Policyholders Protection Act

Though the Act does provide a safety net for policyholders, nobody would want to insure with a company that failed, and, even with the Act's provisions, anyone who does so will suffer some loss he could have avoided with a safe and sound insurer.

A significant number of the managements of the established life offices indeed expressed the view when the Act was introduced that it was undesirable because it reduced the incentive for the individual to choose his insurer with care and because it might encourage irresponsible management of smaller companies. However, thanks to increasingly strict supervision of recently formed companies by the Department of Trade, this is not now very likely.

The basic reason why small and recently formed companies may be less sound than older ones is that the latter have had the chance over a period of years to build up substantial "free" reserves. These reserves are the difference between the current value of the company's assets and the company's liabilities (the "actuarial liabilities") to its policyholders (though a portion of a proprietary company's assets are attributable to shareholders).

To compare the two, the latter are "discounted" at an appropriate rate of interest to arrive at a net present value. The reserves in mutual companies are the property of policyholders, and it is the management's job to allocate them in an equitable way. The accumulation of enormous reserves would be a pointless exercise so far as policyholders were concerned, since they would prefer the surplus to be distributed among them as higher bonuses.

But running down reserves to a low level, where they accounted for only a small percentage of liabilities, would be an equally foolish course of action, because the value of the company's assets is a reflection of market values and these might fall.

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Life Insurance Companies in Operation

Regulation and Control

Life insurance companies today are subject to a considerable measure of legal control as a result of reformulation of and addition to the law in the Insurance Companies Acts 2013 and 2013. These Acts set out a certain number of general provisions, but the real control is exercised through Statutory Regulations. The Acts empower the Secretary of State for Trade to put such regulations before Parliament and if approved they then come into force. Many such regulations have already been introduced, and they have considerably tightened the control of the affairs of life insurance... see: Life Insurance Companies in Operation

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