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Second Non-Life Directive paves way for borderless Europe.

Second Non-Life Directive Paves Way for Borderless Europe

On June 22, 1988, the European Community's final rulemaking body, the European Council, adopted the Second Non-Life Directive. This directive, one of 300 legislative measures comprising a comprehensive program of change with the goal of a single European market for all goods and services, is expected to become law throughout the European Community on July 1, 1990.

Many EC countries only allow insurers to accept insurance risks from within those countries if the insurers are authorized or licensed to do so, or if they have an operations base in those countries. The issues of establishment and authorization have created a measure of protection for local markets from competition throughout Europe.

Articles 55 through 66 of the treaty forming the European Economic Community required the abolition of all restrictions which prevent EC nationals from establishing themselves and providing services in other member states. Unfortunately, progress has been slow, with some member states moving ahead reluctantly. Financial services, which are closely regulated in all states, have been particularly affected by this situation. While the United Kingdom has virtually no restrictions on the placement of insurance with foreign insurers, such is not the case with other EC members such as France, Germany, Italy and Spain. In contrast, Belgium, Holland and Luxembourg are basically liberal in allowing domestic insurance to be placed with foreign insurers. Italy, Spain and France, however, prohibit the export of insurance to non-licensed or non-admitted insurers unless extenuating circumstances apply. In Germany, though, since extensive state supervision applies, insurance can be placed with foreign insurers except for compulsory classes. In these cases, the placement must be handled through correspondence and not through any presence or activity in Germany.

New Freedoms

For reinsurance, freedom of establishment and service throughout the European Community was implemented by a directive established in 1964, which abolished some national restrictions and freed reinsurance business written by EC insurers from insurance supervision other than in the country of establishment. The First Non-Life Directive, established in 1973, was designed to provide freedom of establishment, but not freedom of services, only for non-life insurers. However, this proved unnecessary, as an EC court case in 1974, held that this freedom already existed under the treaty which formed the European Community. Accordingly, if technical requirements are met by an EC insurer, establishment cannot be withheld and no deposit or security can be required.

The Intermediaries Directive came into effect in July 1978. Under this directive, the insurance brokers who are EC nationals and who are either self-employed or paid employees became eligible to work throughout the European Community. There is also a requirement that the broker must be in business for a specific number of years and prove that it is in good repute. National regulations requiring professional or other qualifications no longer disqualify brokers resident in one member state from operating in any other state.

Currently, registration of brokers is required in the United Kingdom, Belgium, France and Holland. Although the broker situation was improved by the Intermediaries Directive, cross-frontier insurance is still prohibited by many national laws. Such laws will severely hamper brokers until the current directive is implemented throughout the European Community.

On June 1, 1980, the Coinsurance Directive was enacted as a first step towards freedom of services in the European Community. It removed restrictions on coinsurance of risks by insurers from more than one member state. In Europe, the term coinsurance refers to the practice of quota-sharing large risks among primary carriers.

The New Directive

The Second Non-Life Directive lays down the ground rules governing the freedom of EC insurers to provide services in member states other than the insurer's home state. The principle of thresholds determines which risks quality to be written across national borders. Large risks are those above a specified threshold which differs by class of business. There will be no credit threshold for Marine/Aviation/Transport (MAT), credit and surety risks. For fire, property, general liability and miscellaenous financial loss including consequential loss, an insured must exceed two of the following three conditions. From now until December 31, 1992, the insured must have a minimum of 500 employees, annual sales of or exceeding 24 million European Currency Units (ECUs) and a balance sheet showing a minimum reserve of 12.4 million ECUs. Starting January 1, 1993, an insured must have a minimum of 250 employees, annual sales of or exceeding 12.8 million ECUs and a balance sheet showing a minimum reserve of 6.2 million ECUs. The applicable amount of local currency will be set at the ECU/local currency exchange rate as of the end of October of the previous year.

Greece, Ireland, Spain and Portugal have been granted extended transitional periods for these changes and will begin their programs three years after the other EC countries. When their programs commence on January 1, 1993, all MAT, credit and surety risks will be included. For property, general liability and financial risks, (risks most affected by the new directive), each state may initially set its own threshold. In principle, for large corporate risks, insurers need not be established or authorized in member states where they provide insurance services. An insurer only needs to be authorized in its home state.

One of the most difficult issues addressed by the directive is how to handle levels of premium taxation that vary dramatically from state to state. The directive states that insurance contracts are subject to premium taxes exclusively in the member state in which the risk is situated.

With a free internal market, EC insureds and their brokers will be allowed to obtain sufficient affordable coverage due to competitive pricing. EC insureds will be allowed to insure risks located in other member states without having to be established there and without authorization under local statutory provisions.

Thomas J. Drag is senior vice president and national director of Alexander & Alexander Inc.'s International Division.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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Title Annotation:insurance business in Europe
Author:Drag, Thomas J.
Publication:Risk Management
Date:Oct 1, 1989
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