Churchill’s legacy: one market, one regulatory system

01 February 2016 Professor Robert W Vivian & Agata MacGregor & Justine van Vuuren, University of the Witwatersrand

Setting out the history of insurance regulation, we reached the point when the first piece of UK legislation was passed, the Life Insurance Act (1870).

This Act was passed as a consequence of the collapse of the Albert Life Company. This highlights the regulatory solving process; a problem arises, the cause of the problem is identified and remedial steps are taken, and if necessary, legislation is passed.

Two systems evolved

It is accepted that much of the regulatory steps looked to Lloyd’s for guidance. The next step also learnt from what happened at Lloyd’s, which as is well known, is not an insurer; it is an insurance market.

Before 1900, Lloyd’s dealt mainly with marine insurance. Nevertheless, some syndicates started writing non-marine especiallyCuthbert Heath.

Non-marine classes were looked down upon by the established Lloyd’s marine underwriters. Some of the more perceptive underwriters realised that two regulatory systems had evolved; one for marine insurance and one for non-marine insurance. They agitated that a single system should be adopted.

Members of marine syndicates, for example, had to lodge a deposit of £5 000, while non-marine members were not required to do so. Heath tried to get Lloyd’s to accept a deposit for his non-marine insurance and faced considerable resistance.

The Burnard scandal

In 1902, Lloyd’s had to deal with the Burnard scandal. Burnard was a member of a Lloyd’s syndicate and also managed the syndicate. At the time, there were virtually no regulatory requirements binding operations at Lloyd’s.

Syndicates entered into insurance contracts, set premiums rates, collected the premiums and paid claims. The net result was syndicates, as in the case of insurers, held quite a lot of cash in the form of collected premiums. Those premiums were needed to pay claims, as and when they arose.

In the absence of any regulation there was nothing stopping syndicate managers from investing those premiums in other activities. Burnard, in addition to being an underwriter, also had other businesses. One of these was that of a travel agent.

One of the projects the travel agency invested in was King Edward’s Coronation. Unfortunately, King Edward became ill and the coronation was postponed. Eventually, Burnard suffered a loss of £100 000. This was an enormous amount in those days and was unable to pay insurance claims submitted to the syndicate.

Re-examining the system

As a result of the Burnard scandal, the Committee of Lloyd’s was forced to re-examine the fragmented self-regulatory system at Lloyd’s. The Committee looked at the proposals of Heath who advocated that syndicates should be subject to an audit signed off by an accountant, a premium trust fund be established into which all premiums had to be paid and deposits payable by all.

The Committee obtained a legal opinion which concluded that the Committee had no legal authority to insist on any of these changes, since the Act which governed Lloyd’s only dealt with marine insurance.

On the other hand, the press got wind of the problems at Lloyd’s and voiced concerns about the Lloyd’s system. Major insured’s indicated they would be moving business away from Lloyd’s.

The members at Lloyd’s agreed to implement the reforms. Lloyd’s as a market henceforth would be holistically managed. No longer would the two markets be regulated by two different systems, one for the marine market and one for the non-marine market. The Lloyd’s Act of 1911 removed the marine restriction which existed in the 1871 Act.

Therefore, the simple regulatory philosophy was established; one market, one regulatory system.

Insurance under one system

Meanwhile, outside of Lloyd’s, the corporate insurance market was developing. As a result of the collapse of the Albert Life Company, the Life Assurance Act (1870) amended in 1872, governed the life industry. How were the other classes to be regulated?

The possibility of two regulatory systems evolving existed; one for the life market and one for the short-term market. The Lloyd’s experience had shown that this was not the correct route to go.

A Bill was introduced in parliament by Winston Churchill, as the President of the Board of Trade, which became the British Assurance Act of 1909. This Act repealed the Life Assurance Act and included all classes of insurance under one system.

The system which was enacted was the Lloyd’s system, and Lloyd’s was exempted from the Act in terms of a schedule to the Act providing it complied with the provisions, which it clearly did. So the fundamental principle was adopted in legislation for all insurance; one market, one regulatory system. That is Churchill’s legacy to society.

Is there a connection between Churchill and Lloyd’s, a connection of such a nature that it can be accepted that the developments at Lloyd’s influenced Churchill?

Churchill married Clementine Hozier. Her father was Colonel Sir Henry Hozier, the secretary of Lloyd’s, from 1874 to 1906 the period when the British Assurance Act was passed.

There can be little doubt that Churchill was extensively briefed by his father-in-law about the troubles at Lloyd’s, and the steps taken to deal with those problems.

Holistically regulated

What does this have to do with regulation in South Africa? During the late 1800s, the South African insurance market developed rapidly in the Cape. Insurance expertise came from the UK via the long list of UK companies. Shortly after the 1870 Act was passed in the UK, the Cape Parliament followed suit with the Cape Act.

Once the 1909 British Act was passed, work started at the Cape to produce a similar Act in South Africa. Of course that period was dominated by the Second Anglo-Boer War and the formation of the Union. In 1923, the Union Insurance Act was passed.

If the parliamentary debates are read of the time, the reliance on the work done at the Cape and the British Assurance Act is noted. Oddly, when the two current insurance Acts were passed in 1998, the Churchill legacy – one market, one system, was forgotten and two acts passed, one for life and one for short-term.

Professor Jan Tinbergen was the first Nobel Prize winner in economics in 1969. He espoused a regulatory philosophy of one policy - one instrument similar to the one market, one regulatory system. Legislatively, this seems to work better than complex inter-related systems. Think of the judicial system, the police investigate crimes, a different body - the prosecutor, prosecutes the case and a different institution the judiciary judges the case. They are separate institutions, each with non-overlapping functions.

Thus, in the UK from 1909 until 1986, the insurance market was holistically regulated which worked exceptionally well – that is Churchill’s legacy.

Quick Polls


The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?


Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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