Alastair Evans believes that this year's EU enlargement offers significant opportunities to the London market

On 1 May of this year, 10 new countries (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) joined the European Union. This was the fifth 'enlargement' in the EU's 47 year history since the formation of the European Economic Community in 1957 by its six original founding members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands).

Since its foundation, the EU has grown by a series of enlargements. The six became nine in 1973 with the accessions of Denmark, Ireland and the UK; the nine became 10 in 1981 with Greece; the 10 became 12 in 1986 with Portugal and Spain, then 15 in 1995 with the accessions of Austria, Finland and Sweden. With the latest enlargement, the EU now comprises 25 member states.

For the 10 new states, membership of the EU represents the fulfilment of many years of political and economic ambition and several years of negotiations with the EU which started in the late 1990s. To join, each state had to show that it met the so-called 'Copenhagen criteria', laid down by the European Council in Copenhagen in 1993.

These require:

- stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;

- the existence of a functioning market economy, as well as the capacity to cope with competitive pressure and market forces within the Union;

- the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union.

The effect of the latest enlargement is to increase the total population of the EU by 75m, its area by 34% and GDP by 5%. It also strengthens the EU's position as a trading bloc on the world stage with a total population of 450m, significantly larger than, for example, the 280m of the US.


The entire implications of enlargement will only become fully evident in time. One implication, if Commission president Prodi's idea that all EU athletes will compete under the EU flag as well as under their own national flags is adopted, is that the EU should comfortably occupy first place on future Olympics medal tables assuming performances at Athens are repeated!

Each of the EU's enlargements has been significant to the London market.

The first in 1973 positioned the London market within the EU and meant that its insurers and reinsurers would become subject to the benefits and obligations of existing and future EU law. Subsequent enlargements have increased the size of the EU's internal market and the scope for writing insurance and reinsurance business from additional joining countries.

Countries that join the EU are required to accept the 'acquis communautaire' (the existing body of EU law) by the time of their EU entry unless special derogations have been negotiated. The 10 new member states had to demonstrate compliance in 31 separate areas.

No significant insurance derogations were negotiated. The 10 are therefore bound by the EU insurance directives with their exclusive home state financial supervision principle, the passport authorisation system and other rules, and are legally required to apply these rules from their date of joining the EU.

In other words, EU insurers that wish to enter their markets can now do so on the basis of common EU rules and a home state passport, and are not obliged to seek separate authorisations from each 'host' state in which they wish to trade. London market insurers trading in other jurisdictions outside the EU, a number of which impose formidable authorisation and trading rules, are all too aware of the huge comparative advantage that the EU home state authorisation and supervision and passport system offers.

The acquis communautaire includes the 1964 Council Directive on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of reinsurance and retrocession, which the new member states, like the earlier members, will need to respect.

There is as yet no common system of regulation of 'pure' reinsurers within the EU although there is a Commission proposal on this subject which is currently being considered by the governments of all the 25 member states.

This proposal follows the basic model of the existing insurance directives to the extent that it extends the home country control system for authorisation and financial supervision of insurance undertakings, already in place for direct insurers, to reinsurers whose head office is located in the EU.

Increased opportunities

The London market is keen to take advantage of the increased trading opportunities that this enlarged EU offers. Even whilst the joining festivities were occurring, Lloyd's and many London market companies were taking steps to obtain authorisation from their home state regulator, the Financial Services Authority, to trade in the new member states, mostly on a cross-border basis, so as to be able to access the business opportunities available and to offer their range of insurance products.

Lloyd's was already a licensed insurer in two of the accession countries (Malta and Cyprus) and the acquisition of eight additional licences from the new EU states means that Lloyd's is now able to write direct business from 72 territories worldwide, including all the 25 EU member countries.

On the occasion of a visit in early May by the Polish president, Aleksander Kwasniewski, to Lloyd's, Lord Levene, the Lloyd's chairman said that: "These (new EU) licences mark a further expansion of Lloyd's outreach in Europe. Our underwriters look forward to offering their expertise and resources to the rapidly-changing needs of the new EU countries. The potential of the new enlarged European market cannot be underestimated. Expanding our presence in Europe will enable Lloyd's underwriters to better serve their existing customers while offering new and exciting opportunities to the new EU countries."

Similar messages have been emerging from the London company market whose trade association, the International Underwriting Association of London, has spoken of its expectation that demand will grow in the new accession states for the type of major and complex risk coverage that the London market is renowned for.

The size of the economies and of the insurance markets are not of course uniform across the 10 countries. It is clear that some countries are going to offer the London market greater potential for business than others.

The GDP of Poland, for example, represents almost half of the total GDP of the accession states, with the Czech Republic and Hungary being the next two largest economies.

Although the collective GDP of the enlargement states is small compared with that of the 15 member states before 1 May, the 10 are growing at a faster economic rate than the original EU. Their GDP rose by about 3.5% last year and is forecast to increase by more than 4% this year. GDP growth in the small Baltic states has been particularly impressive in recent years and last year rose by 4.7% in Estonia, 7.5% in Latvia and 8.9% in Lithuania. Commentators have also predicted continuing growth in their economies as they face up to the challenges and benefits of the EU's internal market with acceptance of its four main 'freedoms': the free movement of goods, services, persons and capital. In traditional non-life insurance, the London market's particular area of expertise, it has been anticipated that premium volume in the 10 will grow faster than growth in GDP.

The London market's prospects for increasing its market share of business written from these countries may be aided by the fact that the level of competition, measured in terms of insurance companies per million inhabitants, is still at the lower end of the EU scale, particularly in the case of the larger countries.

Yet it would be wrong for the market to assume that business is quickly and automatically going to flow in substantial quantities through to London.

There is already a wide choice of established suppliers in these countries offering a range of insurance products. Insurance companies in the new EU member states have considerable potential for enhancing their internal efficiency and many have begun this process, realising that there can be no scope for complacency in the face of the increasing competition that they face in the enlarged internal market.

It is thus crucial that the London market, in close cooperation with its distribution arm, the brokers, works hard to raise its profile with potential insureds and reinsureds in the 10 countries, and to make them aware of the diversity and range of products that the market can offer to clients to protect themselves and their assets against risk. We are confident that this will occur and that an increasing volume of non-life commercial business from the new member states will be written in the London market as clients take advantage of the benefits of the EU's internal market.