REQUIREMENTS TO INFORM THE ACTUARY AND OBTAIN HIS REPORT (Hansard, 6 April 1981)

§ Mr. John Roper (Farnworth)
I beg to move, That the clause be read a Second time.

§ The Chairman
With this it will be convenient to take new clause 15—Offences under Part II of 1974 Act.

§ Mr. Roper
The new clauses cover requirements to companies carrying out life assurance business to inform the actuary and to obtain his report on certain matters. Under the Insurance Companies Act every insurance company carrying out long-term business—that is, life assurance business—has to appoint an actuary who has to certify annually that the long-term business is solvent. An actuary is required for that purpose because the obligations under life assurance policies can stretch many years into the future. The actuary has to calculate whether, in reasonably foreseeable circumstances, the company will be able to meet those obligations.
Unfortunately, an actuary's solvency certificate given on one day can be invalidated on the next by a switch to unsuitable investments or by the issue of a block of life assurance policies on unsound terms. The Insurance Companies Act 1974 provides for elaborate annual returns for insurance companies but they are after the event and do not prevent an insurance company issuing life assurance policies on unsound terms or improperly speculating with the investments.
The terms that apply throughout the existence of a life assurance policy are fixed at the outset. Once an insurance company has issued a large block of life assurance polices on unsound terms, or has invested a large proportion of its life assurance funds in an unsuitable investment, no subsequent reporting, however elaborate, can prevent that company being in serious trouble if conditions become adverse. I am not saying that the company would necessarily be in difficulties but that it could he if conditions turned against it. The most that can be achieved by the elaboration of the returns is the early detection of the company's being in financial difficulties.
Two life assurance companies failed in 1974, causing hardship to thousands of policyholders who had invested substantial parts of their life savings with the companies. London Indemnity failed because it issued large numbers of single premium policies on unsound terms, and Nation Life failed because it invested too high a proportion of its life assurance fund in a speculative property investment that failed.
The Department of Trade recognises that. It is aware that it does not have the powers to prevent irresponsible acts by fringe insurance companies that will render the companies liable to failure in adverse but foreseeable circumstances. In an address to the Financial Times world insurance conference on 3 December 1975 the official then in charge of the insurance division said: When it comes to supervision of the solvency of an existing company, we are inevitably to some extent behind the game. We obtain much information about what has happened but not until after it has happended, and too often our task is to try to pick up the pieces. The Institute of Actuaries and the Faculty of Actuaries in Scotland became concerned about actions by fringe insurance companies that might imperil their solvency. They issued a guide to actuaries appointed by insurance companies under section 15 of the Insurance Companies Act 1974. The guide states that although, as a statutory requirement, an investigation into the solvency of the life assurance company is to be made only at specific intervals, the profession regards it as the appointed actuary's duty to 729 take all reasonable steps to ensure that he is, at all times, satisfied that if he were to carry out such an investigation the position would be satisfactory.
The guide goes on to say that to enable the actuary to be satisfied about the continuing financial state of the company he is required to secure that he is given adequate information concerning the terms and conditions on which new contracts are being issued, and on the company's continuing investment policy and marketing plans.
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The Department of Trade has commended the actuaries' guide to insurance companies. However, there is, unfortunately, no obligation on an insurance company to inform its actuary if, during the year, it changes its investment policy or changes the terms or conditions on which new life assurance contracts are being issued.
If an insurance company makes such a change and acts unsoundly the position may not come to light until the next annual return is submitted. The position by then may be irrevocable and the insurance company may be in an unsound position when it is liable to failure if it runs into seriously adverse economic conditions. That, indeed, is what happened with London Indemnity and Nation Life.
The then Under-Secretary of State for Trade, in an address to the Faculty of Actuaries in Scotland, referred to the guide to actuaries and said: It is the Government's intention to support this by requiring a certificate from the appointed actuary to the effect that he has been receiving the necessary information from time to time. It has also been suggested to us that the directors should be asked to certify that they have in fact kept the actuary informed on those vital matters, and we are considering that suggestion. That was some time ago, but no such requirement has been made by the Government.
In Committee I proposed a new clause that would have closed the serious gap in the protective legislation by requiring that an insurance company should not issue or alter life assurance policies, or change the investments of its life assurance fund, on terms that the appointed actuary to the company considered would imperil the solvency of the company. The feeling of the Committee was that the new clause was cumbersome and unnecessarily elaborate. The Committee believed that it would hamper sound insurance companies in the normal transaction of their business. The Institute of Actuaries wrote to the Department of Trade to that effect and sent copies of the letter to members of the Committee. The institute stated: If, however, it is felt that legislation should be more specific about the company's responsibility vis-a-vis its appointed actuary a practical approach might be to study the possibility of placing a duty on a company to provide the appointed actuary regularly with such information as he may reasonably require about the financial conduct of its long-term business and to obtain a report from him before making significant changes in that conduct. The clause that I now propose follows the suggestion by the Institute of Actuaries. It will achieve virtually the same end as I proposed in Committee, but by simpler means. In Committee I proposed to prevent an insurance company changing the financial conduct of its life assurance business in a way in which the appointed actuary considered would imperil the solvency of the company. Although the clause that I now propose does not of itself prohibit unsound actions by the insurance company but merely requires a report from the actuary, the practical effect is likely to be the same. If the company is 730 determined to go ahead with actions that the actuary considers unsound, he is under a professional obligation to inform the Department of Trade, which has power to intervene.
The Life Offices Association has kindly informed me that although part of my new clause might meet its problems it has some reservations about other parts. I am pleased to learn that subsection (1)(a) might be acceptable as a means of giving statutory backing to the guidelines for appointed actuaries issued by the institute and the faculty in 1975. However, the association has two reservations about subsection (1)(b). The first is that the expression "financial conduct" is not defined. However, the words in paragraph (b)— of a kind which that actuary has informed the company would in his opinion significantly affect the result of an investigation made under section 14 above in effect define the intended changes in the financial conduct of an insurance company's long-term business which I seek to bring within the ambit of the new clause.
The association's second reservation is that new paragraph (b) does not require an insurance company to provide information about intended changes in the financial conduct of its long-term business that the actuary has not specified in advance. It seems that the association is saying that to this extent the clause does not go far enough. I am aware of that possible objection, but I had hesitated to go as far as to require a company to provide information on intended changes in the financial conduct of its long-term business additional to that which the actuary had informed the company was significant, especially as failure to do so would constitute an offence.
When we considered that matter in Committee the Under-Secretary was kind enough to say that the proposals that I put forward then represented a radically different approach to insurance legislation. I am not sure whether he would say the same about the new formulation of the proposal that I am putting forward today. However, it represents a new approach, in that it seeks to protect the savings of life assurance policy holders by preventing insurance companies from taking action that would imperil those savings. That is in contrast to almost the whole of the existing insurance legislation, which simply finds out that an insurance company has done unsound things after it has done so. It shuts the gate after the horse has bolted. Therefore, I hope that this approach will commend itself to the Under-Secretary and to the House as an attempt to deal with a problem that is of considerable concern to those who take an interest in those matters.

§ Mr. Eyre
As the hon. Member for Farnmouth (Mr. Roper) explained, the amendment is different in nature from those that he tabled in Committee. I accept that it avoids many of the pitfalls of his earlier proposals. In particular, it avoids placing new burdens on the staff of my Department and new bureaucratic, supervisory controls on companies. I appreciate the hon. Gentleman's efforts in that respect.
The new clause confines itself to placing an obligation on companies to keep their appointed actuary informed of matters which might affect solvency. New clause 15 goes on to make failure to keep the appointed actuary informed in the prescribed fashion a criminal offence.
I emphasise to the hon. Gentleman that his proposal is as serious as to make neglect of the provision a criminal offence. It is common ground that an appointed actuary needs access to the information that he requires to fulfil 731 his role in a company. However, there are great difficulties—I ask the hon. Gentleman to consider this carefully—in defining in statute precisely this or other aspects of the relationship between a company and its appointed actuary. It is not only the Government who consider the amendments to be unnecessary and difficult, but representatives of the insurance companies and the actuarial profession who are opposed to such change.
The guidance for appointed actuaries issued by the Institute and Faculty of Actuaries in May 1975 already covers the same ground. I believe that that is a later date than the date to which he referred, when his former hon. Friend, the Member for Hackney, Central (Mr. Davis), who was the Minister responsible for insurance, made a speech on the matter. The guidance stipulates that the actuary must have all the relevant information at his disposal to enable him to be satisfied as to the continuing financial state of the company. In my view, those matters are best dealt with in that sort of professional guidance note.
I cannot accept that we should impose new statutory duties on companies and create a new criminal offence without the fullest opportunity for consultation and comment by those affected. The hon. Member for Farnworth will realise that his proposals have been available for only a matter of days. He will appreciate that there has been no opportunity to consult, although I believe that much evidence will be gathered against his proposals, on the grounds which I have mentioned. I know that the hon. Gentleman will appreciate the emphasis which I have placed on professional guidance and present practice, which are much improved on earlier years.
The hon. Gentleman pressed me to agree to a study of the possibility of such future legislation requiring companies to keep their appointed actuary informed of matters affecting solvency. There has been reference again to the Institute of Actuaries' letter. I emphasise that the Institute of Actuaries did not propose a study. It said only: if it is felt that legislation should be more specific about a company's responsibility vis-á-vis its appointed actuary. I do not feel that need. Neither does the Institute of Actuaries or the faculty.
As I said in Committee, if the profession or anyone else were to study the matter and bring forward proposals, my Department would consider such proposals carefully. But in the first instance, I think that the ground should be gone over by the profession and representatives of the life offices.
For the reasons that I have given, I ask the hon. Gentleman to consider whether it would be right, in these circumstances, to press his amendment.

§ Mr. Roper
I am grateful for the Under-Secretary's opening words. I am glad that he accepts that we have moved, since the discussions in Committee, to a proposal which gets around a number of the objections which were put forward. I also accept his point about the relatively short time available for consultation with the Life Offices Association and other professional bodies. It is interesting to note that the Life Offices Association says that new clause 14(1)(a) may be acceptable as a means of providing the statutory backing which is sought.

§ Mr. McCrindle
The hon. Gentleman would not wish to mislead the House. Neither during his last speech nor 732 on this occasion has he led us to the conclusion reached by the Life Offices Association, which is that we should reject the new clauses which he is proposing.

§ Mr. Roper
For the reasons that I gave before, the Life Offices Association is not satisfied about other points in the new clause. As the Minister said, it therefore feels that it should be rejected. I did not wish to mislead the House on that point.
There is an opportunity for a continuing discussion on the matter by the Department, the faculty, the institute and the Life Offices Association. I was glad that the Minister referred to "anyone else". Sometimes there is a danger of too cosy a relationship between the professions and the companies. One or two other persons may wish to take advantage of that request.
It must still be considered whether there is a need for a statutory backing for the guidance which the Institute of Actuaries has given. My contention is that there is a need for such a backing. While the vast majority of good insurance companies will provide their actuaries with that information, there is the risk that some may not. In those cases, the savings of ordinary people could be put at risk.
Therefore, I hope that there can be continuing discussions to try to find out whether a satisfactory statutory backing could be found. There will be opportunities for the matter to be further considered in another place. However, in view of what the Minister has said, I beg to ask leave to withdraw the new clause.