Abstract: Why did shareholder liability disappear? We address this question by looking at its use by British insurance companies from 1830 until its complete disappearance by 1975. We explore three explanations for its demise: (1) regulation and government-provided policyholder protection meant that it was no longer required; (2) it had become de facto limited; and (3) shareholders saw an opportunity to expunge something they disliked when insurance companies grew in size. Using hand-collected archival data, our findings suggest investors attached a risk premium to shareholder liability, and it was phased out after a merger movement increased the size of insurance companies which meant that they were better able to pool risks.
Lay summary: Between 2011-5, the Insurance Compensation Fund paid out €1.4 billion to clients unsupported by insolvent insurance companies. Customers footed this bill, but what of the shareholders? Was there a historical precedent for this absolution of liability? This paper explores shareholder liability in the insurance industry, and ask if the removal of this feature was a deliberate exercise in shareholder placation, or a natural evolution of the industry.
Cite this paper: David A. Bogle, Gareth Campbell, Christopher Coyle, John D. Turner, Why did shareholder liability disappear?, Journal of Financial Economics, Volume 152, 2024, 103761, ISSN 0304-405X
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