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The other side of the 1992 rainbow.

We are on the eve of 1992, the year in which, according to the hype, Europe becomes a free trade area, and insurers and brokers located in one European Community country can start selling their products and services in any other EC member country without hindrance. It sounds like a good idea, and it was certainly intended to benefit both consumers and industry, but has there been too much euphoria over 1992? Is there a downside? Well, yes, as with everything else, there is a downside.

Nobody likes the idea of insurance company insolvencies, but few have considered that these may occur more often in a lightly regulated, freer marketplace. Also, nobody benefits much when insurers suffer huge underwriting losses, but how often is it indicated that the insurance markets which suffer most are those which are heavily brokered? When enthusiasts for 1992's freedom of services emphasize the benefits of having American and British international brokers help German industrial and commercial clients, do they wonder if the end result of the brokers' negotiating muscle might turn a stable risk transfer mechanism into a volatile and unpredictable one? Therefore, do continental Europeans really want to experience the extremes of the insurance cycle to which Americans and British are now inured? Continental Europe has so far escaped the worst excesses of the insurance cycle, but after 1992 will it be on track to catch up with the United States and Britain?

Of course, the companies which would benefit from any shakeout or from increasing fears among buyers about security are the bigger ones with their vast financial resources and unimpeachable security status. So, it is not surprising that one of them, Zurich Insurance Group, should be among the few voices to speak out on 1992's dangers. At a recent Zurich client symposium held in Interlaken, Switzerland, Charles Wyniger, a general manager of Zurich Insurance Co., addressed the benefits and possible consequences of the new Europe for corporate clients. Although the benefits have been too frequently documented about to warrant repetition, what dangers did Mr. Wyniger foresee?

He discussed the problems rising from three trends in Europe: the transition from an insurance industry conceived from a "social risk community" to a more commercially oriented private insurance governed by competition; the transition from state supervision with a broad material basis to one which is only financial; and the trend toward a greater interdependence of markets (a Euro-trend in insurance activities and requirements).

What Mr. Wyniger meant by a "social risk community" is the tightly regulated insurance system under which clients might have paid high premiums; however, the risk transfer cost was relatively stable across the years and insurers felt obligated to cover the bad and good risks. Well, those days are going. Mr. Wyniger said: "Deregulation gives the European insurer considerably more flexibility in its business activities. Insurers will now have much greater freedom to determine the form, content and marketing of their products, based on criteria of profitability and growth that reflect market conditions, without having to look for (or hide behind) government support. They will have greater freedom to decide whether to insure a particular risk or not."

The customer will be able to purchase policies from companies that are not domiciled in the country of the risk to be insured and that have no established infrastructure there. "The other side of this trend," Mr. Wyniger said, "is that although the services and products offered may be more diverse, they will at the same time be less transparent. The customer will no longer have the assurance of government authorities ascertaining that the insurer and his services are reliable and that the services promised bear a reasonable, or justifiable, relation to the price. " Moreover, the move to an industry characterized by an increased and more market-oriented competition logically implies a reduced scope of consumer protection, Mr. Wyniger said.

What about the move from a material-based supervisory system --preventive supervision of insurance operations and approval of tariffs--to a global and, by definition, retrospectively operative inspection of companies' financial solvency? Mr. Wyniger commented: "In the liability sector especially, but also in other sectors such as life insurance where scope and/or maturity of insurance provisions normally do not appear until some years have passed, without preventive material supervision, insufficient capital provisions can often only be recognized later, and sometimes too late. The Anglo-Saxon markets have demonstrated that payment difficulties experienced by insurance companies, hitherto a rare occurrence in continental Europe thanks to strict advance supervision, are going to become increasingly more common here as well, also because the increased competition will be putting greater demands on the financial strength of private insurers."

As for the growing interdependence of markets, Mr. Wyniger suggested this as a problem which has no counterbalancing advantage for buyers or sellers. "The redimensioning and harmonization of supervision and its cross-border implementation by a single authority--namely that of the country in which the international insurer is domiciled--will necessarily result in a greater interdependence among local markets in the EC," he said. "However, it is unrealistic to expect that a uniform single market without local variation will emerge within the EC in the near future. The legal and economic environment for insurance companies will, to a great extent, continue to be different in individual markets, in terms of labor, market conditions, tax and social security systems and judicial procedures in, say, liability cases. The opening up of the markets will also not prevent the continuation of differing, country-specific risk factors and corresponding premium levels. Major differences such as language, culture, mentality and business practices will functionally delineate individual local markets as far as the insurance industry is concerned. The 1990s will therefore not lead to a single Euro-monolith, but rather to something like an expanded menu with a choice of dishes 'a la carte.'"

There's food for thought ! Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
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Title Annotation:London Perspective
Author:Best, Chris F.
Publication:Risk Management
Date:Dec 1, 1991
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