite of being assured that there was such a one in insurance legislation, I have not yet been told where it is. I congratulate the hon. Gentleman that now, for the first time I believe in insurance legislation, we have a definition of that word. Because of that I believe that the Regulations are greatly improved. On page 6 we have for the first time "accounts" defined as being the balance sheet, the profit and loss account and the revenue account. I have that this is not the last time that such a definition will be given in legislation.

The proviso to Regulation 2 states: Provided that such accounts, statements, certificates and reports shall not be deemed not to give such a true and fair view by reason only of the fact that the amount of which any asset of the company has been included in the balance sheet is less than the full value of that asset. This raises the whole question of secret reserves in insurance companies' accounts. The valid need for secret reserves has in the past been too often exaggerated. If there are to be secret reserves why must they be restricted, as they are in this paragraph, to the valuation of assets? The scope and convenience for creating such reserves in assessing liabilities of a company is clearly considerable. I remained very much unconvinced for some time about this proviso until I looked up the Jenkins Committee's Report and found what it said about this matter. The Regulation follows the Jenkins recommendation, paragraph 412, that insurance companies should continue to be exempt from disclosing the market value of their investments". I discovered, on looking back, why the secret reserves should be restricted to assets rather than to any other aspect of the balance sheet. It is for two reasons set out in paragraph 410, the main one being the fact that so much of the business of insurance companies, particularly non-life insurance companies, is carried on abroad and it was thought by the Jenkins Committee that, if full disclosure of the value of assets was made in overseas countries, there would be a tendency for certain countries to pressurise insurance companies either to leave in that country or to bring from this country into that country more assets than they would otherwise wish. On balance, I agree with the proviso.

On a point of clarification, what is the exact meaning of this very important proviso? Does it mean that every asset has to be valued at full value or less for "a true and fair view" to be given? Or does it mean that each class of asset, as outlined in paragraph 10 of Schedule 1, which lists different classes of assets, must, as a class, be at full value or less? In other words, if an asset, because possibly of the fluctuation of the market, is worth less at market value than the book value, is that deemed not to give "a true and fair view"—speaking as an auditor, this is a vital thing to have clear in one's mind when preparing a report—even though, in aggregate, the book value of all the assets together is substantially less than the market value? What does the proviso mean when it speaks of the "full value" of an asset? I cannot see any description of "full value" in the interpretation paragraph. It may appear somewhere else, but I have not been able to spot it

My last question on asset valuations relates to the Jenkins recommendation which I have quoted. Jenkins recommended that insurance companies…should continue to be able to apply. without disclosure, the profits from sales of investments and other assets to writing down the balance sheet value of the remaining investments and other assets as the case may be. When the Regulations become operative next year, will companies be in order in switching secretly-made surpluses on sales of assets to the writing down of the book value of other assets? In other words, is the absence of any mention of such a practice sufficient authority for its adoption? Jenkins thought fit to mention the matter specifically.

The question of who should be eligible to be the auditor of an insurance company was left to be the subject of a regulation; and it is laid down in these Regulations. I welcome the fact that Regulation 7 fixes the qualifications necessary for auditors of these companies as being the same as those which are necessary for the auditors of any other company.

This I believe to be right, and I should need the strongest evidence ever to hold the contrary view. It might be argued that the accounts of these companies are not the easiest to audit and call for special experience, but these arguments can be used about many widely differing companies and groups of companies. It is just worth mentioning that the special arrangements which have been made with regard to the appointment of auditors to underwriters of Lloyd's, as laid down in the 1958 Act, remain unchanged—a good case of leaving well alone.

The auditor is required under Regulation 7(2) to say whether the accounts and statements have been properly prepared, in much the same way as he would have to do in the case of any other company. In addition, he is required to confirm that the three certificates required under Regulations 3, 4 and 6, which have to be signed by the secretary and two directors, have been properly prepared and reasonably given. However, I am glad and relieved, speaking for myself as an accountant and, I hope, for all accountants, that the auditor has no responsibility in regard to the actuary's certificate required by Regulation 5. This also, I believe to be right.

The actuary must be a fully qualified professional man, or at least someone of wide actuarial experience and a person approved by the Board of Trade. The only difference between him and an auditor is that, while they are both professional men with high qualifications, the one is often, I understand, actually employed by the insurance company. whereas no one employed by a company may be its auditor. I make no complaint about that, but it is a matter of interest.

Now, questions of timing and future review. During the passage of the 1967 Act, it was recognised that it would be helpful to the industry if sufficient time were given, before the introduction of new Regulations, that is, those now before us, so that book-keeping and recording arrangements could be geared to provide the necessary information. Regulation 20 provides that the new arrangements shall not apply to accounts relating to a financial year beginning before 1st January, 1969. This seems reasonable to me, but I shall be glad if the Minister will confirm that it is generally so regarded in the industry.

Second, again on timing, will the Ministry itself be adequately manned to cope with the additional work imposed upon it by the Regulations? My hon. Friend the Member for the City of Chester (Mr. Temple) has raised this question in the past, and we had an assurance from the former Minister of State that matters would be put in order by the time the Regulations came along. Is the complement of trained staff now complete to handle the influx of accounts which will have to be examined, and how much will be the likely increase in expenditure in the Department as a result of the additional work put upon it?

Subject to the Minister's reply, we welcome the Regulations. They complete our work of last year, and they restore the safeguards which are so essential to the good name of the industry and to the confidence and protection of the public. As I understand, the Ministry may now call upon a panel of experts in the industry as well as upon the Insurance Consultative Committee whenever advice or consultation is desirable.

I hope that the new protection that has now been given to the good name of the industry and to the public will be kept under review so that public confidence, once again reassured, may not at some future date be found to be misplaced because the rules have not been kept up to date.

9.50 p.m.

The Minister of State, Board of Trade (Mr. Edmund Dell)

May I, first, thank the hon. Member for Scarborough and Whitby (Mr. Michael Shaw) and his colleagues for praying against the Regulations in this sympathetic way so as to give me an opportunity to explain to the House and others interested the background of thinking which has led to their introduction.

I agree with everything that the hon. Gentleman said about the proud history of the insurance industry, and the necessity to take further protective steps to ensure that that proud history is long continued.

Most people have some fairly broad conceptions, or possibly misconceptions, about insurance, but when it comes to detail the subject is regarded as being rather esoteric. I compliment the hon. Gentleman on his evident understanding of the Regulations. They are necessarily rather complex, and I welcome the opportunity to give the House a brief explanation of their underlying purpose and the changes which they incorporate, and to answer the specific points that the hon. Gentleman has raised.

The basic principle of our legislation for the supervision of insurance, which goes back nearly 100 years, may be described as "freedom with publicity". Unlike many other countries which favour more bureaucratic methods of control, we have always maintained that insurers should remain free to determine the terms on which they will do business with their clients and the manner in which they will ensure their ability to meet claims when they arise. As a counter-balance to this freedom, however, insurers are required to make available to the public information in a reasonably standardised form which will permit an assessment to be made of their financial position, at least by the professional advisers to the public, such as the insurance brokers, and by the Board of Trade as the guardian of the interests of the public at large. Consequently, requirements of a substantially similar kind to those contained in these Regulations have been in operation for decades.

We have reviewed these requirements, and in making the new Regulations we have been concerned with five main objectives: first, to modernise the detail of the Regulations; second, to implement certain recommendations of the Jenkins Committee on company law relating to insurance company accounts; third, to bring the Regulations into line with the changed requirements for the disclosure of information by companies generally contained in the Companies Act, 1967; fourth, to enable the Board of Trade to make effective use of the additional powers of supervision it was given by Part II of that Act; and, fifth, to lay the foundations for a more objective method for the verification by the Board of Trade of the adequacy of the reserves set aside by insurers in the non-life classes.

With regard to the first objective, modernisation, it is perhaps not necessary for me to say much more than that the greater part of the existing Regulations consists of the reproduction of Schedules originally enacted in either 1870 or 1909. Modernisation has however been largely a matter of detail, and does not in itself greatly affect the substance of the requirements.

With regard to the second objective, the implementation of the recommendations made by the Jenkins Committee, the analysis of assets is an example. Since 1948, insurance companies have been permitted some latitude in the valuation of their assets in the balance sheet. They prefer to undervalue them so that they have an additional reserve to compensate for serious changes in the level of market quotations. They may do this by retaining particular investments at the original cost in spite of capital appreciation or by writing down the current value. They may also use this freedom to conceal from the public, but not, of course, from the tax authorities, gains realised on the sale of such under-valued assets. In certain circumstances—and here I come to the hon. Gentleman's point—there may be an argument for regarding a value higher than the current market quotation for example, of a redeemable stock, as justified having regard to the needs of the insurance portfolio. The certificate required at Regulation 3(a) provides a safeguard against any over-valuation in the aggregate. Any categories of assets as analysed under paragraph 10 of Schedule 1 which are valued at other than market value for the purpose of giving that certificate are required to be identified and the basis of valuation stated.

The Jenkins Committee accepted that this concession regarding valuation—

Mr. Michael Shaw

The alternative value only needs to be stated where the directors have to use that alternative value in order to get the price above the book value. Is not that right?

Mr. Dell

I should like to consider that detailed question, and write to the hon. Gentleman about it.

The Jenkins Committee accepted that this concession regarding valuation of assets might be continued, and it has been carried over from the Eighth Schedule of the 1948 Companies Act to Schedule 2 of the 1967 Act. The Committee considered, however, that it should be made possible to derive some indication of the true value by means of a suitable analysis of the investments with a parallel analysis of the income obtained from each of the categories. This can, of course, give only a rough idea even to the initiated, but we have accepted that this is a fair compromise between the needs of investment analysts and others interested in the true worth of an insurance company and the objections which insurers see to making public the full extent of their financial strength.

The second Jenkins recommendation which has been implemented suggested that all the accounting requirements to be observed by an insurance company should be contained in one document rather than that there should be two different sets of requirements, under the Companies Acts and the Insurance Companies Acts respectively. Whilst the relevant requirements of the Companies Acts will still apply, the Regulations, by incorporating all of those which are applicable to insurance company accounts, have made it easier for insurance companies to produce a single set of accounts to satisfy the requirements of both Acts. If they prefer, however, companies will still be free to produce for their general meetings somewhat less detailed accounts than those which are required by these Regulations to be submitted to the Board of Trade and to be made available to shareholders and policyholders on demand.

The third objective which I mentioned was greater disclosure. This has been dealt with not only by incorporating the appropriate Companies Act requirements in the Regulations, but also by introducing requirements which correspond with certain Companies Act provisions which are not readily applicable to insurance business without some modification. Thus, the analysis of business by class in the revenue accounts corresponds with the analysis required by Section 17 of the 1967 Companies Act of substantially different classes of business carried on by a company.

To facilitate the effective use by the Board of Trade of the additional powers of supervision given by Part II of the Companies Act, 1967, there will be first of all the new analysis of assets to which I have already referred. This will enable (he Board of Trade to keep a closer watch on the suitability of a company's investments. The certificate as to the availability or otherwise in this country of assets sufficient to cover the liabilities here, which hon. Members will find at (b) on page 3 of the Regulations, will enable the Board to consider whether United Kingdom policyholders are adequately safeguarded. If it is dissatisfied on either of these points, the Board will have to consider whether it should exercise any of its powers under section 80(1) of the 1967 Act. I should also mention in this context the various new requirements relating to a company's reinsurance arrangements, which will enable the Board of Trade to decide whether any intervention on its part is justified on this account under Section 68 of the Companies Act, 1967.

I mentioned the introduction of a more satisfactory means for the verification of the adequacy of the reserves in non-life insurance as the last of the five objectives. The relevant requirements are those set out in Regulations 9 to 13 and the forms on pages 29–32; they are probably the most important innovation in the Regulations and they call for a fairly full explanation within the limits of the time available to me.

For many years past, the reserves required for long term insurance business have been determined by sophisticated mathematical techniques applied by actuaries and no change is to be made in this respect. In the case of general business, the situation is by no means so satisfactory; actuaries are in fact much less commonly employed in this sector than is supposed by many people. The Board of Trade has experienced great difficulty in attempting to satisfy itself as to the adequacy of the reserves made by non-life insurers, notably in the very important motor insurance class.

A reliable means of verifying the non-life reserves is vital to the operation of the basic safeguard which the legislation provides in the form of a minimum solvency margin, that is to say, an excess of assets over liabilities which is proportionate to the annual premium income. In insurance, "prospective and contingent" liabilities, to use the words of Section 13 of the Insurance Companies Act, 1958, which defines the solvency margin, have a very much greater importance than in other types of business.

At any given moment a non-life insurer has prospective and contingent liabilities of three kinds peculiar to insurance. First, there are the claims which have been notified; some of these can be accepted and paid quite quickly at the figure claimed by the policyholder, but others require investigation and negotiation, and possibly even litigation, before it can be established with certainty whether the insurer is liable at all, what amount is to be paid and whether any of this amount can be recovered from other parties.

Then there are claims which have been incurred, in the sense that the incidents giving rise to them have occurred, but which have, for one reason or another, not yet been notified to the company. In some instances, the delays in notification can be very considerable. Finally, there are the claims which must be expected to arise during the unexpired period of policies in force at the date when the assessment is being made.

Thus there is uncertainty in all three categories, as to the number of claims which will eventually have to be paid and as to the amounts which will have to be paid and those which may be recoverable. Generally speaking, the aggregate amounts of these three categories of prospective and contingent liabilities is of the order of at least one year's premiums and can be substantially more. A wrong bias in the estimation may, therefore, be of great significance in relation to the solvency margin and indeed to the solvency of the company.

At present, the Board of Trade has to rely on the estimates made by the staff of insurance companies on each of the known claims individually, and on the likely eventual costs of claims already incurred but not reported and those expected to be incurred under the unexpired policies. There can be little doubt that most insurers make these estimates with a very proper prudence and that the reserves which are set aside are in consequence more than adequate to meet the ultimate costs.

There is, however, no satisfactory way of checking from outside the quality of the estimating in a particular company and recent failures have shown how wrong the estimates can sometimes be. Even if the Board of Trade were to send its officials in to examine the books of insurance companies in detail in order to check the prudence of the estimation, it would be difficult to assert with confidence that the subjective opinion of the official should be substituted for that of the insurance company.

Accordingly, the Board of Trade's attention has been turned to the possibility of applying certain well established statistical techniques in the process of verification. I would like to make it clear at this point that, in referring to "statistics", I am not talking about the kind of statistics relating to an industry's activities which are published by the Central Statistical Office and other Government agencies. What we are concerned with here is not the collection of statistics of that kind but the use in verifying the financial position of an individual company of data which are amenable to mathematical techniques. Briefly, it is to be expected that the claims experience of an insurance company, which does not normally change the character of its business radically from one year to the next, will exhibit a certain consistency. Undoubtedly, there will be trends such as those produced by rising repair costs or a fall in the number of accidents in the case of motor insurance and undoubtedly there will be chance fluctuations as between one year and another. If, however, the right data can be obtained, these are matters which can be allowed for in a mathematical projection of the past experience of the individual company as a basis for checking the adequacy of the reserves it has made to meet its liabilities in the immediate future.

I may say that, in deciding what these data should be and how they should be utilised for the purpose of verification, the Board of Trade have had independent expert advice and have co-operated with insurance supervisory authorities in other countries both in assessing the problem and in undertaking pilot studies of possible ways of overcoming it. I am confident that these new requirements, which are contained in Regulations 9 to 13 and in the related forms on pages 29 to 32 of the Regulations, will, in the fullness of time, enable the Board of Trade to detect impending trouble at an earlier stage than is possible in present circumstances. I say "in the fullness of time" advisedly, because the data will not begin to be recorded by insurers until 1970 and it will require at least two or three years' data before the method can become fully effective, although I believe that it will be of some value even in its earliest stages.

I was asked about the staff available to deal with the additional information which will be required. Undoubtedly, a considerable volume of such information will be received by the Board of Trade under the various headings of the Regulations and a great deal of calculation will be involved in establishing the conclusions to be drawn therefrom. It is foreseen that this work can be put on a computer so that little if any increase in staff will be required. The forms have been designed to facilitate machine processing.

Finally, I can assure the House that the Regulations have been the subject of the most extensive consultation with the British Insurance Association, with the Life Offices Association, with individual insurance companies, with the professional bodies of the accountants, with the Institute and Faculty of Actuaries and the insurance brokers and with a number of other interested parties including investment analysts, and a considerable number of modifications has been made to meet points put to us by one or other of them.

Perhaps I may conclude by quoting the comment made in a Press release put out by the British Insurance Association on the day on which the Regulations were laid: In future, insurance companies will provide the Board of Trade with more detailed statistics and information about their operations. The new requirements will add to insurance companies' administrative costs, but the B.I.A. is in favour of the new system which will help the Board of Trade to detect quickly any company operating on unsound lines. With the increased powers of investigation granted by the Companies Act 1967, the Board will be better able to take speedy action before an insolvency occurs. None of the Companies which failed in 1966 and 1967 were members of the British Insurance Association, but the Association will continue to work with the Board of Trade in the public interest. I welcome those comments.

Not content with this, immediately following the laying of these Regulations the Board of Trade wrote to every insurance company operating in this country inviting it to make a careful study of them and to inform the Board of any difficulty foreseen in complying with the requirements or of any need for clarification. So far this invitation has produced remarkably little response and I think that the House can therefore fairly assume that the Regulations will serve their purpose more effectively than those which they replace without imposing an intolerable burden on insurers.

I hope that the House, therefore, will be willing not to annul the Regulations.

Mr. Michael Shaw

I thank the hon. Gentleman and beg to ask leave to withdraw the Motion.

Motion, by leave, withdrawn.