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The anticlimax of 1992.

MOST RISK managers know that 1992 is the year when doing business across borders in Europe should become much simpler. However, the likelihood that insurers in France can now, unhindered, sell insurance to customers in Germany, Italy or the United Kingdom is remote. Less encumbered transactions will be possible, up to a point, but not because of anything that has happened or will happen in 1992.

The process is called "freedom of services," and it has applied with some restrictions for non-life insurance business in the European Economic Community (EEC) since July 1990. Indeed, certain EEC countries set up insurance subsidiaries in other EEC countries as early as the 1970s.

So, why all the hype over 1992? Because some trade barriers affecting business sectors outside the realm of insurance are now being removed, and at the end of this year some of those restrictions on freedom of services will be eased. Although the lightening of these restrictions will not be fully effective until 1993, this year is now the symbolic--if not the actual--year of change.

In fact, even in 1993 we will not see the coming of the new borderless European Community -- only another stage in its development. The ultimate goals of the EEC for non-life insurance business are enshrined in the Third Non-Life Directive, which will be gradually implemented in EEC countries over a five-year period beginning in 1994.

The Third Non-Life Directive combines earlier, separate actions on freedom of establishment and freedom of services and wipes out the old distinction between the concepts of establishment and services business concerning EEC rules. It also extends the single authorization system from the "large risks only" regime of the Freedom of Services Directive of July 1990 to all non-life risks. The objective is a single insurance market in which insurers will be free to market the full range of their products throughout the EEC without having to establish branches in the different member states. This will be accomplished on the basis of a single insurance license -a single authorization and subsequent supervision by the EEC country in which the insurer's headquarters is located.

Under the directive, insurers need prior authorization for non-life policies that they plan to sell in a member state. However, the "single passport" will apply to branches and to agency operations only --not to subsidiaries --which will continue to be authorized and supervised by the appropriate authority of the country in which they are operating.

The Third Non-Life Directive also eliminates the notification procedure with which insurers currently must comply if they wish to write services business for large risks. Thus, once the Third Non-Life Directive is implemented, any insurance branch, agency or subsidiary based in an EEC state will be able to write any non-life insurance business in any EEC state.

Most of the frenetic insurance industry merger and acquisition activity in recent years was undertaken by companies positioning themselves to capitalize on new trading opportunities as they arise. So far, few Euro-policies have been written on a services basis because genuine European-wide freedom to offer and accept insurance services is still a long way off. Even when that happy day arrives, cross-border insurances will still be problematic because of the diversity in law, taxation, language and culture among the various countries.

For example, underwriting reserves for risks situated abroad will still be calculated and covered in accordance with the requirements in the home country, which means a German insurer will have to maintain fluctuation reserves for an Italian risk, but his local Italian competitors will not have to provide for them in their premium calculations. A United Kingdom insurer underwriting French fire risks from London will still, despite freedom of services, have to pay the French treasury its high local insurance taxes, even though no such taxes exist in the United Kingdom.

[Chris E. Best is Risk Management's London correspondent and editor of Foresight, an insurance and risk management journal.]
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Title Annotation:single European insurance market will not be instituted until 1994
Author:Best, Chris F.
Publication:Risk Management
Date:Jun 1, 1992
Words:654
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