The genesis of regulation

Where do you start in tracing the history of insurance regulation?

A year or so ago, the Financial Services Board (FSB) published a file named Understanding the FSB Better. The file contains an undated document by an anonymous author entitled The FSB within the Supervisory Regime.

The document started with regulatory history by citing the case of the Executive Officer of the FSB versus Dynamic Wealth Ltd in 2012 in the Supreme Court of Appeal, where Justice Wallis used the South Sea Bubble incident of 1720 as the starting place of regulation.

The Elizabethan Era

We start a bit earlier with the Elizabethan Chamber of Assurances, based on recent excellent research into this period by academics such as Prof Johan van Niekerk, Professor in Insurance Law and International Trade Law at Unisa, and David John Ibbetson, Regius Professor of Civil Law at the University of Cambridge.

This Chamber, as the name suggests, was established during the reign of Queen Elizabeth I's (1558-1603). Professor Niall Ferguson, a foremost economic historian, points out that the East and the West were more or less equal until the 1500's after which the West started to surge ahead. It was during the 1500s that London rapidly started to become a center of the commercial world.

It is argued that it is this prosperity which gave rise to William Shakespeare (1564-1616) allowing him to publish his great works, thereby placing the English language on a firm footing also resulting in it becoming a dominant international language.

It was during this period that London also started to develop as a leading insurance market. Initially, the London insurance market was dominated by Italian merchants operating from Lombard Street. Policies were issued in Italian. The insurance market slowly moved into the hands of English merchants.

Widespread concern

As the market developed, there was a growing concern around foreign insureds. In particular that the promises contained in the policies were not being kept. In the early 1570's these concerns became sufficiently pronounced so as to attract the attention of the Privy Council (PC), a body that advised the Queen. The PC was concerned about matters which tended to discredit the city.

There were also concerns about widespread insurance fraud, especially by insureds who were double-insuring. This problem was not unique to London. Spain, facing similar problems, outlawed insurance for a short period of time, and Antwerp, at the time the leading commercial center, had introduced a system of registering policies at a central place, as a solution to the problem.

In 1575, the Privy Council called for a report on the steps taken with respect to matters of assurance. One outcome was the establishment of the Chamber of Assurances in the Royal Exchange. The Privy Council granted letters patent to Richard Candler requiring that insurances be registered at the Chamber.

Chandler was also granted authority to draw-up the policy documents, themselves. This exceeded the practice in Spain and Antwerp, causing unhappiness of almost everyone. Those who were unhappy were unhappy for commercial reasons because if Chandler had the monopoly on drawing up and registering policies, they would suffer financially. In the face of concerted opposition, Chandler abandoned his claim for the exclusive right to draw-up policies and concentrated on registering policies.

Unresolved matters

The registration of policies in the Office of the Chamber may have started another famous tradition taken up later at Lloyd's of London, in which insurance had to be transacted in ‘The Room’.

The fact that policies had to be registered probably also started to lead to a degree of standardisation of policy wordings. The establishment of the Chamber of Assurances seemed to have been successful but other problems were more difficult to resolve. Firstly, the question of the content of insurance law and secondly, and closely related to the first, was the question of the appropriate forum to resolve disputes.

The initial approach was that insurance disputes were resolved by the merchants on the logic that they knew insurance practice, customs and traditions. Despite this claim, there was considerable confusion as to the content of these items. With this practice in mind, the early policy documents contained an arbitration clause.

Some intervention

On the question of law once again, the Privy Council intervened. The Council instructed the Lord Major London to prepare a manual of the applicable orders and customs of insurance. It seems that although considerable work was expended on this project it was never finalised. However, copies of the draft orders have survived but the question of codifying insurance law was not resolved.

The second question, that of the appropriate forum and procedures was equally difficult to resolve. The settling of disputes by merchants themselves was not regarded as ideal and several competing courts began to via for the business.

Eliminating conflicting jurisdictions

There was the common-law court, the Kings Bench, which maintained it had jurisdiction over insurance disputes and indeed, in 1538, the first known insurance case that of Mayne and Poyn versus De Gozi began. There was also the Admiralty Court headed by Dr David Lewis who would have liked to corner the market for adjudicating insurance disputes. He complained that his court was being squeezed out. Then there was Chancery who became involved in evoking equity.

Ad hoc commissioners were also appointed. In an attempt to bring some order in 1577, a special forum called the Court of Alderman was established to deal exclusively with matters of insurance. Seven merchants were appointed to deal with insurance matters with Richard Chandler acting as the clerk of the court. To eliminate conflicting jurisdictions it became a condition that if the policy was registered with the Chamber, the parties submitted to the jurisdiction of the Court of the Alderman. By this time there must have been a significant number of disputes because the panel met twice a week.

Two days after the Court of the Alderman started to function, Lewis launched a counter offensive. He received a special commission from the Crown to hear cases involving marine insurance. A further counter attack was his objection to the Alderman’s Court consisting of merchants and not lawyers. He proposed that at least one lawyer should be in the court – he suggested it should be the Admiralty judge – who was himself. The Court of the Alderman thus did not end the question of conflicting jurisdictions.

The start of the beginning

In December 1601, a Bill was introduced into parliament which envisaged the wholesale transfer of jurisdiction to the Court of the Chancery, a court of equity. This was not well received and a second Bill was introduced into the Commons, giving jurisdiction to commissioners to be appointed by the chancellor with appeal to the Court of the Chancery.

It was passed in great haste because two weeks later it received Royal Assent. The Merchants Assurance Act was the first piece of legislation to deal with insurance disputes; the beginning of insurance regulation. The court consisted of the Admiralty judge, (so Lewis who clearly had influence with the Queen got his way), four lawyers and eight merchants. In the end, it was a compromise trying to appease all factions to the controversy. Professor Ibbetson succinctly sums up the position at the end of the century, “After the squabbles of merchants, common lawyers and civil lawyers – all concerned to protect their own jurisdiction against competitors – the situation in the early seventeenth century was hardly an improvement on the near-anarchy of half a century earlier.”

And that marks the beginning of insurance regulation.