Life assurance (Hansard, 30 November 1994)

§ Mr. Jonathan Evans

In July this year the Vice Chancellor the right hon. Sir Donald Nicholls gave judgment in the Chancery Division of the High Court on a preliminary point arising in a dispute between a life insurance company and one of its policyholders—Fuji Finance Inc.v. Aetna Life Insurance Ltd. and Another. The Vice Chancellor decided that a particular contract which purported to be a contract of life insurance was not, as a matter of law, a contract of insurance at all. The feature of the contract which led to this conclusion was that there was no difference, once the contract had run for five years, between the amount payable on the death of the life assured at a given time and the amount that could be obtained by surrendering the policy at the same time.

An appeal has been launched against this judgment, and the outcome of that appeal may obviously affect the position. But on the basis of the judgment it appears possible that other linked policies which offer no greater return on death than on surrender may similarly not be regarded as contracts of insurance. However, the judgment did not express an opinion about policies which, during the majority of their term, carry on somewhat higher additional level of benefit on death, or include some other guarantee in relation to the benefits payable on death but not on surrender.

The Department of Trade and Industry does not monitor as a matter of course the terms of individual life insurance policies. However, prior to the Vice Chancellor's judgment, the level of additional benefit on death included in a linked policy was not considered by the Department to be critical in determining whether the policy was a contract of insurance. The Department would have taken into account other features of the contract; and it seems likely that, had the question been raised, policies 704W of the kind described in the judgment would have been treated by the Department as life assurance policies. I understand that the Financial Services Act regulators and the Inland Revenue have taken a similar view: as, presumably, have life assurance companies and their policyholders. It is understandable, therefore, that the judgment has created some concern in the insurance industry, particularly as it is not yet clear how far it affects contracts that are similar to, but not on all fours with, the particular policy that was considered in this case.

Companies which have not already done so will wish to take advice upon the legal implications of this judgment for linked policies issued by them. It may however be helpful to them to explain the Government's attitude to certain statutory provisions which appear relevant.

Section 16 of the Insurance Companies Act 1982 prohibits insurance companies from carrying on activities other than in connection with or for the purposes of their insurance business; and the Act confers upon the DTI certain powers of intervention if there is a failure to comply with that section. The Department has taken the view that the judgment has created sufficient uncertainty about the status of contracts carrying no additional benefit on death that it would wish to know if companies propose to continue to issue any such policies. As regards other policies, the Department does not propose to take any action while the judgment is under appeal. However, when the outcome of the appeal is known, it will clearly need to review the position with a view to ensuring that the terms of the section are met for the future.

Companies will also need to bear in mind that their authorisation to carry on investment business under Section 22 of the Financial Services Act 1986 relates only to insurance business and other business that can be conducted in accordance with section 16 of the Insurance Companies Act 1982.

In considering whether to use its enforcement powers in relation to investment business carried on in contravention of section 3 of the FSA, one of the factors which the Securities and Investments Board will take into account, in relation to business carried on prior to the judgment, is that contracts of the kinds likely to be affected have been consistently treated as contracts of insurance. Investors considering whether to take action under section 5 of the FSA will also need to take account of the same factor.

My right hon. Friend the Financial Secretary to the Treasury is making a separate statement about the tax implications of the judgment.