SPECIAL REPORT / A key problem facing policymakers and industry analysts looking to the provision of cross-border services in finance is the level of consumer demand.
After all, what is the point of ensuring that a service is available where it is not even wanted?
In this respect the insurance sector offers a mixed picture.
In 2014 the European Consumer Centre in Germany carried out a study on the cross-border insurance market, covering France, Germany, Austria and UK.
The study examined six frequently used insurance products: travel cancellation, liability car insurance, private liability, individual accident, home insurance and life insurance.
The aim was to check whether consumers can make online purchases of insurance products with a provider established in another country.
Of the 567 insurers approached, only three offered insurance to consumers residing in another member state.
This determination of the low level of cross-border service offering backed up existing statistics determining consumer demand.
In a survey conducted for the Commission in 2007 by Ipsos, 29,000 interviews with consumers were conducted across the then 25 EU member states.
Consumer interest in insurance across borders is low
Insurance services were rated the second best of 11 sectors with the lowest level of dissatisfied customers.
EU consumers believed overwhelmingly (88%) that there was enough competition in the insurance markets. Fewer than half, 37%, even thought it possible to purchase services from an insurer outside their country.
On the face of it then, this is a sector in which few cross-border sales are demanded or required.
If consumers prefer to buy insurance locally, there are some good reasons for this. Apart from the obvious barriers to cross-border sales posed by language and culture, the need for post-sale services, such as repair work or itemisation of loss suggest practical reasons for proximity between consumer and insurer.
“After-sales service is hugely important to consumers and at present many people are unlikely to take out a policy from a firm based abroad and they are not familiar with,” according to British MEP Catherine Stihler (Socialists & Democrats). Stihler is a member of the European Parliament’s committee for economic and financial affairs.
Consumer demand is not straightforward to gauge however, and the wide disparity of prices for financial products including insurance across EU countries is an indicator that market fragmentation is not working in their favour, according to European Consumers group BEUC.
Design of online forms can freeze cross-border activity
The consumer goup believes that in a more integrated market, prices across member states should converge.
“It is to some extent a chicken-and-egg discussion whether demand generates and stimulates supply or vice versa, whether demand adapts to the existing supply of products and services,” according to a BEUC spokesman.
He illustrated the point from another sector: saying that the demand for smartphones was largely created by the phones themselves rather than demand.
“When it comes to the non-existing cross-border market for financial services and barriers for taking out such products in another market, it would be a misguided approach to only focus on the demand side,” he said, adding: “The main issue is that consumers are not aware of the wide diversity of prices for similar products in other member states; they have no information on alternative products that could better meet their needs.”
Consumer awareness is to some extent reinforced by business practices.
The Commission’s IPSOS study suggested that there are numerous design obstacles preventing consumers from shopping on-line for insurance and other financial services in the EU.
For example, online order forms are prefilled and consumers cannot choose their country of residence, or user accounts must be created to conclude the contract.
“Consumer awareness of their rights and protection needs to be enhanced,” according to the BEUC spokesman.
This is not something that can be legislated, however, and the dynamic of consumer awareness is likely to evolve with a combination of technological advance and regulatory change.
As online financial services increase in popularity, so the desire for more offerings is likely to grow.
The EU Directive on insurance mediation is aimed at achieving a market throughout the EU for insurance intermediaries.
The current directive, adopted in 2002, is up for a revision which the European Commission tabled in July 2012.
The Commission says its goal is to upgrade consumer protection by creating common standards across insurance sales and ensuring proper advice.
The EU executive believes the market is still fragmented and complains about "significant inconsistencies", in particular regarding the information requirements imposed on sellers of insurance products.
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