MODELO ESTADÍSTICO

Long Term Insurance

Life insurance has been available in the UK since the 16th Century. Initially premiums were set at a single rate and insurance societies7 restricted their membership to limit risk.

The introduction of mortality tables8 in the mid 18th Century enabled risk to be assessed more accurately and consequently permitted pricing to be more flexible and a wider range o f risks to be considered. Although at first slow to be widely adopted, this development, together with legislative change9, led to an influx o f new companies into the life insurance market in the late 18th and early 19th Centuries10. This period also saw the expansion of many o f the fire offices into life insurance, e g Sun Life, Pelican11, Eagle12 and Atlas13.

Despite the influx of new companies, the life insurance market remained small, with policyholders coming mostly from the landed, professional or commercial sections of

For exam ple the U nion (a subsidiary o f C om m ercial Union after 1907) an d th e A m icable (m erged w ith N orw ich U nion in 1866)

8 First used by E quitable L ife A ssurance Society in 1752

9 T he Life A ssurance Act 1774 allow ed jo in t stock com panies to enter the m arket. 10 E.g. N orw ich U nion and Scottish W idow s

11 A m algam ated w ith Phoenix in 1908, subsidiary o f Sun Alliance from 1984. 1' Now E agle Star

IJ Acquired by Royal E xchange 1959

society In the li)* Century, however, many o f the life companies began to seek a wider market by the increased use of advertising, expansion overseas and the introduction o f new products Life insurers increasingly began to offer products such as annuity loans, mortgages and endowment policies. These efforts were helped by a change in the tax law in 1853, which allowed life insurance premiums to be deducted from income tax14

Of particular impact was the introduction of industrial life insurance in the 1850s. Up until then ‘ordinary’ policies had required the payment o f relatively large annual or quarterly premiums. However, this type o f policy did not meet the needs of the vast majority of weekly wage earners (Cockerell and Green 1994). Instead, industrial policies provided life cover in return for a small weekly premium collected by ‘home service’ agents going from door to door To develop and service this new business the ‘industrial insurers’ established large chains of agents, in some cases numbering tens of thousands The first industrial life policies were issued in 1852 by British Industry Life closely followed by Prudential in 1854 (ibid).

The 20* Century has seen a growing need for retirement provision resulting from the increasing longevity of the UK population The emphasis has been subtly “shifted from taking out insurance against an early death to insuring against living too long” 1' In the 1920s and 1930s, this led to rapid growth in the sale of pension schemes With the average life expectancy in the UK exceeding 65 years since 1945 and the establishment of a standard retirement age, this growth has continued more strongly in the post war years 11

11 Pelici that wan finally w ithdraw n in l ‘tH4 1 ' Personal contact w ith a director o f Prudential

Chapter 4 - The UK Insurance Industry

In the 1960s and 1970s, a number of new entrants to the market, such as Allied Dunbar and Abbey Life, began to offer unit linked life assurance. With this product, benefits are paid in direct relation to the investment performance of a portfolio of shares managed by the insurer. Since the late 1970s, unit linked policies have become increasingly popular due to the stock market’s continuing growth, and this has forced the traditional insurers to move into such products. This trend has increased the importance o f investment management skills.

General Insurance

Forms o f fire loss compensation and the spreading of risk relating to ships and their cargoes have existed in the UK since at least the 14th Century (Dickson and Steele 1984). Transactions tended to be conducted by individual brokers in coffee-houses, one of which was later to develop into Lloyd’s of London. In 1720, London Assurance16 and Royal Exchange Assurance17 were granted royal charters to transact marine insurance. These charters ensured that the two firms had a virtual monopoly until 1824

The need for the more formalised provision of fire insurance was triggered by the losses incurred in the Great Fire of London in 1666 (Cockerell and Green 1994). This led to the establishment of a number o f ‘fire offices’, the first o f which, the Phoenix111 * 1

'' Subsidiary o f Sun A lliance from 196$

1' M erged with G uardian to form G uardian Royal Exchange in 1968 Subsidiary o f Sun A lliance from 1984

was established in 1680. The Friendly Society19 (1683) and the Hand in Hand20 (1696) followed While these pioneering firms initially focused on the London area, the companies that followed21 such as the Sun Fire Office22 (1710) sought wider markets for fire insurance by appointing agents throughout the country and as the British Empire grew, throughout the world. As the 18th Century progressed, the fire offices insured an increasingly wider range of industrial, commercial and personal risks.

Despite a growing number of entrants, by 1800 the market was dominated by Sun, Phoenix and Royal Exchange The increasing complexity and level of risk insured stimulated co-operation rather than competition between these three firms. Discussions in the 1820s led to a sharing of underwriting experience and then to the formation of a fire insurance tariff system, or cartel (Cockerell and Green 1994). By the 1860s this system o f minimum premiums or tariff rates had been adopted by all the main fire offices and was being extended to other types of insurance, including life insurance.

The system of tariffs formally operated for over a century In the late 1960s and 1970s increasing competition from non-tariff insurers and growing government opposition caused most tariffs to be abandoned, although the industrial fire insurance tariff survived until 1985 (Diacon and Carter 1992). The effect of the tariff system was to limit price competition and encourage a high degree o f co-operation between insurers.

19 T raded until 1730

20 A m algam ated w ith C om m ercial Union 1905

21 Including m arine insurers Royal E xchange A ssurance and L on d o n A ssurance in 1721 22 Subsidiary o f Sun A lliance from 1959

Chapter 4 - The UK Insurance Industry

Government Regulation

Prior to the 1980s, much o f the legislation governing the industry had its origins in the 19th and early 20th Centuries. The framework for the regulation and supervision o f the life industry had been established by The Life Assurance Companies Act 1870. The Assurance Companies Act 1909 introduced a similar regulatory framework to fire and personal accidents insurance, and was extended in 1946 to include motor and other new insurance types. The Industrial Assurance Act 1923 restricted the transaction of industrial life insurance to a limited number of companies. Between 1946 and 1982, various Acts have adjusted or consolidated previous legislation rather than introduced radical change21

Summary

The provision of insurance products in the UK has a long history stretching back into the 16th Century. However, it was not until the mid 19th Century that it became a major industry. Growing collaboration between insurers, due to the increasing range of risks being underwritten, led to the formation o f tariff or cartel systems in the early 19th Century These systems remained in place until they were gradually abandoned in the 1960s and 1970s, although the last continued to operate until 1984

Competition started to increase with the abandonment of the tariff system and the entry o f unit trust companies into the long term market. However, prior to the 1980s 23

23 T h e Insurance C om panies Act 1958 am ended requirem ents for acco u n tin g and auditing w hile the C o m p an ies Act 1967 increased solvency requirem ents. T he Insurance Com panies Act 1974 co n so lid ated earlier legislation (D ic k so n and Steele 1984).

long standing inter-company relationships, strong professional and trade bodies and deeply rooted industry practices limited the impact o f these changes (see also Knights and Wilmott 1993 and Diacon and Ennew 1996). A director of GRE, commented that the insurers would avoid making “unfriendly or hostile” competitive moves towards each other as “it wasn’t the done thing!” With little radical change in regulation, the environment faced by the insurers prior to the 1980s was passive

The power of such industry groupings was significant even in the 1980s. For example when Scottish Equitable raised its commission rates for its agents, the Association of Scottish Life Offices expelled the insurer and the chief executive was forced to resign.