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How free is free?

How Free is Free?

It is no surprise that the freeing of Europe's economic trade barriers in 1992 will favor the strong, the competent and the prepared. Those who are not any of the above are unlikely to get a share of the action, just as they do not now.

Unfortunately, that is not the general perception of how freedom of establishment and freedom of services, which will allow the sale of insurance across national borders, will impact the European insurance market. Despite the lip service paid to the need to gear up for the "New Europe" by the creation of local companies and branches, the underlying feeling of those in the insurance community is that trading conditions will not only be freer after 1992 but easier as well. It might be nice if that were true, but it is unlikely.

The more realistic operators in Europe have already heard the European Commission's public relations hype and now recognize that the new Europe will be different but not necessarily easier. In effect, those who find life easier as a consequence of freedom of services are likely to be the customers, not the providers and sellers.

However, I should mention that not everyone is taken in by the euphoria. With their Swiss thoroughness and practicality, Zurich Insurance Group examined the last detail of the legislation and considered its implications on work practices. They have drawn unpleasant conclusions which, for the most part, most others are ignoring.

Insight into the coming problems was given by Zurich Insurance Co. at a seminar in October for European insurance and risk managers. Alfred Reichmujth, Zurich's tax counsel, pointed out that a system for agreeing on the measures needed to collect premium taxes in freedom of services cases had been swept under the carpet and was now a major problem, since July 1990 is the operative date. A system for handling the tax aspects of cross-border insurance policies has not even been discussed, he said.

Premium taxes are handled in various ways throughout the EC. Some countries, such as the United Kingdom, Ireland and Spain, apply no tax at all, while the rates can be as high as 30 percent for fire insurance in France and as high as 50 percent for motor liability in Denmark. Harmonization on rates, as Dr. Reichmuth pointed out, is therefore out of the question in the near future. But when will the problem of collection be discussed?

The EC intention is that taxes levied on Europe-wide policies will be apportioned to the different countries involved in relation to their allocation of risk and local tax rates. If a UK insurer issues one policy for one premium to a multinational client with operations in all EC countries, no one yet really knows how that allocation is to be done. They can only presume that, since the U.K. premium tax rate is nil, the United Kingdom will get nothing even though the U.K. company has had to load its premium to pay other countries' taxes!

Dr. Reichmuth also said premium notification should be made to both the country of incorporation of the policyholder and the country in which risks are located. But as yet the mechanism for doing this, of course, is unknown.

Would it be a question of filing a tax return? he asked. And if so, would it be to the policyholder's supervisory authority? Would the notifications fall within the scope of the duty to report to supervisory authorities? And would Euro-clearinghouses, as in the case of value added tax (VAT), have to sort out the problem?

Zurich Insurance sees the premium tax issue as only one of many fiscal problems which could stymie the intended release of competitive energies by freedom of services. On the direct tax side, for example, all attempts at harmonizing corporate income tax have been blocked for many years, and in Dr. Reichmuth's opinion, even the harmonization of VAT by 1992 is extremely problematic.

The consequence, he said, is that tax differences will be used to decide where premiums and other expenses are charged within a multinational group affecting a freedom of services Euro-policy.

Zurich also drew attention to the problems of underwriting reserves and different languages. Because freedom of services requires underwriting reserves to be calculated by home-country standards, a German insurer will have to provide fluctuation reserves for an Italian risk even though the local competitors do not because it is not required under Italian law.

Problems can arise when a supervisory authority of the country in which the risk is located demands that annual reports detailing the cross-border business be written in the local language. Will the German insurer in Munich who underwrites a Greek risk have to employ a Greek speaking staff?

Another question is whether brokers, working for insurers, can also perform services for the foreign insurer in a way similar to that of an existing branch establishment.

Lastly, although everybody is talking about the Euro-policy, unfortunately, the foreseeable differences between the laws to be enacted by the member states make it difficult to draft one. Of course, in the domain of "large" risks, it will be possible to insure from one EC country risks that are located in any of the other member states. But it remains doubtful, according to Zurich's legal adviser, Anton Schnyder, whether this will entail the creation of a uniform policy to be used in all EC member states. The discrepancies between countries' supervisory legislation will cause problems even when the policy is drafted in the state of establishment. Home-country control will further emphasize primary supervisory competence of the member state of establishment.

Dr. Schnyder said: "Once the member state of establishment (Italy, for instance) has been determined, it still appears doubtful whether a standard wording of the Euro-policy will be adequate. One will, possibly, have to resort to a structure using different elements as `building stones,' the master or Euro-policy taking account of the respective member states where the provision of services is undertaken or states where the insured risks are located, and to which insurance cover is to be extended. For example, even if it is stipulated in an Italian contract that it is governed by Italian law (something that is admissible), qualified mandatory provisions of the different countries involved, that is, where insured risks are located, may also have to be taken into account. With regard to this extremely difficult and complex is to be pointed out that we do not know, as yet, which countries will make some of their legal provisions relating to cross-frontier contracts mandatory (in the above sense). Similar considerations will also have to be made regarding possible `splittings' in the case of compulsory insurance. Finally, it must not be forgotten that a great number of international insurance programs are not meant to cover risks within the EC purely but also risks that are located in countries that are not located in member states. In the latter case, it will also be necessary to modify the Euro-policy in certain cases."

Well, freedom of services seemed like a good idea.

Chris F. Best is editor of Foresight, a London-based risk management and insurance journal published by Risk and Insurance Group Limited.
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Title Annotation:freeing Europe's economic trade barriers
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Dec 1, 1989
Previous Article:Managing financial risks across borders can be chaotic.
Next Article:IRS rules on issue of sufficient risk transfer.

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