This article is part of our special report EU policies and the insurance sector.
SPECIAL REPORT / With trillions of assets under management, the insurance sector remains a mainstay of the European financial industry. But insurance services are less frequently offered across borders, adding unnecessary costs to consumers, critics say.
As the largest institutional investors in the European economy, insurers currently have about €8,500 billion of assets under management.
Figures from the trade group Insurance Europe show that the size of these investments has grown by around 50% over the last decade, in spite of the financial crisis.
Insurers’ investments currently account for over half of all institutional investment in Europe, including 24% of European government debt and 21% of European corporate bonds, the group’s statistics suggest.
Fragmentation due to localised culture
The sector continues to reflect the broader fragmentation of the EU market for financial services, however.
In 2012, the European Commission proposed a revision of the existing directive on insurance mediation, citing a fragmented European market as one of the reasons. A review of the directive carried out by the Commission in 2005-2008 found a patchwork of national regulations, with some governments gold-plating the measures and other implementing the bare minimum necessary for compliance.
“It is virtually impossible for an EU consumer to shop across-borders for savings accounts, home or car insurance, personal loans, mortgage credit or individual pension products,” according to a spokesman for the European consumers’ group, BEUC.
Fragmentation due to localised culture
There are many reasons for the fragmented EU markets, according to Catherine Stihler, a British MEP with the Socialists & Democrats group.
Stihler is a member of the economic and financial affairs committee – working on regulation impacting on the insurance industry such as the Solvency II rules, which have reset the capital requirements financial institutions including insurers are required to maintain as a ratio of their riskier investments.
She explained that European insurance markets have traditionally remained national due to factors such as language barriers, cultural differences, the need for local claims handling to deal with cross-border redress and also the different legal, regulatory and supervisory rules between member states.
All of these add additional costs to the price of premiums when trading cross-border.
“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 Stihler.
Consumer interests detect the hand of national champions and interests at play too.
The situation with cross-border access to bank accounts illustrates the illusory nature of the financial single market, according to BEUC’s spokesman.
He points to the recently adopted Payment Accounts Directive which will enter into force next year, allowing consumers to open bank accounts in other member states.
“This positive achievement was ultimately considerably undermined because of the pressure exerted by the financial industry,” he said.
The BEUC spokesman explained that the directive will allow banks to require from consumers who wish to open a basic bank account in their territory to show a genuine interest in opening an account in that country.
“The interpretation of genuine interest may depend on each individual bank and would prevent consumers from shopping for better deals across the EU,” he said, explaining that similar vested interests stymie the insurance sector.
Attempts to offer cross-border services
Regulatory changes in the aftermath of the financial crisis, and technological advances, are both factors nudging change to the sector.
Solvency II is only one part of a jigsaw of new regulations coming into place that will affect the sector, strengthening pan-European standards that should encourage cross-border services.
Trilogue negotiations, three-way talks between the European Commission, Parliament and Council, on the Insurance Mediation Directive (IMD2) are currently taking place.
“Part of the aim of IMD2 is to reduce the fragmentation between member states by ensuring common standards,” according to Catherine Stihler.
She believes that despite the many obstacles to cross-border services in the insurance sector, “this is a great opportunity to see an increase in cross-border sales”.
Meanwhile there are moves under way to bring about change on a global level too. The International Association of Insurance Supervisors (IAIS) is developing a common framework to help supervisors cooperate and coordinate more efficiently when supervising international active insurance groups.
Regulatory moves on European and global level
As part of this framework, the IAIS – which works closely with the G20 – is currently developing an international capital standard which to apply to global insurance groups, which it plans to finalise by the end of next year.
Coming on top of European changes, the industry is cautious about these developments.
Insurance Europe warned against rushing these international initiatives without careful consideration of potential unintended consequences.
“It is also vitally important that capital measures are developed for insurance business model and do not introduce artificial volatility into insurers’ balance sheets, thus potentially reducing insurers’ willingness and ability to invest long-term,” according to a statement from the group.
The main factors – including language and culture – which keep the insurance markets largely local cannot be addressed through legislation.
However, Stihler believes a gradual increase in cross-border business can be expected in the future, driven by rising consumer confidence and the development of new technologies.
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.
- Distribution of insurance products and after-sale activities
- Frequently asked question on IMD2
- Text of the Proposal
- Impact assessment on IMD2 revision: Executive Summary | Full text