Insurance in the Internal Market

Patrick Pearson *


The necessary EC-Directives to establish an Internal Market in insurance are now in place. For the insurance sector, though, the Single Market is still over 12 months' away: July 1994. The reason for this delay is clear: the European insurance sector belongs to one of the most heavily regulated sectors of the economy in view of its strong focus on consumer protection. Although the First Non-Life Directive was already adopted in 1973 (1), and its counterpart in life assurance, the First Life Directive, in 1979 (2), which both laid down common rules for the establishment of insurance companies, progress in the field of freedom to provide insurance services had to wait for 15 years.

Apart from telecommunications, insurance is in fact the only field of economic activity in Europe for which the Court of Justice of the EC has had to act as a crowbar to open it up through its decisions in the 'Co-insurance cases' in December 1986 (3). These Court decisions introduced a two-stage process for free provision of services by identifying clients who require a higher degree of protection (so-called 'mass-risks') than others ('large risks'). Today we are still in the first stage of that process, which is covered by the so-called 'second generation' of insurance directives.

The progress began in June 1988 with the Second Non-Life Directive (4), followed in November 1990 with the adoption by the Council of the Second Life Directive (5) and the Motor Services Directive (6). The new directives ensure the free provision of services for two important sectors of insurance activities: commercial "large risk" insurance on the one hand, and "own initiative" and group life insurance on the other.

Seen in the context of the years of long and arduous negotiations over the provision of services proposals, these measures are little short of revolutionary. Member States accepted that the principle of freedom of services applied to insurance - this was not so obvious only a few years ago. They also accepted and indeed now also apply in national law the principle of 'home country supervision' (i.e. supervision of an insurer's activities and solvency for its operations through branches and services in all other EC states by one authority only: the authority of the Member State that granted the original insurance license), albeit only for 'large risks' and " own initiative" in life assurance. Yet in the light of more recent progress these measures already look inadequate. For the first and second generation Directives still do not create a true single market in which insurance companies can freely provide services on a cross-border basis and in which all consumers have the choice between a range products from European insurance companies. That is what the 'third generation' of insurance Directives intend to introduce. As a basis for these crucial 3rd directives three other important steps had to be made.


The Insurance Accounts Directive

First the Annual and Consolidated Insurance Accounts Directive, adopted in December 1991, and due to enter into force by the beginning of 1994 (7). This Directive is crucial to the single market not only because it harmonizes rules for the calculation of the risks assumed by insurance companies ('technical provisions') - which the Court of Justice of the EC stated as a precondition for the move to full home country control (8)- but because it achieves, for the first time, a common basic standard of transparency and information relating to insurance accounts throughout the Community.

In the past, it has not been possible to compare the financial position of companies in different Member States because the structure and content of their accounts has been different, and their assets and liabilities have been evaluated according to different criteria. From now on the insurance accounts of companies in different Member States will become directly comparable. That is of value not only to potential policyholders and to insurance intermediaries who have a direct interest in the relative financial strength of different companies - but to supervisors too.

The Insurance Committee

A second measure set up a high-level forum of insurance supervisors in January 1992, known simply as the Insurance Committee (9). The Committee is chaired by a representative of the European Commission. As the single market in insurance takes shape the dialogue must intensify not only between the different national supervisory authorities, but between all of them and the European Commission. If the new market is to run smoothly it needs a network of personal contacts and close working relationships between those most responsible for making it work.

Insurance Intermediaries Recommendation

The third important measure adopted in December '91 was the Commission's Recommendation on Insurance Intermediaries (10). The Recommendation encourages Member States to establish adequate rules on professional competence and registration for all those selling insurance. It also urges Member States to maintain a clear distinction between dependent and independent intermediaries so that policyholders can be confident that intermediaries who profess to be "independent" are genuinely so.

The emerging single insurance market will give European consumers more choice than ever before between competing companies and products. This increases the need for qualified intermediaries who are properly regulated.

The Commission is now monitoring Member States' efforts to bring their national procedures into line with the Recommendation. They have been invited to inform the Commission, by the end of 1994 at the latest, of the progress they have made.


The Third Non-Life Insurance Directive

The three measures discussed so far, while important, were but the hors d'oeuvre. The real cornerstones of the Community's efforts to create the single market are the Third Insurance Directives.

The 3rd Non-Life Directive was adopted in June 1992 and needs to implemented by Member States on 1st July 1994 (11). It introduces :

- the single insurance licence to do business throughout the Community,
- home country supervisory control, and
- a minimum co-ordination of prudential rules for assets backing technical reserves and the solvency margin (capital requirement).

The final text strikes a right balance between freedom for insurers to operate on a cross-border basis on the one hand, and an adequate level of consumer protection on the other. The freedom is guaranteed, in particular, by the single licence, home country supervision and the abolition of prior systematic notification and approval of policy conditions and premiums of insurance contracts.

This is balanced, however, by necessary safeguards. Where justified in the policyholder's interest, for example, the Directive allows derogations from the principles that have been listed above. The Directive maintains systematic notification of policy conditions for obligatory insurance and health cover substituting for social security schemes. Equally, the freedom of companies to establish policy conditions without prior notification is bounded by the need to respect Member State provisions designed to protect the 'general good', insofar as such provisions are proportional, and do not unnecessarily obstruct freedom of services or establishment.

In the field of contract law, too, the Directive includes safeguards to protect consumer interests. In most cases the law of the policyholder's own country will apply. This approach entails that the Commission's proposal for a Directive harmonizing Insurance Contract Law in the EC has become superfluous: work on the proposal has in fact stalled completely in practice (12).

The 3rd Life Directive

The last major piece missing was the Third Life Insurance Directive, adopted in November 1992 (13). This achieves very much the same objectives for life insurance as the 3rd Directive achieves in the non-life sector. It will enable life companies to sell their products throughout the Community on the basis of a single authorization and supervision in their home state. Consumers will benefit from increased competition which will encourage wider choice, better prices and better service.

The specific issues related to life assurance have made negotiations on this proposal even more intricate than for the non-life sector.

The question of a maximum rate of interest for the purpose of determining life assurance technical provisions was one particularly knotty problem. The Directive acknowledges the principle of a final maximum interest rate, but accepts that the methods for calculating the rate may be different. The essential point is that the different practices in Member States are equally correct and prudent. The Community thus supports, within limits defined at Community level, the continuation of present supervisory practices in the Community. Member States are left a free choice to determine the applicable method, without seeking to impose one, harmonized approach.

Both the Third Life - and the Non-Life Directives explicitly allow insurance companies to advertize and market their products in other Member States in the same way as in their own country, albeit within any limits set by Community law.

Implementation of Directives

The prompt and correct implementation of Directives into national law is, of course, essential if they are to have their effect. In the insurance field Member States' track-record for timely implementation is generally impressive.

Timely implementation, however, is only half the battle. Directives must also be implemented correctly. The Commission will be vigilant in monitoring the timely and correct implementation of the Third Insurance Directives. In this context, it should perhaps also be recalled that even where a Member State has failed to transpose a Directive into national law, the Court of Justice of the EC has ruled that its provisions on establishment and services may still be directly invoked by insurers - or consumers- before their national courts (14). A Member State may also be required to compensate for any damages caused by its failure to implement a Directive.


The volume of any new proposals will clearly not begin to compare with that of the past three years. The accent will move from legislation to implementation.

Nevertheless, work has resumed on the Commission's 1987 proposal for a Winding-Up Directive (15). That is an indication that countries recognize the need for greater clarity in this area within a single market. This is the only Directive from the 1985 Internal Market programme that will not have been agreed by the 1993 deadline. The Commission is currently examining whether the proposal as it stands requires modification to take into account developments since it was tabled.


A further very important insurance issue for the coming phase concerns taxes. In general, taxes are a matter for Member States. The insurance directives are therefore based on the principle of 'territoriality' for indirect taxation. The fiscal rules of the Member State of the policyholder are applicable, and the tax is collectable there.

But the fact that the Community does not come forward with tax harmonization proposals does not mean there will be no pressures for change. As the Single market takes shape it could be expected that the Market itself forces such change, not only in the field of premium taxes but in other areas as well.

Other tax issues are of more direct concern to the Commission. The recent Bachmann judgement of the Court of Justice is one example because it has implications for the full freedom of selling life, health and invalidity insurance products across Europe (16). In consequence, it has implications for the free movement of workers, too. The Court appeared to accept what it termed the "fiscal consistency" of national tax schemes as a reasonable ground for restricting these freedoms.

It is important that when tax authorities allow deductibility of premiums with a view to taxing the benefits later, they should indeed be able to ensure that they do receive these taxes when the benefits are paid. This appears to be what the Court meant when it spoke of "fiscal consistency". The Community's task, then, is to find a way of giving national tax authorities that assurance in a way which will not hamper the freedom to sell life, health and invalidity policies on a cross-border basis.

The Commission is presently analysing the Bachmann judgement in the light of Member States' fiscal systems and looking at any bilateral taxation treaties they may have signed. It ought to be possible to find a pragmatic solution to this problem.

Financial conglomerates

Another major issue for the coming years concerns the prudential supervision of financial conglomerates. Major European banks have set up their own insurance subsidiaries, particularly for life assurance business. Banks and insurance companies have become subsidiaries of common holding companies. Cross-shareholdings between banks and insurance companies are proliferating. The number of such groups within the Community is now very large and they are present in virtually every Member State: recent estimates show around 200 of such groups at this moment.

There is a very clear need for more systematic co-operation not only between Member State supervisors, but between supervisors responsible for different branches of financial services. The essential objectives must be to ensure both the financial solidity of increasingly complex conglomerates, and fair competition between companies offering similar products from within different structures.

The Commission's feeling is that the complex problems raised in this area are best approached with flexibility by means of procedural agreements between supervisors and amendments to existing Directives to overcome such problems as the "double gearing" of capital.

Pension funds

Pension funds, too, will continue to figure on the Community's agenda. Projected demographic changes in the Community in the years ahead suggest that a larger and larger number of pensioners must be sustained by a smaller and smaller number of workers, and this has dramatic implications for the provision of pensions in all Member States. At the same time, the Commission is concerned that the lack of structures and pension arrangements at a European level constitutes a serious barrier to the mobility of labour within the single market.

The Commission has presented a proposal to ensure freedom of pension fund management, and to overcome investment restrictions which cannot be justified on prudential grounds (17). Discussions are also taking place with Member States on the possibility of cross-border pension fund membership for expatriates who remain with the same employer or group of employers.


Over the coming period, the Community's insurance sector will be moving from the theory of the Directives to the practice. In view of the importance of the insurance sector for the economy of the EC, the challenges - for supervisors, companies and for the European Commission too - are immense.



* Principal Administrator, Insurance and Pension Funds Division - Financial Institutions - Directorate General Internal Market and Financial Services. Commission of he European Communities. Rue de la Loi, 200 - B-1049 Brussels. The views expressed in this paper are not necessarily those of the Commission.

(1) First Council Directive of 24 July 1973 on the co-ordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (77/239/EEC)228/3

(2) First Council Directive of 5th March 1979 on the co-ordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct life assurance (79/267/EEC), OJ 1979, L 63/1

(3) Judgements of 4 December 1986 in Case 205/84, Commission v. Federal Republic of Germany, (1986) ECR 3755; Case 206/85, Commission v. Ireland, (1986) ECR 3817; Case 220/83, Commission v. France, (1986) ECR 3663; Case 252/83, Commission v. Denmark, (1986) ECR 3713.

(4) Second Council Directive of 22 June 1988 on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC (88/357/EEC), OJ 1988, L 172/1

(5) Second Council Directive of 8 November 1990 on the co-ordination of laws, regulations and administrative provisions relating to direct life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC (90/619/EEC), OJ 1990, L 330/50

(6) Council Directive of 8 November 1990 amending, particularly as regards motor vehicle liability insurance, Directive 73/239/EEC and Directive 88/357/EEC which concern the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance (90/618/EEC), OJ 1990, L330/44

(7) Council Directive on the annual accounts and consolidated accounts of insurance undertakings (91/674/EEC), OJ 1991, L 374/7

(8) See Cases referred to in footnote (3)

(9)Council Directive setting up an Insurance Committee (91/675/EEC), OJ 1991, L374/32

(10) Commission Recommendation of 18 December 1991 on insurance intermediaries (92/49/EEC) OJ 1992, L19/32

(11) Third Council Directive of 18 June 1992 on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (92/49/EEC), OJ 1992, L 228/1

(12) (Amended) Proposal for a Council Directive on the co-ordination of laws, regulations and administrative provisions relating to insurance contracts, OJ 1980, C 355/30

(13) Third Council Directive of 10 November 1992 on the co-ordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (92/96/EEC), OJ 1992, L 360/1

(14) Case C-6/90, Frankovitch v. Italy, (1991) ECR

(15) (Amended) Proposal for a Council Directive on the co-ordination of laws, regulations and administrative provisions relating to the compulsory winding up of direct insurance undertakings, OJ 1987, C 71/5

(16) Case 209/90, Bachmann v. Belgian Tax Authorities, 28 January 1992,not yet reported in ECR; Case 300/90, Commission v. Kingdom of Belgium, 28 January 1992, not yet reported on ECR

(17) Proposal for a Council Directive relating to the freedom of management and investment of funds held by institutions for retirement provision, OJ 1991, C 312/3