Consumer access to possibly superior, cross-border insurance products in the European Union depends on intermediaries, but virtually nobody is able to say with precision how a broker may operate openly and legally in the EU on the basis of freedom to provide services. Harald Krauss describes the changes intermediaries want to see.

Freedom of services insurance business today remains insignificant in Europe despite the single market legislation. As Mario Monti, the EU commissioner in charge of financial services says: "We have no real internal market in insurance. We are failing ."

It is true that in all EU markets insurers have made very considerable numbers of notifications: that is, they have told the host country's authorities of their intention to do business there. However, the number of notifications is more likely to reflect a precautionary move than the belief in real business opportunities. How can this limited European cross-border business be explained?

In practice, there are still numerous obstacles preventing the creation of a true single market. The chairman of Assicurazioni Generali, Antoine Bernheim declared at the annual seminar of the International Insurance Society: "There remain considerable differences among member states in terms of insurance culture, products, distribution and tax systems which affect cross-border competition."

This less than satisfactory situation is confirmed by the findings of a report entitled Consumers in the Insurance Market, which the EU Economic and Social Committee adopted earlier this year. The report regrets that: "Even after the introduction of the single licence system, consumers do not enjoy guaranteed rights of free access to insurance in other member states." It further found that in the provision of insurance services within the single market there was considerable complexity and uncertainty, especially in the event of dispute between insurers and insured parties. "This is particularly so where the latter are non-professional, individual consumers, who have neither basic information and specialist technical knowledge nor specific legal support."

Intermediaries' rights denied

Even the best public relations service of a trade association for insurance intermediaries could not have given any better description of their fundamental role for bringing about a meaningful single market for insurance! It is, indeed, evident that without well functioning distribution channels, a company's best product could also be in danger of being its best kept Euro-secret. To put it differently: how does, say, a superior UK policy reach a consumer in Italy? The intermediary in Europe is indispensable in this process.

So do insurance intermediaries enjoy similar rights as underwriters to operate across borders? Here, one has to admit to a disappointing and totally unsatisfactory situation. There is virtually nobody who is able to say with precision how a broker may operate openly and legally in the EU on the basis of freedom to provide services. One thing is absolutely certain: unlike insurers, intermediaries cannot operate across borders on the basis of a single home country licence.

BIPAR, or to give it its full name in French, the Bureau International des Producteurs d'Assurances et de Réassurances, represents today 49 national associations of insurance intermediaries, brokers and agents, from 27 countries. BIPAR is definitively of the opinion that the absence of such a single licence for intermediaries is a clear denial of their fundamental right to freedom to provide services as granted by the Treaty of Rome.

Complexity and confusion

As things stand, it would seem that any insurance intermediary established in one EU member state wishing to do business in another, even without opening an office there, has to comply with the law and regulations governing intermediairies of both countries. To give a practical example: in France, one requirement of the law is that any broker must hold FFr 10,000,000 (about £1 million) of professional indemnity insurance for each and every occurrence. This, coupled with the requirements that, to be recognised in France such a policy must be written in French and adhere to the statutory French insurance code, makes it highly unlikely that the existing professional indemnity policy of, say, a UK broker would satisfy the French authorities. In Italy, he would infringe regulations if he were to place more than 30% of his business with one insurer or if a single client's premiums made up more than 50% of his portfolio.

These two examples illustrate the need to change this complex pattern if brokers are going to be able to operate effectively on a cross-border basis. It is true that the 1976 EU directive on insurance intermediaries sets the conditions for mutual recognition of professional qualifications and experience obtained in one's home country. For any other requirement, however, member states can still demand the fulfilment of their own national conditions.

In the case of Spain this even means that, according to their current legislation, a foreign broker has to submit his business plan for approval to the Spanish authorities. This business plan has to contain exact data on his clients, classes insured, number of his employees and very detailed financial information.

After intensive discussions with BIPAR, the European Commission published a set of guidelines in December 1991 on professional requirements and registration of insurance intermediaries. However, the commission guidelines only had the character of a recommendation and as such were non-binding for the member states. For instance, the UK government in its official submission to the European Commission clearly stated at that time that it did not see a need for any further legislation of the profession.

What does this lack of any meaningful, binding European legislation on insurance intermediaries mean in practice? As there are no compulsory legal texts in this field, virtually nobody is able to give any reliable information on what exactly constitutes, say, for a UK broker, the exercise of his broking activity on foreign soil, for instance in France, which would trigger the application of this country's broking legislation. Is it the broker's first telephone call or fax or in general giving business to a French insurer? Is it the fact that the broker visits a prospective client domiciled in France, is it the inclusion of his UK client's holiday home on the Côte d'Azur in a UK policy?

As a first practical step to solve these difficulties, BIPAR questioned the national authorities throughout Europe on what they considered to be an activity on their territory triggering the application of the respective national legislation on brokers. Their answers only added to the confusion; as there is no harmonised view on this triggering element. Whereas one country considers the domicile of the insured to be the decisive element, others refer to the location of the risk or that of the underwriter.

This leads to highly complex situations: a UK broker intending to place the risk of a French policyholder with a Portuguese underwriter would have to abide by the entire legislation on brokers of all three countries concerned! A costly situation - and a dangerous one, because there are several countries in Europe which make the exercise of broking activity without the necessary authorisation a criminal offence. Dangerous, too, under the aspect of a broker's professional liability.

Where do we go from here?

BIPAR clearly sees the need for binding legislation on insurance intermediaries at EU level while respecting the well known principle of subsidiarity laid down in the Maastricht Treaty, which means in practice that there should be no legislation at EU level in cases where a national act would better achieve the aim of the legislation. However, the current situation is much too burdensome for insurance intermediaries wishing to let their clients benefit from the single market for insurance. BIPAR is also fundamentally sympathetic towards the need for a degree of deregulation: after all, insurance brokers throughout Europe wish to work in deregulated markets.

So BIPAR is certainly not asking for fully-fledged harmonisation of broking legislation in Europe, if only because this would probably be impossible to achieve over the next century or so. It is, however, of the opinion that the EU should proceed with the minimum harmonisation of the conditions for access to and the exercise of the profession necessary to allow for the mutual recognition of an intermediary's local registration. As such a single measure would replace the application of several national broking laws, this would by the same token constitute an act of deregulation.

Noting the absence of any meaningful progress more than 20 years after the adoption of the transitional directive of 1976, last spring BIPAR joined forces with the European federation of consumers, BEUC, to lobby the two European commissioners Emma Bonino and Mario Monti. In its green paper entitled Financial Services: Enhancing Consumers' Confidence published in June 1997, the Commission announced the preparation of several new legislative measures regarding the insurance sector, including a new directive for insurance intermediaries, with a deadline of spring 1998!

Further to this communication, in September 1997 the Commission submitted to the interested parties a draft working paper on insurance intermediaries for comments by the end of last year. Following the submission of position papers by the European federation of insurers (the CEA) and BIPAR which were both broadly very supportive of such new legislation, the commission will now intensify its soundings with the 15 member states.

After a first round of consultation, it appears that there is a clear majority for such a directive and in spite of some frustrations over the last year, I am still sufficiently optimistic to expect the adoption of a draft directive at the level of the commission before the end of this year. This text would then, of course be submitted to the Council of Ministers and the European Parliament.

What would the directive say?

The Commission itself has not even a preliminary view on the contents as they are currently concentrating their efforts on getting the necessary political support from the member states to get the ball rolling towards the objective of mutual recognition throughout the union. However, to venture a very preliminary and purely personal guess: I expect the directive to include minimum rules on the level of professional qualification, professional indemnity cover, additional financial requirements, transparency regarding the intermediary's relations with the underwriter and the obligation to register. As to the precise level of the requirements on these issues, one should expect some very tough horsetrading, since you still have an enourmous divergency of relevant rules. Indeed, there are still two member states (Germany and Denmark) without any regulation at all on intermediaries, while a couple of others have very stringent ones in place which they deem necessary for the protection of the consumer.

Following the 1991 recommendation which was drafted in fairly broad terms, BIBAR prepared some guidelines for member states to assist them in the implementation. To date this still represents the only proposals in this field and one would, therefore, not be surprised if the ultimate directive were considerably inspired by these guidelines.

Although they may require some updating, our proposals were as follows:

* Compulsory registration of anybody carrying out the activity of insurance mediation. A minimum of ECU 350,000 (approximately £220,000) with a minimum aggregate of ECU 700,000 (£450,000) professional indemnity cover.

* Compulsory use of a separate account for insurance monies or bonding.

* Carrying out this activity without being registered or entering into an agency with somebody so registered to be a criminal offence.

The discussions on the fine tuning of these requirements will be on the European Commission's agenda for the remainder of this year.

Harald Krauss is director of the Bureau International des Producteurs d'Assurances et de Réassurances (BIPAR). Tel: (32) 2 735 60 48; fax: (32) 2 732 14 18; e-mail:

His article is adapted from a speech given at IBC's annual conference on European insurance regulation held in London in February.