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Passport to profits

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.

Product development

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

marketing activities.

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.


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