The European Union stands at a crossroads faced with key decisions on how best to complete the single insurance market programme without impairing the ability of European based insurers to compete worldwide, writes Patrick Devine.
Hard driven by visionaries, the European Commission is soon to celebrate 30 years of deregulation of the insurance sector, a process ably assisted by radical judgments of the European Court of Justice and hampered only by the intransigence of individual member states motivated to protect their domestic industry from the destabilising effect of competition from other community insurers.
The object of EU insurance regulation is and was to facilitate intra-community trade in insurance by removing national barriers designed to hinder access to national markets and cross frontier competition, so that the remaining constraints are those which could not be legislated away, such as differences in language, differences in culture, differences in marketing.
If an insurer wants to seek a local licence in another member state it would do so for its own commercial reasons, not because the local regulator demanded it. The ability to trade through the EU under a single licence, as a right, is now engrained in the collective psyche of the European insurance industry to the envy of their counterparts in the United States who still need to secure a multiplicity of licences from an equal number of interventionist regulators if they are to do business in each state.
In Europe, much has been achieved against considerable odds, and the main beneficiaries have been industrial and commercial lines insurers and their reinsurers, with life and other personal lines, pensions and investment coming a poor second.
The market which has changed radically since the first EU insurance directives appeared in 1973, and globalisation and consolidation are the key characteristics of the insurance market in Europe as elsewhere.
Prompted by the attractions of economies of scale, increased efficiency in delivery systems and the need to make excess capital work harder, consolidation of the insurance and reinsurance industry is a global phenomenon and one given extra encouragement in the EU by the adoption of “bancassurance” as a model in the deregulatory framework. According to Insurance and Reinsurance Solvency Report, merger mania in 1998 produced a record 550 deals worldwide with a further 85 announced in the opening months of 1999. No one is immune from this process - in five years Lloyd's has consolidated from 93 managing agencies with 360 syndicates to 69 agencies and 139 syndicates. The merger of the Institute of London Underwriters and LIRMA to create the International Underwriting Association of London, which this edition of Global Reinsurance celebrates, is further evidence of the ongoing consolidation of the industry.
Technical not radical
While the insurance market is embroiled in consolidation of one type, EU insurance legislation can be said to be in a period of consolidation of another type, exemplified by the proposed introduction this year of consolidated texts of the first, second and third life directives, followed by similar consolidation of their counterpart non-life directives.
Although not proceeding at the pace of the heady days of the single market programme in the 1980s, the focus of legislation has changed from the ground breaking co-ordination of licensing and conduct of business rules to technical measures, the nuts and bolts of consumer protection, lines of liability and the challenges of e-commerce and information technology.
Insurers and reinsurers in bancassurance groups were the subject of additional supervisory measures laid down in a directive published in October last year. Sensitivity to the exposure of consumers to direct marketing operations from other member states and outside the EU led to the Commission's recent proposal on the distance selling of financial services, designed to regulate both insurers and intermediaries and their procedures for direct marketing by post, telephone, mail, e-mail and via the internet.
Incorporating a pre-contract “warming up” period and a post contract “cooling off” period, entitling the consumer to walk away from the contract within 14 days if he has not received all of the terms and conditions of the contract (or 30 days for life and pensions products), the proposal also introduces the concept of unfair inducement to enter the contract and restrictions on cold calling. Further work needs to be done before the draft is adopted, not least because it gives greater protection to consumers who buy from distance sellers than when they buy face to face, skewing the market against distance sellers. The problem of collecting insurance premium tax and parafiscal charges from policyholders and offshore internet insurers will continue to exercise the minds of finance ministers throughout the community.
Consumer protection is again the main driver behind the recent third motor insurance directive which introduces a raft of measures to assist motorists in bringing cross border claims, including the right for claimants to bring legal proceedings in their own country when injured in another EU state.
The European Court of Justice has led in constraining divisive national interpretations of directives, most significantly in the field of taxation, recently denying Sweden's right to impose a tax on premiums paid on policies taken out with non-Swedish insurers and clarifying the VAT-exempt status of procurers of insurance for holders of credit protection policies. By issuing a draft interpretative guidance note, the Commission has sought, without legislation, to resolve the problem of states imposing national restriction on services business issued under the guise of the European Court's concept of “general good”.
The euro as catalyst
Notwithstanding the Commission's best efforts, structural constraints remain on doing business on a pan-European basis - the most frequently quoted being the absence of co-ordinated tax rules. To date the majority of member states report only insignificant cross border sales of life insurance and in spite of a number of EU directives, national accounting laws are barely harmonised so that it is difficult to compare accounts from one member state with those created in another.In an industry already used to dealing in a large number of different currencies, the euro is just another currency to be factored in and its introduction in January this year was greeted with a “business as usual” approach by the industry.
In marked contrast, the Commission accorded far greater significance to the launch of the euro. It was to be the catalyst for the issue of a number of new initiatives for the entire financial services industry designed to remove residual national barriers to intra-community trade. A report by Eurostat, the community's statistical office, identified Ireland, Luxembourg and Belgium as the current champions of cross border insurance activity and confidently predicted that the euro would encourage cross border services through transparency in pricing.
Coincident with its launch and in response to fears that the full benefit of the euro would not be realised due to residual national regulatory barriers and divergent tax regimes in the EU, Brussels planned to dismantle restrictions on cross border investment by pension funds and to make it easier for consumers to secure compensation for services supplied across borders.
The Commission proposed better enforcement of existing EU legislation and greater transparency in the application of EU laws which, by being interpreted in different ways in different member states, increased barriers to trade - precisely the opposite of the effect they were designed to achieve. Increased transparency would enhance the Commission's role as policeman, intervening where local regulators employ conduct of business rules to protect their domestic markets.
Some member states resisted these initiatives and the euro was, as a result, launched in to the midst of a pitched battle with the Commission over the way forward. Lined up against the Commission are powerful voices led by France, which fears the Commission is going too far in the direction of Anglo-Saxon style deregulation and has produced its own blueprint for the future.
Tax reform is also high on the Commission's agenda. Mario Monti, until recently the single market commissioner, is on record as saying that “You cannot have an integrated financial market with no integration on tax”. The Commission's controversial plans to harmonise taxation on savings in the community have led to fears that much business would migrate to non-EU countries.
The industry's sensitivity to tax issues has received wide publicity by the threat of German insurers to relocate from Germany in the face of a proposed massive increase in taxation proposed by Oskar Lafontaine when German finance minister. The Commission's own controversial plans to harmonise taxation on savings similarly led to fears that while this may create a more level playing field within the community, it would only do so at the expense of loss of business to offshore tax havens.
Taxation as an issue is now on the table and is likely to survive both the recent resignations of Mr Lafontaine and of every EU commissioner. This issue is set to colour the debate in the years to come unless the newly appointed commissioners wholly abandon the plans of their predecessors.
The outcome of the debate, which is unlikely to be concluded in the short term, remains uncertain. Trade-offs are, however, likely with progress on the liberalisation of pension funds and a host of other issues yet to emerge being tied to progress on the harmonisation of taxation. It is pure speculation and possibly one too many “ifs”, but it may be that member states will seek to protect their competitive position in the wider world by imposing restrictions on offshore tax havens as part of the legislative package agreeing some form of compromise tax harmonisation between themselves.
Patrick Devine is a partner and head of the Insurance Group in the London office of Akin, Gump, Strauss, Hauer & Feld, comprised of lawyers admitted in the UK, US and a number of other jurisdictions. He has written and lectured widely on insurance regulation, transactions by and with the insurance industry and alternative risk transfer. He is European editor of Sweet & Maxwell's Encyclopaedia of Insurance Law.