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The insurance business is a major industry and source of employment in the european union. Annual insurance premiums amount to over 7% of eu gdp and insurance company assets represent a substantial pool of capital for investment and job creation. The three generations of eu non-life and life insurance directives have established the basic legal framework for prudential supervision in the single insurance market. This has led to a flurry of cross border mergers and acquisitions whose pace is expected to increase further with the imminent launch of the euro. At the same time the euro will remove currency matching constraints on investment policy and promote the formation of europe-wide equity and bond markets. This move will be reinforced by the increasing need to finance retirement pensions through individual and employer funded schemes. Electronic commerce is still at early stage, but growing rapidly and in certain market sectors it has already made a strong impact on insurance sales.
Although there are promising signs, there is still evidence that the single insurance market is fragmented and that consumers are not yet reaping the full benefits. As noted in the single market action plan, confidence is critical to the success of the single market. The focus of this overview is therefore primarily on infringement proceedings and measures to improve consumer confidence. Business needs to be certain that directives have been fully and properly implemented and consumers need confidence that their interests are protected and respected throughout the single insurance market.
The third council directives on non-life and life insurance (92/49/eec and 92/96/eec) put in place the basic single market framework in the insurance sector. They introduced, as of 1 july 1994, a single system for the authorisation and financial supervision of an insurance undertaking by the member state in which it has its head office ('home country control'). Such authorisation issued by the home member state is a true "european passport" which enables the insurance undertaking to carry on its insurance business anywhere in the european community, Either by opening agencies or branches in other member states, or by providing services directly from the home country or another member state. This single-licence supervisory system is made possible by the level of harmonisation achieved by community legislation on insurance, especially in the prudential field. The directives also required member states to abolish controls on premium prices and prior notification/verification of policy conditions.
Although the third life and non-life directives only entered into force just over three years ago (later in some member states because of implementation delays) the effects of the directives are beginning to be seen in the marketplace, particularly for industrial business, in the form of greater competition in national markets and the selling of new insurance products. Moreover, the number of undertakings to have notified their intention to provide insurance services from a base in another member state has increased since the application of the single license regime, and this tendency will increase over time as the single market develops further.
However, the single market for insurance has not yet developed its full potential, as indicated for example in the commission's communication on the impact and effectiveness of the single market (see smn n°6). After some initial delays, the overall level of implementation by member states of the key insurance directives is now broadly satisfactory. This improvement is partly the result of the Commission stepping up its contacts with national authorities and improving its methods of pursuing infringement proceedings for non-implementation and incorrect implementation of EC legislation. Moreover, the insurance committee, comprising representatives of Member States' insurance supervisory authorities and chaired by the Commission, has a Working Party which discusses and examines, inter alia, problems relating to interpretation of insurance Directives.
Implementation of the directives
In all infringement cases, the commission's objective is to ensure conformity with community law as rapidly as possible, and problems can often be resolved through discussions with member states before the case reaches the court of justice. However, the commission had to decide to refer spain to the court of justice for failure to implement the third council directives on non-life and life insurance (see smn n°1). The court condemned spain for failure to implement the non-life directive on 18 december 1997.
A number of infringement proceedings for incorrect application of insurance directives have also been initiated. The commission has sent a reasoned opinion to france in view of the fact that no measures to apply the third life and non-life insurance directives to mutual societies offering insurance have been communicated to the commission (see smn n°5).
The commission has decided to refer belgium to the court of justice because belgian legislation related to the control of insurance companies excludes insurance against accidents at work from the scope of the third non-life directive (see smn n°5). A similar problem exists in finland.the commission has also decided to send a reasoned opinion to germany for incorrect application of the third non-life directive as regards health insurance (see smn n°5).
Car insurance is of practical, every-day importance to european citizens. Proper consumer protection is paramount. Under current legislation, it is often difficult for the victim of a road accident outside the country of normal residence to secure timely and adequate compensation. This gap will be removed by a commission proposal for a "fourth motor directive", which is currently being discussed with the european parliament and the council.
The main directives governing motor vehicle civil liability insurance are the first, second and third motor vehicle insurance directives (72/166/eec, 84/5/eec and 90/232/eec). Following careful examination of the conformity of national implementation measures, the commission has taken action against belgium before the court of justice for only partly implementing directive 90/232/eec. The commission also decided to send a reasoned opinion against spain for failure to conform with directive 84/5/eec (see smn n°5). In particular, spanish legislation transposing this directive does not provide for the obligation, laid down in the directive, for the body created in the member states to provide compensation for damage caused by unidentified vehicles to justify its response to the victim regarding its intervention. Furthermore, the commission is in contact with several member states (germany, luxembourg, belgium and finland) to assess the conformity with the motor insurance services directive (90/618/eec) of their legislation on the financing of guarantee funds to compensate victims of uninsured or unidentified drivers.
There are also problems concerning the imposition in france, belgium and finland of compulsory no-claims bonus schemes on undertakings offering civil liability motor insurance. The imposition of obligatory coefficients is incompatible with the requirement of the third non-life directive for all forms of control of policy prices to be abolished. A similar problem in greece was resolved by an amendment to greek legislation following contacts with the commission.
Intermediaries and brokers
The commission has also been reviewing its policy and examining consumer protection in the field of insurance intermediation. Currently directive 77/92/eec on insurance intermediaries only provides for limited coordination of conditions giving access to the profession based on work experience. While recommendation 92/48/eec does provide for the training, registration and professional indemnity insurance of intermediaries, it is non-binding. Nevertheless, important legislative changes have already been introduced in various member states. The commission is therefore carrying out a review of the directive and the degree of implementation of the recommendation and will consider what further steps are needed, including the possibility of widening the scope of the existing directive.
After re-examining national legislation on intermediaries, the commission has also opened a number of infringement proceedings. A reasoned opinion has been sent to spain (see smn n°9) because of the requirement under national law for full vetting of the documents concerning the applicant's financial standing and good repute to be produced by brokers operating in spain on a provision of services basis. In belgium, the commission is concerned about a requirement imposed only on brokers not established in belgium to produce an additional guarantee that their products conform with belgian 'general good' requirements. In sweden, the commission is concerned about legislation under which insurance brokers not established in sweden may offer their services there only through a branch.
Freedom to provide services and "general good" restrictions
The commission has issued a draft interpretative communication on the freedom to provide services and the "general good" in the insurance sector (see smn n°10), which is now the subject of a wide ranging consultation exercise. General good restrictions is the name given to a collective group of restraints imposed under national law to protect the interest of the general good or the public at large. The problem is that sometimes the scope of these restrictions is excessively widely defined or general good restrictions are implemented in an abusive manner. In the light of the comments received (deadline for submission 31 march 1998), the commission will prepare a definitive communication embodying the principles it will use for assessing the validity of general good restrictions by member states.
Solvency margin rules
The commission presented in july 1997 a report on the solvency margin of insurance undertakings (see smn n°9). Adequate solvency margins lie at the heart of the single passport and the system of mutual recognition by national authorities. The report examines whether the current solvency margin rules need to be changed in order to ensure the financial strength of the insurance undertakings and to propose the necessary amendments to the existing directives. In essence, the conclusion is that the existing rules have operated satisfactorily but that certain incremental improvements can be made. These improvements are now being discussed with national supervisors and industry.
The Commission has also adopted a proposal for a Directive on the Supervision of Insurance Undertakings in a Group (see SMN n°10). Under the proposal, supervisors would be required to look beyond an individual insurance company, if it belongs to a wider group of insurance undertakings, in order to assess its financial strength. In particular, 'double gearing' (double counting) of capital between insurance companies would have to be eliminated. The Directive would enhance the protection of policyholders and reduce the risk of unfair competition between insurance undertakings within the Community. It would also prepare the way for a coherent EU approach towards the supervision of so-called 'financial conglomerates' (groups of banks and insurance companies). The Council's Common Position on the proposal is due imminently.
The pensions Green Paper
The Commission is conducting a major review in the field of supplementary pensions. All the evidence indicates that the existing pay-as-you-go financing of social security pension schemes will become unsustainable at the beginning of the next century. This raises major social issues and one way forward would be to facilitate the individual and employer financing of retirement benefits through pension schemes.The Green Paper on Supplementary Pensions in the Single Market, presented by the Commission in june (see smn n°8), considers the potential role of the Single Market for investment funds. Whilst the financing of national social security systems clearly remain under the sole competence of Member States, the Commission considers that the Single Market and EMU could play a positive role in the development of funded supplementary pension schemes. On the one hand, the creation of EU wide markets could make investment more efficient and less volatile and provide greater scope for asset diversification. On the other hand, EMU and the advent of the euro, will create a much bigger pool of European capital with greater liquidity. The Commission has now collected a vast and rich repertoire of comments from national authorities, the insurance industry, consultants, consumers and other interested parties. It is currently analysing these comments and will seek to draw the proper policy conclusions.
What has been the main impact of the Insurance Directives within the Single Market?
Without any doubt the main impact of the single licence regime laid down by the Third Council Directives on Non-Life and Life Insurance has been an increase of competition within different national markets. The abolition of prior approval of policy conditions and tariffs by supervisory authorities, which was the rule in many Member States before the adoption of the Third Directives, has encouraged insurers to enter new markets, and has so helped increase competition. It has also made possible the marketing of new insurance products in individual national markets, both as regards policy conditions and the price of insurance contracts. In many cases, customers have a much wider choice of insurance products than they had ten years ago. Although there are of course still imperfections in the single insurance market, insurers are increasingly forced to compete in order to offer insurance products which more fully meet customers' requirements. This is also contributing to lower prices for insurance products, in particular in those national markets where the prices were artificially high.
In addition the liberalisation introduced by the insurance Directives is tending to encourage insurers to improve the quality of their services to customers and to react quickly to the demands of policyholders.
The trend towards greater competition is likely to be strengthened as insurers' commercial policies adapt to emerging Single Market realities and as remaining obstacles to establishment and provision of services disappear.
Can I buy insurance in another eu country? If so, can I buy this insurance cheaper than in my own country?
Thanks to the Third Council Directives on Non-Life and Life Insurance (92/49/eec and 92/96/eec) the legislative framework is now in place which allows individual citizens and businesses to buy insurance in another Member State. The Directives have eliminated the major legal obstacles - now it is a question of commercial judgement for companies to carry on insurance business in other Member States.
In practice, insurance undertakings may be unwilling, for commercial reasons, to enter into an insurance contract with a policyholder living in another Member State. This can be explained by the fact that an insurance undertaking may not have the necessary information to assess the level of the risk existing in the member state of the policyholder for it to be able to set an adequate premium tariff for the insurance contract. In order to set a tariff for a premium, the insurance undertaking has to undertake the investment necessary to enter another Member State's market (e.g. technical and commercial studies to become familiar with a particular market's risks, actuarial study costs, statistical analysis, need to establish an official representative, need to participate in a guarantee fund in the case of civil liability car insurance). This investment, in particular in technical studies, may prove too expensive for an insurer to justify selling policies outside its own national market. However, as time goes on, more companies are likely to want to enter other Member States' markets, helped by new technologies such as direct selling by phone and the internet.
As for insurance policy tariffs, these are likely to continue to vary to some extent from one Member State to another because of different circumstances in different markets (such as repair costs, life expectancy, awards for damages, distribution differences). The insurance Directives have created a level playing field as regards the basic legislative framework but do not, of course, seek to harmonise the characteristics of the markets themselves. These differences mean that an insurer offering a particular tariff in one Member State may not want or be able to offer the same tariff to a potential client in another Member State. That said, as competition increases on an individual Member State's market, differences between tariffs from one Member State to another are likely to narrow.
Is there a Single Market in insurance?
The necessary EU legislation to permit insurance undertakings to offer services and establish branches in other Member States on the basis of a single licence issued by their home Member State has been put in place and it is in force since 1 july 1994. The same legislation abolished prior notification or control of policies and tariffs.
Some residual barriers still exist that hinder the Single Market in insurance developing its full potential. However, the Commission is acting in order to get rid of such obstacles. For example, it has published its draft Communication on the freedom to provide services and the general good in the insurance sector with a view to clarifying its interpretation of how Community law applies to residual barriers. It also pursues infringement procedures against Member States which fail to apply Single Market rules for insurance, or do so incorrectly.
That said, some differences will continue to exist between different Member States' insurance markets as a result of variations in risk characteristics. The insurance Directives have created a level playing field as regards the basic legislative framework but cannot seek to harmonise the risk characteristics of the markets themselves. Nevertheless, competition is still not yet fully effective in the single insurance market and there appears therefore still scope for a narrowing in premium differences.
Are differences in insurance contract law a barrier to buying an insurance policy in another Member State?
The insurance Directives have set up specific rules concerning the law which will be applicable to an insurance contract in the EU. As regards insurance contracts taken out by consumers these rules provide that, in general, the contract will normally be subject to the contract law of the place where the risk is situated (i.e. where the policyholder lives). This regime ensures policyholders the application to the insurance contract of a law which they are familiar with and therefore avoids legal uncertainties raised by the application of a foreign contract law. Although this situation may deter some insurance undertakings from engaging in insurance activities in other Member States, it ensures an adequate level of protection of the policyholder.
The potential for Member States to apply their own legislation on insurance contract law in such a manner that it constitutes a barrier to the provision of insurance services is one of the issues covered in the draft interpretative Communication on the freedom to provide services and the general good in the insurance sector (see smn n°10). The Commission is already in contact with some member states concerning problems arising from contract law.
Why are there still such large price differentials between Member States?
Partly because the markets of different Member States have different risk characteristics and partly because increased competition following liberalisation is only beginning to feed through to the marketplace. The particular case of car insurance illustrates this. Recent studies have revealed that considerable price differences persist between national markets. However, there are still substantial differences between national legislation on compulsory third party motor insurance as regards the levels of compensation to victims and the civil liability regime. Other factors causing price differences include substantial differences between Member States as regards the cost of vehicle repairs and the average frequency of claims. On the other hand, increased competition brought about by the way car insurance is sold (directly from the insurer to the policyholder for example by phone) can reduce premiums.
Are tax differences an obstacle to a single market in insurance?
For life insurance products, differences between Member States' direct tax regimes have proved to be a significant barrier to the development of cross-border activities. This is in particular the case of national legislation that does not grant tax deduction of life insurance premiums under insurance contracts concluded with an insurer not established in the same country as the policyholder.
The Court of Justice has ruled that Member States may refuse tax deduction for contracts concluded on a cross-border basis when it is necessary to ensure the "consistency of their national tax regime". Some Member States therefore refuse to allow deduction of premiums paid under contracts with insurers established in another Member State on the grounds that they need to preserve the consistency of their tax regime.
Nevertheless, the Commission is carefully reviewing the application of the Court's case law in this area. Nearly all Member States have established bilateral tax-treaties with one another to remove and reduce double taxation problems. The Commission is therefore currently examining to what extent national tax regimes validly meet the criteria of the Court of Justice as regards the need to preserve "consistency" in the light of the existence of these bilateral tax-treaties.
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