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The Actuary The magazine of the Institute & Faculty of Actuaries

GI: A brief history of GI supervision

Insurance is a promise made to purchasers that, in an event, the insurance company will have funds to meet its insured liabilities. That is why insurance needs to be regulated – to be sure that firms can meet the risks they are covering. Regulation in the UK has developed over time and passed through many laws and regulatory bodies.

The first body overseeing general insurance was the Board of Trade. It first had to deal with the aftermath of the collapse of the Fire, Auto & Marine Insurance Company (FAM) which affected 400,000 motorists in the UK. The main beneficiary of the firm, Dr Emil Savundra, overstated the assets of the firm and it grew by paying brokers higher margins and offering lower premiums. After this, all insurance companies were made to register with the Board of Trade and legally required to submit reserve information on an annual basis.

In the 1980s, decades of industrial risks and insurance spirals brought huge losses to Lloyd’s of London. The Lloyd’s market was accused by several US states of fraud and selling unregistered securities. As a solution, Equitas was established in September 1996 to reinsure and run off 1992’s and prior years’ non-life liabilities of Lloyd’s Names. Since then, Lloyd’s has been more closely supervised. In April 2007, Equitas was taken over, together with all its assets and liabilities, by Resolute Management Services, a subsidiary of Warren Buffet’s Berkshire Hathaway.

In 1996, regulatory returns for general insurance companies changed and became substantially more detailed. This was off the back of Michael Heseltine’s drive to reduce regulation in the insurance industry.

The Financial Services Authority took over regulation of insurance companies in 1998. In May 2000, it ordered Drake insurance to stop writing new business and a few days later, the motor insurer with 200,000 policyholders was put into liquidation. Drake was not maintaining a high enough solvency margin having paid out large dividends and a hefty tax bill. Its US owner had refused to inject more capital.

Independent Insurance collapsed in June 2001. It had 500,000 individual and 40,000 commercial customers. The firm used large reinsurance contracts that were effectively loans and large liabilities were not being recorded electronically. The firm had argued that its rapid expansion and under-pricing was due to substantially improved systems for claims assessment. The company’s founder and chief executive officer, Michael Bright, and its deputy managing director and director of finance were convicted of conspiracy to defraud in October 2007.

The future of regulation is currently being decided with the development of Solvency II at the European level, with ongoing consultation with industry. It it suggests is that insurance firms will need more detailed planning and justification in their business plans with firms’ own models being approved only after substantial testing. This should lead to fewer insurance failures in the future if the risk architecture can be properly set.

Of course, one of the biggest faliures still fresh in our minds is AIG, last September which, with a lack of risk management and lax regulatory oversight managed to bring the modern world economy close to the brink. But that is a story - of Copulas and David Li (dubbed the world’s most influential actuary by the FT) - for another day.


Emil Suvandra
Dr Emil Savundra was a doctor who purchased the controlling interest in an insurance company called Fire, Auto & Marine Insurance Company in the late 1950s. He systematically bled funds from the company, lied about its assets and then sold it to three unsuspecting buyers. The company collapsed in days, leaving 400,000 motorists with no insurance. He twice served jail sentences for his fraud crimes. Dr Savundra and Richard Nixon share the accolade of having been quizzed by David Frost on his TV interview based chat-show.

Savundra disassociated himself from any blame and even went as far as calling the affected motorists ’peasants’. He was for a time involved with the model and showgirl Christine Keeler of Profumo affair-notoriety (a political scandal that damaged the government of Harold Macmillan).


Ravi Kalia is a PhD student in statistical finance at Oxford University