Capital market development over the long run: the portfolios of UK life assurers over two centuries

European Review of Economic History, 26, 370–398 © The Author(s) 2021. Published by Oxford University Press on behalf of the European Historical Economics Society. All rights reserved. For permissions, please e-mail: This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/ licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact doi:10.1093/ereh/heab017 Advance Access Publication Date: September 16, 2021 Capital market development over the long run: the portfolios of UK life assurers over two centuries What shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency, and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemony-secured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry. 1. Introduction An important driver of economic growth is capital market development. Ultimately, investor demand and the supply of capital are critical factors in the development of capital markets (Albuquerque de Sousa et al. 2016). While previous studies have assessed long-run capital market development by examining changes in the overall size of markets, we examine one of the most important channels of supply of capital to markets over the long run—life assurance companies. Life assurance companies have a long history in the UK, stretching back more than 300 years. To perform their societally important function of pooling mortality risk, insurance companies have invested their premium income into capital markets. The assets under management (AUM) of British life assurance companies (which have been as high as 25 percent of the capital market) mean that they have always played a very important role in capital markets. Indeed, until the late 1970s, they were the largest grouping of institutional investors in the UK (Alborn 2002; Office of National Statistics 2020).1 In this paper, we analyse the portfolios of these important asset managers over the past two centuries. In particular, we explore the role of historical contingency and political reactions to events in shaping and driving changes in portfolio composition over time. We consider how the following affected portfolio composition: the supply of financial assets, regulation, the general economic environment, and firm-specific characteristics. To do this, we have 1 By 1970, the assets of the insurance sector even exceeded the total assets of the UK banking system (Sheppard 1971, pp.116–7, 157–8; Ryan 1973). D A V I D A . B O G L E, C H R I S T O P H E R C O Y L E A N D J O H N D. T U R N E R Queen’s Management School, Queen’s University Belfast, UK, , , The portfolios of UK life assurers over two centuries 371 compiled large amounts of asset composition data from insurance archives, government publications, and industry reports. Our results reveal that there have been major changes to the composition of life assurance company assets over the past 200 years. One major change has been the switch away from government debt and relatively unmarketable assets, such as mortgages, towards financial assets traded in nascent capital markets. This switch had been largely completed by the 1920s. Notably, British government debt has at times been the largest asset class, but these occasions have coincided with abundant supplies of government debt having been issued to fight wars. Another major change has been the switch away from fixed-income securities towards equity, which started as far back as the 1890s, but accelerated rapidly after the 1920s. What were the main drivers of changes in the asset portfolios of life assurance companies? The supply of different types of financial assets played a major role in the 19th century, with the development of the share, debenture, and foreign government debt markets. The availability of these new markets expanded the options for portfolio managers and a sharp switch away from government debt during the Pax Britannica period facilitated investment in these assets. In the 20th century, changes in the wider economic environment appear to have been the main determinant of the changes in portfolios of life assurance companies. The wartime finance needs of governments and the resulting inflation, allied to a healthy equity risk premium, resulted in a move away from government bonds and towards equity. Actuaries also played a role in the evolution of asset portfolios. The seminal investment canons of the UK life assurance industry, which were articulated by the actuary (Bailey 1862), favoured low-risk fixed interest assets such as mortgages and debentures in the 19th century. However, in the interwar period, the changing macroeconomic climate led to a re-evaluation of these actuarial canons by Smith (1924), The Economist (1927), and Raynes (1928). This re-evaluation was accompanied by an increased investment in equities. To explore the role played by regulation in the evolution of asset portfolios, we compare the trends in the UK after 1870 to what was happening in the United States. Although the general environment was somewhat similar in terms of wartime finance, inflation, and the equity premium, the regulatory regime in the United States was much stricter in restricting the types of assets that insurance companies could invest in. We suggest that the switch to equity occurred much later in the United States and US life assurers tended to have less property in their portfolios than their UK counterparts because of this more stringent regulatory regime. It is possible that changing firm characteristics were the main drivers of change in the asset management practices of UK life assurers. Using panel regression analysis, we explore the relationship between firm-specific characteristics of life assurance companies and their asset portfolios. We find little evidence that changes in firm characteristics over time impacted on the composition of asset portfolios. As well as contributing to our knowledge of what shaped British capital markets over the past 200 years, this paper contributes to the historiography of the asset management practices of UK life assurers. To date, this has consisted of studies of the practices of one company over short periods of time (Supple 1970; Treble 1980; Trebilcock 1985, 1998), an analysis of the sector at one point in time (Johnston and Murphy 1957), a study of the interwar period and the rise of the “cult of equity” (Sc (...truncated)