13.3.3Regulation of insurance services in the eu

As with other nancial services, the insurance industry has always been highly

regulated. The special features of insurance have also, until quite recently, favoured

local insurance companies. The combination of these factors ensured the fragmenta-

tion of the insurance industry into a number of relatively isolated national markets.

With the exception of reinsurance, which deals with very large and often interna-

tional risks, the insurance industry has, in all EU countries other than the UK, been

well protected from foreign competition.

From the beginning, the European Commission acknowledged the additional

problems associated with the long average length of contracts in life insurance by

the issuing of separate directives for life and non-life insurance. Hence, 1973 saw

the promulgation of the First Non-Life Insurance Directive. The First Life Insurance

Directive followed in 1979. Both of these directives followed the principle of host

country regulation. They established the right for companies to operate in other

member states, but harmonisation of regulations across the EU was slow. Several

members strongly resisted attempts to open their insurance markets to greater com-

petition. In Germany, for example, non-German rms were required to have a local

establishment and were taxed at rates that the European Commission considered

discriminatory. In 1986, the European Court of Justice ruled that the restrictions

imposed on insurance companies from other member states by Germany, France,

Ireland and Denmark were partly illegal. In particular, the Court attacked the prac-

tice of requiring establishment and local authorisation before a company could

participate in the co-insurance of large risks situated outside its home country.

This court ruling, together with the increased role for qualied majority voting

introduced in the Single European Act, encouraged the European Commission to

attempt to incorporate the home country regulation principle into insurance directives.

It was, however, inhibited from replacing the requirement of full harmonisation of

the rules regarding the authorisation of companies by mutual recognition because of

the sensitivity of the consumer protection issue in a signicant part of the insurance

industry.

The Commission tackled the problem by following a 1986 European Court of

Justice ruling that had made a distinction between the insurance of large risks

(including all marine, transport and aviation risk) and small commercial risks and

personal insurance. Whereas host country regulation was preserved for the latter

category, the Commission felt able to apply the home country regulation principle

to the former category on the grounds that large companies or people responsible

for insuring large risks were much better able to collect and assess information about

insurance companies than was the average consumer.

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