§ 7.32 p.m.
§ Lord TREFGARNE rose to move, That the draft Regulations, laid before the House on 12th June, be approved. The noble Lord said: My Lords, I fear I cannot deal with this order quite so shortly as we have dealt with the last two. It is a very technical and important matter and affects a good many people, so I hope your Lordships will bear with me if I deal with it in rather more detail.
§ These regulations are the fourth in a series giving effect to the EEC non-life Directive, or, to give it its full title, the European Communities First Council Directive on the Co-ordination of Laws, Regulations and Administrative Provisions Relating to the Taking-up and Pursuit of the Business of Direct Insurance other than Life Assurance. The Directive was adopted in July 1973. It dealt with general insurance business, not life assurance business, and introduced a large measure of harmonisation into the supervision of insurance by the Governments of Member States.
§ To set the present reulations in context, your Lordships may find it helpful to be reminded of the other regulations already made to implement the Directive. The 1375 first of these, the Insurance Companies (Classes of General Business) Regulations 1977, modified the Insurance Companies Act 1974 by introducing new classes of general insurance business in line with those contained in the Directive in place of the classification contained in Section 1 of the Act. Those regulations came into operation on 1st January 1978. The change they brought about was almost entirely technical, with no direct effect on the operations of existing companies or Lloyd's.
§ The Insurance Companies (Authorisation and Accounts: General Business) Regulations 1978, which came into operation on 31st July 1978, dealt with authorisation to carry on general business and with related matters. The Insurance Companies (Solvency: General Business) Regulations 1977, which I shall be referring to as "the solvency regulations", are the most relevant to today's business. They introduced modifications to the solvency requirements contained in the Insurance Companies Act 1974. They apply to insurance companies only. They do not apply to Lloyd's.
§ The solvency margin requirements in the Directive do, however, have to be applied to Lloyd's, and that is the purpose of the regulations we are considering today. They apply to the general business of Lloyd's as a whole the same solvency requirements as now apply to the general business of most insurance companies with their head office in the United Kingdom. In the extremely unlikely event of Lloyd's as a whole not meeting those requirements, the regulations also enable the Secretary of State to intervene in broadly the same way that he may in the affairs of an insurance company that does not meet these requirements. Your Lordships may find it helpful if I go through the regulations with some care, though Regulations 1 and 2 are conventional and I do not think call for any detailed explanation. If, however, noble Lords raise any points on them or on any other aspects of those regulations, I hope to be able to answer them when I reply.
§ Regulation 3 is the heart of the matter. It applies to Lloyd's requirements analogous to those imposed by the solvency regulations on British insurance companies. Before explaining the regulation, it may be helpful to your Lordships 1376 if I summarise the principal features of the solvency regulations as they apply to British insurance companies. The regulations require each British insurance company to maintain a margin of solvency, that is to say an excess of assets over liabilities, not less than the greater of two sums. The first sum is calculated from the company's recent world-wide premium income, the second from its recent worldwide claims payments. If a company fails to maintain this solvency margin, the Secretary of State must require it to submit for his approval a plan for the restoration of a sound financial position. If the company's position deteriorates further so that its solvency margin falls below one-third of the minimum I have referred to, the Secretary of State must require the company to submit for his approval a short-term financial scheme. If the company fails to submit an acceptable plan or scheme, the Secretary of State is entitled to exercise his powers of intervention in Sections 29 to 37 of the Insurance Companies Act 1974 in order to protect the position of policyholders. These powers include requiring the company to maintain assets in trust, to limit its premium income, to cease carrying on certain types of business, or—in extreme cases—to cease accepting business.
§ The Directive requires Lloyd's to maintain a solvency margin on the same basis as an insurance company. This is not entirely straightforward, since the insurance business at Lloyd's is conducted by individuals, each of whom must meet his liabilities from his personal assets. Although Lloyd's maintains central funds from which to meet the insurance liabilities of any member who defaults, it is not an insurer, and strictly has no need to meet the liabilities of defaulting members. We therefore had to decide which assets should be taken into account when calculating Lloyd's solvency margin. Our conclusion is that Lloyd's should be permitted to take account of the net personal assets of its individual members—that is, their real assets disregarding their insurance liabilities—and the net assets of Lloyd's itself. Its solvency margin comprises the difference between the total of these assets and the insurance liabilities of individual members; individual members are not required to maintain individual solvency margins, although the rules of Lloyd's require that 1377 they should have minimum personal fortunes and make deposits at Lloyd's.
§ Lloyd's will, let me emphasise, have no difficulty in meeting the solvency margin imposed by these regulations. Lloyd's net premium income in 1977 was £1,600 million. If this were adjusted in accordance with the arrangements in paragraph 2 of the schedule, Lloyd's notional gross income would have been of the order of £1,900 million and its required solvency margin about £150 million. Lloyd's have sent us figures which show that the Corporation and the members of Lloyd's held assets valued at over £700 million in addition to those required to meet their insurance liabilities. On this basis, it is clear that Lloyd's possessed a solvency margin almost five times greater than will be required under these regulations.
§ The second feature peculiar to Lloyd's is the basis of calculation of its premium income. Whereas the calculation for companies is based on gross premium income, the Directive and this regulation recognise that Lloyd's brokers deduct their commission before passing the premium to the underwriter. Lloyd's premium income is therefore generally given and indeed generally known only net of broker's commission. To restore comparability with the requirements for insurance companies, Lloyd's total net annual premium income is therefore for the purpose of the calculation of the solvency margin to be scaled up by a flat-rate percentage. This scaling-up factor is to be fixed by the Secretary of State, and will reflect the most recent data on commissions paid. This dispensation is provided for in the Directive and implemented in the schedule to these regulations.
§ I should now like to move on to Regulation 4. It is most unlikely that Lloyd's would ever fail to meet the solvency critiera, but the Directive requires that a supervisory authority should have the power to intervene if necessary. Regulation 4 therefore gives the Secretary of State the power to intervene in the affairs of Lloyd's as a whole if it should ever fail to meet the solvency requirements under these regulations or the obligations under Section 74 of the Insurance Companies Act 1974. Section 74 deals with the annual deposits by Lloyd's of a statement of all its business.1378
§ The intervention powers are prescribed in Part 2 of the Act. They have so far applied to insurance companies only. Within the framework of Sections 73 and 74 of the Act, Lloyd's has been essentially self-regulating. I must emphasise that we have no expectation of using these powers of intervention in relation to the members of Lloyd's together.
§ I have already taken up some time in introducing and explaining the regulations. They enable this unique British institution to be accommodated satisfactorily within a Community system of insurance supervision without diminishing in any way Lloyd's ability to continue to carry on business in its established way. The regulations have been accepted by the Committee of Lloyd's, and I commend them to your Lordships. I beg to move.
§ Moved, That the draft regulations, laid before the House on 12th June, be approved—(Lord Trefgarne.)
§ 7.41 p.m.
§ Lord PONSONBY of SHULBREDE
My Lords, I am sure that the House will again be very grateful to the noble Lord—this time for explaining the draft regulations and for telling us about the new margins of solvency required at Lloyd's. Judging from the noble Lord's explanation, the proposed solvency margins seem to be very reasonable indeed. I feel that the fact that as from 1st August Lloyd's has to comply with these regulations can only help to underwrite the worldwide reputation of Lloyd's as an institution. Furthermore, people who deal with Lloyd's will know that Lloyd's is having to comply with these new regulations and that will give them added faith in the institution. I believe that, particularly in view of reported large claims against Lloyd's in recent times, this proposal will be beneficial to the institution.
§ On Question, Motion agreed to.