Changes in EU legislation, with the advent of the various life and
non-life EU directives, have introduced the longawaited
single-passport rules allowing insurers authorised by their home
authority to supply services to another European country as well
as providing the right of establishment throughout Europe.
The single-passport rules have made breaking into a European market
more attractive for insurers, especially with the current economic
realities at home.
According to the German Insurance Association, the total life
insurance premium income generated by German insurers in 2000 was
£38bn. The German market, due to its size, is obviously a prime
candidate for investment and various UK insurers have, through
affiliated international companies, gone into the German market
through either a UK, Dublin or Luxemburg base.
Other countries that may be attractive for investment include the
other big European economies of France, Italy and Spain. Although the
rewards could be substantial if such a move were successfully
implemented, there are risks and pitfalls.
As the German life market and economy is the biggest within Europe
and therefore potentially the most attractive, Germany is a good
example of what is to be expected.
To take advantage of the single passport provisions, life insurers
must seek the req-uired regulatory approval through their home
regulator – in the UK, the FSA – and the regulator of the target
market before actively engaging in sales activity within any EU
market. Approval will usually be provided in a few months unless the
home or target market regulator have any relevant objections.
Selling the right product into the target market is a fundamental
consideration. The product development stage should include a review
of the relevant target market to understand which types of product
could be successfully provided for that market.
For example, Germany imp-lemented the third life directive into its
own insurance legislation in 1994. Before these changes were made,
the German insurance market was highly regulated with, on the whole,
a very conservative product range.
The local regulator had control over the product structure used by
the various insurers and also actively vetted policy conditions
within the local market. The system ensured that providers were
inclined to provide similar products for clients that did not
always offer attractive returns.
On top of this, German consumers were noted for their aversion to
risk, which meant that adventurous products were not widely accepted.
However, many of these barriers were removed after the implementation
of the EU directives and deregulation. German consumers have also
become more flexible. Unit-linked products, for example, have proved
more popular than first thought.
Legal and tax issues
Legal and tax issues will usually be of great importance when
deciding on the type of product that should be offered. Many life
offices faced with this problem adapt ideas and concepts from the UK
for the relevant EU market.
The transformation of the UK product into a suitable EU product
will need intensive legal and fiscal review.
The life insurance market in Germany is largely driven by generous
tax incentives. As a result, many products are structured to ensure
that the tax benefits available under German legislation will be
applicable. This means that quite often the flexibility to structure
a product is considerably limited if it is to remain tax-efficient.
New and innovative product types may not be covered specifically by
local tax legislation and it may ultimately be left to the local tax
authorities to assess whether they consider a particular product
structure to be tax-effective.
In many cases, local legislation will affect the product structure
itself. Clearly, the product development stage is a crucial period
during which success or failure may hinge.
Apart from getting the legal and tax requirements right, the product
must remain competitive in the market to ensure it can compete
successfully against the competition.
Once the product has been structured and the policy conditions
drafted, it has to be sold. The groundwork for a successful strategy
must be implemented well in advance of the product hitting the market
to ensure success. The strategy needs to be assessed from a business
and legal side to ensure the sales process will function effectively.
In Germany, the rules of implied agency need to be considered when
using intermediaries, as many in the German market may consider
themselves to be brokers but the legal realities can often mean that
they may actually be deemed to be agents under German law.
There are therefore liability implications for the insurer that will
need to be considered when using such intermediaries.
Then, of course, there is product marketing. Again, the local
legislation needs to be taken into account when eng-aging in
Some of the laws concerning marketing in European jurisdictions can
be more stringent in the UK.
The German legislation is generally more conservative in its approach
to advertising and marketing, which means that a company can be
caught up in producing uns-uitable marketing documentation or
undertaking illegal marketing activity if legal advice is not
obtained before implementation.