Cicero Policy Briefer

Issue 3, August 2006

Making the EU Single Market for Financial Services—
Insurance and Reinsurance

By Marie-Louise Rossi

For many years, financial services regulation in the former European Community was fragmented. However, over the last two decades or so, a common framework for the regulation of banking (and latterly insurance) has been created across the European Union Member States. This process has culminated in the Financial Services Action Plan—although obstacles remain to full implementation.

The form that this has now taken is one of mutual recognition of supervision between Member States, based on prudential controls, solvency and corporate governance by ‘fit and proper persons’. An insurance licence in one Member State enables a company to carry on business in the other 24—the so-called ‘single passport’. With separate Directives for life and non-life insurance, this regime covers both the insurance of commercial risks and individual consumers. (Earlier Directives had distinguished between ‘mass’, ie consumer and retail risks, and ‘large’, ie commercial risks.) There are some minimal reporting requirements in each Member State, but the EU has adopted a lead regulator model with the former Insurance Committee (of regulators, central bankers and finance ministries—formed with the statutory force of a Directive) evolving into the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), under the Lamfalussy Process.

So with a basic framework in place, what next?

The last few years have seen formal completion of the single market for insurance and reinsurance with the introduction of the somewhat misleadingly named Mediation Directive, framework regulation for the distribution chain of insurance intermediaries and/or brokers, falling under the Financial Services Action Plan; and the Reinsurance Directive (bringing reinsurance into the ‘single passport’/licence framework), which was a coda to it.

These do not merely complete the insurance single market in the EU, but also provide a framework for aspirant and applicant countries still emerging from communist regimes. More importantly, they provide a European (as opposed to a principally American) model for insurance and reinsurance regulation, creating international standards for both the work of the International Association of Insurance Supervisors (the insurance equivalent of the Basel Committee for banks, but with the participation of many more countries) and international trade liberalisation talks (whatever may now be salvaged from the WTO Doha round).

Meanwhile, the Accounts Directive is making a tangible difference to transparency, and work continues on International Accounting Standards. Also currently being refined is the Solvency II project, unfinished business from the Third Framework Directives and a parallel measure to the Capital Adequacy Directive for banks, which will introduce a regime of risk-based solvency.

As mentioned above, there still remain obstacles in different Member States and full implementation is yet far from achieved. The European Commission, together with the Economic and Social Committee, is clearly committed to identifying remaining barriers and taking governments to task as necessary. There has been an encouraging level of co-operation with the industry, which now represents nearly €1,000bn premium income per annum and nearly €6,500bn in assets, over this.

The next major step is simplification. The European Commission seems to have listened to industry when, in reaction to possible future proposals for legislation, it expressed a desire for a pause to allow for proper implementation. The current proposal is to produce a Directive to consolidate all existing legislation on insurance and reinsurance regulation. (For example, aside from the legislation mentioned already, there are four going on five Motor Insurance Directives.)

In so doing, the European Commission assures us that it will follow the principles of the Lisbon Agenda, with due regulatory impact assessment as well as full consultation with industry.

Many argue that another completion measure for the Single Market is extending the Eurozone. The UK has no realistic prospects of joining, perhaps for a decade. Together with France and Germany, and closely followed by Italy, the UK is one of the area’s largest domestic insurance markets. Uniquely, London is also the world centre for international wholesale insurance and reinsurance business. The City of London Corporation has long argued that London’s wholesale markets, in insurance and other sectors, have long been part of the Eurozone. Certainly, London’s pre-eminence as the world class insurance centre does not appear to have suffered by the UK staying out—but there are some interesting economic models suggesting that it could benefit even more, if and when the UK joins.

London’s insurance market has truly played a full part in co-operating with, promoting and often leading the completion of the Single Market.

Marie-Louise Rossi is the former Chief Executive of the International Underwriting Association of London (IUA) and its predecessor the London International Insurance and Reinsurance Market Association (LIRMA), whose initiative and core objects were to promote the Reinsurance Directive. She also served as an expert witness to the EU Economic and Social Committee in the early 1990s on the (then draft) Third Non-Life Framework Directive and also, in recent years, as a member of the Bank of England City Euro Group.

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