The era of self-regulation : tariff committees

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

This article continues to outline the development of insurance regulation.

We reached the point, in 1844, when the UK parliament passed legislation allowing companies once again to be formed. After the passing of the British Assurance Act in the early 1900s, a single Act regulated the insurance market.

The main legislative requirements were that £20 000 be deposited with the government as well as annual financial statements. However, no regulator in the modern sense was established.

Freedom with publicity

Since the financial statements became publically available, the regulatory mantra was ‘freedom with publicity’. Insurers therefore maintained a good deal of business freedom provided that their affairs and financial positions were made public in such a way that it could be independently examined.

Lloyd’s, on the other hand, had the Committee of Lloyd’s which could exercise oversight of the Lloyd’s market. Initially, no similar and comparative oversight mechanism existed for the corporate market.

United Kingdom

In the early 1800’s, insurers started to co-operate on a range of issues and in 1868 the Fire Offices’ Committee (FOC) was formed, which fostered co-operation on a wide range of matters.

This system became known as the tariff and the FOC was responsible for administering the fire tariff. The FOC never had a formal constitution nor even adopted a statement setting out its aims and objectives until June 1970. The tariff itself existed in a documentary form, a book, which grew ever more comprehensive as the years passed. The tariff contained model policy wordings in addition to minimum premium rates. It was in this way that the corporate market was self-regulated. The premium rates were of course set high enough to ensure the viability of the market. Tariff committees were formed for different classes of insurance.

Not all fire companies joined the tariff. Tariff companies were very unhappy that there were non-tariff companies which would not jointhe tariff. When, for example, the CII was formed, which concentrated on insurance education, tariff companies wanted to exclude persons who worked for non-tariff companies from becoming members of the CII. In any event the tariff system spread to other parts of the world.

In 1970, the UK Monopolies Commission started to investigate the tariff system and submitted its report to Parliament in 1972. The commission concluded the tariff system could not be redeemed (par 395) - ‘we see no alternative to [the] abolition of the system as a remedy’ and with that it concluded that the FOC, with its tariff, should be terminated. As tempting as it may be to believe that the commission ended the tariff, there were also other factors. Tariff agreements are in any case very difficult to maintain in practice. They are unstable in the long run.

On the other hand, the tariff was very successful in warding off insurer insolvencies. Between the 1960s and 1970s, a number of the UK insurer insolvencies occurred. These were largely (if not exclusively) drawn from the ranks of non-tariff companies.

The tariff committees thus operated for nearly a century in the UK. Their demise thereafter left a regulatory vacuum which was soon filled in an unexpected manner as will be indicated in a later edition of this series.

United States of America

The US is a federal system and powers that are not assigned to the federal government remain with the individual states.

In terms of the Constitution the federal government was responsible for interstate commerce. Paul versus Virginia 1868 is a seminal case in the federal versus state-based regulatory controversy.

Mr Paul was an intermediary who placed business in Virginia with New York insurers. The State of Virginia argued that state legislation applied to Mr Paul, and accordingly that he, even as an out of state agent for a group of New York fire insurers, was required to be licensed by Virginia and pay a security deposit. Paul refused to pay the deposit and accordingly was fined thereafter. Mr Paul argued that the sale of insurance across borders constituted interstate commerce and therefore was subject to federal laws and not state laws.

The matter went to court, which had to decide if insurance formed part of interstate commerce making insurance subject to federal legislation. The US Supreme Court decided that insurance was not commerce in terms of the Constitution and that settled the matter. Insurance was a state matter, to be regulated by state laws.

In 1944, the matter was reconsidered in the South-Eastern Underwriters Association (SEUA) case. The South-Eastern Underwriters Association looked suspiciously similar to the UK tariff committee. It regulated everything, including premiums. By that stage, the Federal Congress had passed the Sherman Anti-Trust Act (1890) which prohibited any monopolistic business practices.. The SEUA was prosecuted for its anti-trust conduct.

The SEUA raised Paul versus Virginia pointing out that insurance did not fall under the purview of federal legislation and therefore that the 1890 Act did not apply to state insurance. The US Supreme Court changed its mind and decided that insurance was in fact a federal matter. The states and industry were both outraged and persuaded Congress to pass the McCarran-Ferguson Act in 1945, which exempted insurance from federal legislation as long as state legislation was in line with federal legislation.

The state tariff committees were closed down as regulation of insurers was transferred to state regulators. In this way the US insurance market became one of the most regulated markets in the world.

The history of US insurance regulation demonstrates an important point, and that is that each country has its own unique history.

South Africa

There is little doubt that South Africa followed the UK system. By 1898, six fire tariff associations had been formed. These were in Cape Town, Port Elizabeth, East London, Durban, Johannesburg and Pretoria. Even at this early stage plans were put in to place to establish a central body, the Fire Insurance Council for South Africa, which was formed in the early part of the 1900s.

It does not appear as if any of the original documents concerning operation of tariff committees or the Council survived, except for possibly some records held by Mutual & Federal. Some tariff books survived. The demise of the tariff in the 1970s in South Africa, following the UK was traumatic. For a while there was concern that there would be a market meltdown. It is not clear if the demise of the tariff caused the problem or if it simply happened to coincide with the downside cycle of the market.

Eventually, the then registrar who was concerned about the instability of the market summoned the insurers and required them to come up with a proposal to instill discipline in the market. Insurers arrived at a market accord in terms of which they would not quote against each other unless their quote was considerably below the prevailing price. The market eventually stabilised and became used to operating without the tariff.

After a few years insurers found that they were being asked by leading brokers to approve specific policy wordings. Insurers found this to be a time consuming exercise and eventually suggested that a working committee be established involving the brokers and insurers to agree on a model wording. This gave birth to the MultiMark series of policies. Although the MultiMark policies are conceptually similar to the model policies of the tariff, according to persons who were involved in the MultiMark exercise, there is no link between the two.

In light of these developments, it is interesting to note how regulation has prevented the natural development of sound market practices. Common sense dictated that a committee consisting of brokers and insurers should develop model policies. The development of model MultiMark policies was abandoned for fear that this may infringe the competition legislation.

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