EU GUIDE

RELATING TO THE

INSURANCE SECTOR

JUNE 2005

Prepared By: Berna Özşar

TSRŞB EU Specialist

TABLE OF CONTENTS

  1. The Creation of a Single Insurance Marketp. 3.
  1. The European Community Acquis relating to Insurancep. 6.
  1. Life Assurancep. 6.
  2. Non-Life Insurancep. 10.
  3. Accountingp. 24.
  4. E-Commercep. 31.
  5. Insurance Groupsp. 32.
  6. Financial Conglomeratesp. 33.
  7. Insurance Mediationp. 35.
  8. Motor Insurancep. 37.
  9. Reinsurancep. 45.
  10. Solvencyp. 46.
  11. Winding-Upp. 47.
  12. Statisticsp. 47.
  13. Insurance Committee p. 49.
  14. International Agreementsp. 51.
  15. Infringements of the Insurance Acquis by Member Statesp. 52.
  1. European Union Enlargement 2004 and Insurancep. 56.

1. What are Accession Negotiations?p. 57.

2. Negotiations in Insurancep. 58.

a. Greek Cypriot Administrationp. 58.

b. Czech Republicp. 59.

c. Estoniap. 61.

d. Hungaryp. 62.

e. Latviap. 63.

f. Lithuaniap. 64.

g. Maltap. 65.

h. Polandp. 66.

i. SlovakRepublicp. 68.

j. Sloveniap. 69.

I. THE CREATION OF A SINGLE INSURANCE MARKET

The creation of a single market in the insurance sector has been one of the priorities of the European Union in the field of financial services.

The legal basis of the European Union acquis communautaire in this fieldis Chapter 2 of the Treaty Establishing the European Community relating to the right of establishment (Articles 43-48 (ex Articles 52-58)) and Chapter 3 of the Treaty Establishing the European Community relating to services (Articles 49-55 (ex Articles 59-66)).

Under Chapter 2 relating to the right of establishment, restrictions on the freedom of establishment of nationals of a MemberState in the territory of another MemberState are prohibited and this also applies to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any MemberState established in the territory of any MemberState. Freedom of establishment also includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings.

Under Chapter 3 relating to services, restrictions on freedom to provide services within the Community are prohibited in respect of nationals of Member States who are established in a State of the Community other than that of the person for whom the services are intended.

According to the Treaty, the internal market in the field of insurance is an area where there are no internal frontiers. The process for realizing a single market for insurance started in 1961 with the launch of a General Programme on free movement of services, aiming at approximating substantive national law. Since 1 July 1994, the European Union insurance markets (including the 10 new Member States as of 1 May 2004), together with those of Liechtenstein, Norway and Iceland under the European Economic Area, have created a vast single insurance market.The reason why the process lasted for more than 30 years can be explained by the fact that the form of regulation in different Member States was different in terms of scope and rigidity.

The creation of a vast single insurance market is a unique development which has no equivalent around the world. It has made it possible for companies to sell their products anywhere in the Union and rendered it possible for consumers to have access to any Community insurer, including the ones not established in their country of residence.

Through this Single Insurance Market, the European Union not only aims at increasing the competitiveness of undertakings but also providing clients with the opportunity to have access to better products and establishing client confidence in insurance operators. By realizing these aims, the European Commission aspires for the creation of a competitive insurance sector which will contribute to economic efficiency and development in general.

In recent years, the insurance markets in EU Member States have witnessed a growing demand for insurance products, accompanied by a noteworthy growth in turnover. This growing demand and the growth in the insurance sector have thus triggered economic activity and development.

With these recent trends, the Community now has a dual activity in the insurance sector:

-Making it possible for all Community citizens to have access to available insurance products in the market and providing them with the necessary legal and financial protection in insurance transactions;

-Ensuring that an insurance company with the authorization to operate in one MemberState can enjoy the right of establishment and the right to provide services in order to pursue its activities throughout the European Union.

Legislation governing the insurance sector

To realize its objectives, the Community separated life assurance and non-life insurance and also legislated in different fields like accounting, motor insurance, solvency, e-Commerce and reinsurance.

-The life assurance sector

The first coordinating Directive on direct life assurance (Directive 79/267/EEC repealed by Directive 2002/83/EC) was adopted in 1979 to lay down the rules necessary to facilitate the effective exercise of the right of establishment in respect of insurance activities.

The second coordinating Directive on life assurance (Directive 90/619/EEC repealed by Directive 2002/83/EC) aimed at facilitating the effective exercise of the right to supply life assurance services.

A third coordinating Directive on direct life assurance (Directive 92/96/EEC repealed by Directive 2002/83/EC) was adopted by the Council in 1992 to complete the internal market for insurance activities on the basis of the principles of a single administrative license and supervision of the activities of an insurance undertaking by the authorities in the Member State where the undertaking has its head office.

All these directives were consolidated in one coherent text with the adoption of Directive 2002/83/EC by the European Parliament and the Council on 5 November 2002.

-Non-life insurance sector

The legal framework for the realization of the freedom of establishment in respect of direct non-life insurance in the Communitywas established by the adoption of Directive 73/239/EEC.

Directive 88/357/EEC, on the other hand, set the necessary arrangements guaranteeing the effective exercise of freedom to provide non-life insurance services.

A third coordinating Directive on direct non-life insurance (92/49/EEC) was also adopted by the Council. This Directive covers provisions relating to insurance supervision, the coordination of national rules governing the investment, spread and localization of the assets used to cover technical provisions, access to and pursuit of insurance activities, supervision according to the principle of home country control, etc.

-Specific areas

Apart from life assurance and non-life insurance directives, the Community has also legislated in other fields like motor vehicle insurance, annual accounts and consolidated accounts of insurance undertakings, solvency, e-commerce, reinsurance, insurance groups, financial conglomerates, insurance mediation, and winding-up.

All these Community measures have provided the legislative framework for completing the internal market in the insurance sector. These measures will be more closely examined under Chapter III of this study, relating to the European Community acquis in the field of insurance.

II. THE EUROPEAN COMMUNITY ACQUIS RELATED TO INSURANCE

1. LIFE ASSURANCE

1.Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance

(Official Journal L 345 , 19/12/2002 p. 1 – 51.)

Repeals:

  • First Council Directive 79/267/EEC of 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance

(Official Journal L 063, 13/03/1979 p. 1 – 18.)

  • Council Directive 90/619/EEC of 8 November 1990 on the coordination of laws, regulations and administrative provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC

(Official Journal L 330 , 29/11/1990 p. 50 – 61.)

  • Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life Assurance Directive)

(Official Journal L 360, 09/12/1992 p. 1 – 27.)

  • European Parliament and Council Directive 95/26/EC of 29 June 1995 amending Directives 77/780/EEC and 89/646/EEC in the field of credit institutions, Directives 73/239/EEC and 92/49/EEC in the field of non- life insurance, Directives 79/267/EEC and 92/96/EEC in the field of life assurance, Directive 93/22/EEC in the field of investment firms and Directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (Ucits), with a view to reinforcing prudential supervision

(Official Journal L 168 , 18/07/1995 p. 7 – 13.)

  • Directive 2002/12/EC of the European Parliament and of the Council of 5 March 2002 amending Council Directive 79/267/EEC as regards the solvency margin requirements for life assurance undertakings

(Official Journal L 077, 20/03/2002 p. 11 – 16.)

Summary

Directive 2002/83/ECconcerns the taking-up and pursuit of the self-employed activity of direct insurance carried on by undertakings which are established in a Member State or wish to become established there.

It aims at simplifying EU legislation governing life assurance by converting all previous directives into a single and consistent text. The Directive replaces all the directives adopted in this field since 1979 and includes provisions under 8 titles: Definitions and Scope (Title I); Taking-up of the Business of Life Assurance (Title II); Conditions Governing the Business of Assurance (Title III); Provisions Relating to the Right of Establishment and Freedom to Provide Services; Rules Applicable to Agencies or Branches Established within the Community and Belonging to Undertakings whose Head Offices are Outside the Community (Title V); Rules Applicable to Subsidiaries of Parent Undertakings Governed by the Laws of a Third Country and to the Acquisisition of Holdings by such Parent Undertakings (Title VI); Transitional and Other Provisions (Title VII) and Final Provisions (Title VIII).

Under Title I,the definition of “assurance undertaking” is of particular importance. The Directive defines “assurance undertaking” as “an undertaking which has received official authorization from the authorities of the home MemberState”. This undertaking, however, should have established its head Office in the territory of that State and extended its business to an entire class or to other classes(Title II, Art. 4, Principle of Authorization). The definition aims at ensuring that non-Community insurers who are established in the Community only through an agency or a branch do not benefit from the provisions on freedom to provide services.

Under Title III, Directive 2002/83/EC strengthens a number of rules which have previously existed in the First Life Assurance Directive. For instance, the powers of the supervisory authorities are increased.Under Article 13, competent authorities should have the powers to make detailed enquiries (by gathering information or requiring the submission of documents and carrying out on-the-spot investigation); to take any measures with regard to the assurance undertaking, its directors or managers or the persons who control it; and to make sure that these measures are carried out, where appropriate through judicial channels.

Article 15 relating to “qualifying holdings” is another important issue under Title III. Natural or legal persons who propose either to hold or to dispose a “qualifying holding” in an assurance undertaking, should inform the competent authorities of the home MemberState. Such persons should also inform the competent authorities if they propose to increase their qualifying holding so that the proportion of the voting rights or of the capital held by them would reach or exceed 20%, 33% or 50% or so that the assurance undertaking would become their subsidiary. The same is also true for persons proposing to dispose of a qualifying holding.

Directive 2002/83/EC also sets rules relating to technical life-assurance provisions under Article 20. Every assurance undertaking is to establish sufficient technical provisions whose amount should be calculated by prudent prospective actuarial valuation, taking account of all future liabilities. The rate of interest, the statistical elements of the valuation and the allowance for expenses should be chosen with prudence. Assurance undertakings can only cover their technical provisions with the following assets: investments (debt securities, bonds and other money- and capital-market instruments; loans; shares and other variable-yield participations; units in undertakings for collective investment in transferable securities (UCITS) and other investment funds; land, buildings and immovable-property rights), debts and claims (debts owed by reassurers; deposits with and debts owed by ceding undertakings; debts owed by policy holders and intermediaries; advances against policies; tax recoveries; claims against guarantee funds) and others like tangible fixed assets, cash at bank and in hand.

Another very important issue under Title III is the rules relating to the solvency margin and to the guarantee fund. According to Directive 2002/83, assurance undertakings should have an adequate available solvency margin which consists of the following assets of the assurance undertaking: paid-up share capital; reserves (statutory and free); the profit or loss brought forward after deduction of dividends to be paid; profit reserves appearing in the balance sheet.

The required solvency margin, on the other hand, is the sum of two results.

The first resultis:

4% of the math. provisions relating to direct business and reinsurance acceptances gross of reinsurance cessions × ratio of the total math. provisions net of reinsurance cessions to the gross total math. provisions (last financial year)

The second result is:

(For policies on which the capital at risk is not negative)

0,3 % of capital underwritten by the assurance undertaking × ratio of the total capital at risk retained as the undertaking’s liability after reinsurance cessions and retrocessions to the total capital at risk gross of reinsurance.

For temporary assurance on deathof a maximum term of 3 years, the fraction shall be 0,1%; while for such assurance of a term between 3 and 5 years, the fraction shall be 0,15%.

In accordance with the Directive, the guarantee fund is 1/3 of the required solvency margin and it might not be less than EUR 3 million.

If the solvency margin falls below the guarantee fund, the competent authority may require a short-term finance scheme from the undertaking. In cases where policy holders’ rights are threatened, then the competent authority is to require a financial recovery plan.

Under Title IV,Directive 2002/83/EC also sets provisions relating to the right of establishment and freedom to provide services. Accordingly, if an assurance undertaking has the intention to establish a branch in another MemberState, it shall first inform the competent authorities of its home MemberState.

Title V is about the rules applicable to agencies or branches established within the Community but belonging to undertakings whose head offices are outside the Community. Such an undertaking should fulfill certain conditions to be granted an authorization by the Member State, like being entitled to undertake insurance activities under its national law, designating a general representative, undertaking to establish accounts at the place of management of the agency or branch, undertaking to keep a solvency margin and submitting a scheme of operations.

With Directive 2002/83/EC, a procedure of reciprocity between the Community and third countries in respect of life assurance is also introduced. The Community aims at gaining a comparable access to third countries by establishing a special procedure through the authorization of a subsidiary of a non-Community company or the acquisition by a non-Community company of a share in the capital of a Community insurer. As a result, the Community tries to receive the national treatment normally reserved for companies of that country.

Directive 2002/83/EC is amended by Directive 2004/66/EC , which adapts the legislation in force relating to free movement of goods, company law, agriculture, taxation, education and training, culture, and the audiovisual field and external relations to be able to facilitate transposal by the new Member States.

2.Directive 2000/64/EC of the European Parliament and of the Council of 7 November 2000 amending Council Directives 85/611/EEC, 92/49/EEC, 92/96/EEC and 93/22/EEC as regards exchange of information with third countries

(Official Journal L 290, 17/11/2000 p. 27 – 28.)

Summary

Directive 2000/64/EC amends four directives, which among these is the Third Non-Life Insurance Directive, as regards exchange of information with third countries.

In accordance with the Directive, Member States may conclude co-operation agreements for exchanging information with the competent authorities of third countries or with authorities or bodies of third countries (authorities responsible for the official supervision of financial institutions, bodies involved in the liquidation and bankruptcy of insurance undertakings, persons responsible for carrying out statutory audits of the accounts of insurance undertakings) if the information disclosed is subject to guarantees of professional secrecy. The exchange of information should serve the purpose of supervision by the above-mentioned authorities or bodies.

3. Council Directive 2004/66/EC of 26 April 2004 adapting Directives 1999/45/EC, 2002/83/EC, 2003/37/EC and 2003/59/EC of the European Parliament and of the Council and Council Directives 77/388/EEC, 91/414/EEC, 96/26/EC, 2003/48/EC and 2003/49/EC, in the fields of free movement of goods, freedom to provide services, agriculture, transport policy and taxation, by reason of the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia

(Official Journal L 168 , 01/05/2004 p. 35 – 67.)

Summary

Directive 2004/66/EC amends a number of directives, among which is Directive 2002/83/EC, by reason of the accession of 10 new Member States, namely the Czech Republic, Estonia, Greek Cypriot Administration, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia.

The Directive amends Article 6, relating to the conditions of authorisation. Accordingly, the home MemberState is to require every assurance undertaking for which authorization is sought to adopt one of the forms listed under Article 6 paragraph 1(a). The forms which can be obtained from the new Member States are added in their official languages.

Another amendment is made to Article 18 of Directive 2002/83/EC which is about the pursuit of life assurance and non-life insurance activities to include the new Member States.

2. NON-LIFE INSURANCE

1. First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance

(Official Journal L 228 , 16/08/1973 p. 3 – 19.)

Summary

Directive 73/239/EEC is the first directive on the co-ordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of business of direct insurance other than life assurance. It is, in other words, the first of three Council Directives on non-life insurance. The Directive has been amended several times over the years and almost every article of the Directive has been subject to alterations.

The rationale behind this directive was to facilitate the taking-up and pursuit of the business of non-life insurance and to eliminate certain divergencies which existed between national supervisory legislation.