Slow progress in insurance sector’s drive for harmony

Date: 06/02/1997

By Chris Johnstone

TWO books to be published next month will, literally, speak volumes about the state of the European insurance market.

Each of the 400-page rough guides to life and non-life insurance rules in Europe is symbolic of the progress - or rather lack of it - the EU has made along the road towards a single market in a key sector which accounts for 7&percent; of its gross domestic product.

The books will, according to their authors - Europe's insurance lobby, the Comité Européen Des Assurance (CEA) - “enable operators to find their way through the maze of Community texts and the mysteries of national legislation”.

Local deregulation rather than the opening of national markets has characterised the European industry since the early to mid-1990s' wave of legislation which cut out most price fixing by governments and allowed companies to set up operations outside their home markets.

But local rules still remain in place, often justified and defended as being in the 'general good'. Adapting policies and products to fit these different rules is a serious obstacle to insurance industry mobility.

The European Commission has already tried to curb the use of 'general good' clauses as protectionist measures in the banking industry, and is now turning its attention to the insurance sector.

“A series of practical problems, mostly linked to a lack of harmonisation of aspects essential to their activities such as taxation, contract law, distribution and winding up, has characterised operators' early experience of the single market,” says the CEA's 1996 annual report.

“It is still early. A lot of the single market legislation only came into effect a few years ago,” adds CEA spokesman Jacques Léglu .

For consumers, there are similar frustrations. Difficulties in obtaining cross-frontier insurance cover; different insurance conditions for residents and non-residents; the absence of tax harmonisation; inadequate information particularly on cross-border contracts; the lack of cooling-off periods in non-life insurance; cumbersome compensation procedures after accidents abroad; and obstacles hampering access to justice were some of the bugbears aired last year.

The insurance industry, its national watchdogs and the Commission are due to consider some of the problems confronting both operators and consumers at a round table with Internal Market Commissioner Mario Monti in March.

For the industry, there is a lot at stake in Brussels this year, although not all the Commission's activities are likely to be welcomed.

By this July, it must recommend how far current solvency rules (the requirements placed on companies to cover their liabilities) should be changed. It must also work out how the increasing mix of bank and insurance companies and the trend towards insurance groups should be regulated. Meanwhile, the industry is carefully shadowing EU plans for pensions provision and what rules will be drawn up to pay for Europe's environmental clean-up bills.

Insurance solvency rules have not altered for decades - and the insurance lobby would like that situation to remain largely unchanged, although it accepts some tinkering may be required at the edges to take account of new products and procedures.

Stricter solvency rules would not, it maintains, have had any impact on recent bankruptcies in Scandinavia and the UK.

“Those rules act as a sort of shock absorber and are only useful if the rest of the company is working well,” said Léglu. “Solvency rules could have been twice or five times as strong and it would not have made any difference.”

Past insurance failures have been sparked by the inability of regulatory frameworks to focus on mixed bank-insurance groups. Such watchdogs currently cover one or other sector, but there are no mechanisms for an overview of the group or for an exchange of information between regulators which would give early warning of the danger of collapse.

The fall of Scandinavian insurer Baltica, dragged down by the banking and real estate activities of subsidiaries, was a case in point.

The Commission's proposal for a directive to bridge this gap - the proposed supplementary supervision of insurance undertakings in an insurance group directive - has come up against stiff resistance from the industry.

The proposal comes at a time of major restructuring within the sector, with mergers such as Axa's take-over of French rival UAP and the blurring of divisions between banks and insurance companies expected to continue.

The number of local insurance firms dropped by 10&percent; in Spain in 1995, with falls of around 7&percent; in Belgium, Greece and France.

The strongest opposition centres on the proposal to ban so-called double gearing. This allows an insurance company which buys a stake in a counterpart to count this shareholding as part of its own funds when meeting solvency requirements.

The Commission argues that groups or holding companies should only be able to cover their solvency requirements with their own funds. But European insurance firms say the proposal goes too far by including all participations above 20&percent;. They want its scope reduced to cases where one group or company controls another or exerts considerable influence upon it.

As they stand, says the CEA, the Commission's moves to eliminate double gearing would impose considerably higher capital requirements on the sector which would put EU firms at a disadvantage against world-wide competition.

Insurers are also vying for a slice of the boom in the Union pensions industry which is expected when governments admit they cannot adequately cover their elderly populations, and self provision becomes all the rage.

At the moment, insurers can offer pensions cover but complain that they are handicapped by tougher rules than those which apply to pensions funds.

They are looking to Monti to straighten out this discrimination and to Competition Commissioner Karel van Miert to extend exemptions from EU competition rules to allow insurance companies to co-operate more widely.