Mortgages and bonds: The asset management practices of Australian life insurers to 1960

Abstract

Recent studies of the experience of the British life insurance industry indicate that a period of transition, and the development of more diversified investment strategies, began in the interwar period. Australian life insurers lagged behind their British counterparts in the introduction of such strategies. This paper investigates why this was the case. It argues that in the Australian market there was both a lack of opportunity and incentive to broaden asset portfolios. However, this did not mean that asset management practices did not advance. Australian life offices became progressively more sophisticated in their approach to portfolio management during this period. Developments in the interwar period provided a grounding for post-war expansion into the equity market.

Keywords:

• Life insurance
• asset portfolio management
• interwar period
• diversification
• Australia

Acknowledgements

The author is indebted to the anonymous referees of this journal for their comments and advice on earlier drafts of this paper.

Notes

1. In the case of the Australian Mutual Provident an act of parliament was required.

2. Three American companies entered the market in the 1880s. However, they met with stiff opposition and were never able to do sufficient business to compete seriously with Australian offices. After 1905 they began to retreat from the market and policy liabilities were transferred to the major mutuals (Gray, 1977: pp. 121–24).

3. Examinations were introduced by the Sydney institute in 1910. They were discontinued during the First World War but reintroduced nationally when the insurance institutes federated in 1919 (Gray, 1977: p. 204).

4. The Royal Commission was established to inquire into the conduct of the financial system during the depression of the 1930s.

5. This action was part of a package introduced with Premiers Plan in June 1931. This plan constituted an agreed response on the part of state and federal governments to the crisis in government finance which had been evolving throughout the previous decade. Amongst other things the plan agreed to a reduction in government expenditure of 20 per cent, an increase in federal income and sales taxes and a reduction in public and private interest rates. The conversion loan was based on a reduction in rates of 22.5 per cent on local government securities. Private interest rates were expected to fall by a similar amount (Schedvin, 1970: p. 249).

6. Prior to 1945 the life insurance industry was loosely regulated at the state level. The extent of regulation differed markedly between states, with one state (New South Wales) having no regulatory control over life insurers. For an explanation of the regulatory environment in which life offices operated, see Keneley (2005).

7. Cited in Hirst & Wallace (1974: p. 185). The antipathy of life offices to the intervention into their affairs is also evident in their public condemnation of government action. The response of leading offices such as the National Mutual Life is chronicled in the records of the federal treasury department (see Investments by Life Office Companies, 1963).