STATE OF PLAY AND OUTLOOK FOR CROSS-BORDER TRADE IN INSURANCE. RELEVANCE AND IMPACTS OF DIFFERENCES IN INSURANCE CONTRACT LAW

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1 Expert Group on European Insurance Contract Law First Meeting Minutes Brussels, 17 th -18 th April 2013 On 17 April 2013, the Expert Group on European Insurance Law met for the first time. The meeting was chaired by Dirk Staudenmayer, Head of Unit of unit A 2 of DG Justice. General Introduction Ms Paraskevi Michou, Director of Directorate A of DG Justice, welcomed the experts and thanked them for their commitment. She reiterated the main tasks of the Expert Group (EG), namely: to assist the European Commission (Commission) in finding out whether the differences in national contract law systems are obstacles for the development of cross-border trade in insurance products; if this is the case, to identify the insurance areas most affected by such obstacles. She underlined the importance of the final report, which the EG had to deliver by the end of 2013, for the future possible development of European Insurance Contract Law (EICL). Working methods The experts endorsed the following working methods of the EG. It was agreed that this approach could be modified depending on the needs of the EG. STATE OF PLAY AND OUTLOOK FOR CROSS-BORDER TRADE IN INSURANCE. RELEVANCE AND IMPACTS OF DIFFERENCES IN INSURANCE CONTRACT LAW GENERAL COMMENTS In the beginning of the discussion on substance the Chair invited the experts to make general comments and observations. Several experts wanted to know the long term objective of the EG activity. One expert was interested in the relation between the EICL and the CESL. Another expert asked if in its work the EG would have to take into account also other instruments (e.g. soft law). Some experts queried if the EG would have to deal only with cross-border contracts or also with domestic contracts. An expert asked if the EG had to develop different solutions for different categories of risks. Finally, an expert was interested in whether EIOPA would be involved in the EG work. The Commission representatives explained that the follow-up to the EG work would depend foremost on the report the EG would produce and was therefore open. With regards to the link with CESL, the Chair stated that in principle there was no link between the two issues. However, CESL could be a relevant background on potential discussions on general contract law aspects with a relevance to insurance contracts. Referring to the EG tasks and mandate, the Chair clarified that the EG would deal with possible problems for cross-border contracts. 1

2 The Commission representatives also made clear that the EG was not required to develop "a solution", but had to focus only on the analysis of possible problems relating to cross-border trade of insurance products and if a problem was identified, on the possible areas where the problem had an impact. The Chair noted that other Commission departments with a competence in this area (such as DG MARKT) would be involved in the work of the EG. The Chair explained that EIOPA was informed about the EG and would continue to be informed and that it would also have the opportunity to give inputs to the Commission. STATE OF PLAY OF CROSS-BORDER SUPPLY AND DEMAND IN INSURANCE PRODUCTS. ECONOMIC BACKGROUND. A Commission representative made a brief summary of the state of play of cross-border supply and cross-border demand for insurance products in the EU. Several experts asked questions relating to the figures relating to cross-border supply and demand. In particular, they noted that the figures were not always comprehensive or clear. Several experts agreed that reliance on statistical data should be cautious because data from different sources is collected in different ways and for different purposes. In relation to the survey on consumers' experience of crossborder shopping for insurance, it was noted that this most likely related to consumers purchasing products from other EU countries on their own initiative. These figures were unlikely to reflect the products consumers had bought in their own country, which however could have been supplied by companies from other EU countries which had established or provided services in this country. Furthermore, an expert noted that the definition of "cross-border activity or trade" in insurance had to be clarified. In particular, it was pointed out that the cross-border activity by way of establishment (e.g. branches and subsidiaries) should not be underestimated compared to the cross-border provision of services even though the statistics may indicate that the level of cross-border service provision is lower. Another expert supported this view and insisted that the freedom of establishment may have to be facilitated further, even if it has developed more compared to the freedom to provide services. A third expert noted that companies could in some cases prefer the freedom of establishment to service provision in order to facilitate compliance with tax obligations, while a fourth one noted that the freedom to provide services could be preferable in other cases in order to test a new market on a small scale. A fifth expert pointed out that the situation was different in respect of different kinds of insurance contracts. Some products were largely standardised and did not require a physical establishment by the insurer for the access to a foreign market (e.g. term life insurances, where all the necessary information can be provided via web by the insured), while others required a deeper individualisation on the base of the customer's needs (e.g. industrial or professional liability insurances). Regarding this latter case, the establishment in a foreign country could be a sine qua non condition for the access of the relevant market. Another expert pointed out that companies could use both freedoms at different points in time. An example was given about an insurance company from one Member State which first established cooperation with insurance intermediaries in another EU country. After a certain time, having gained some position in the new market, the company set up a branch there. Furthermore, an expert argued that "cross-border activity" also would cover situations in which both the insurer and policy holder were located in the same country, but the risk was located in another one (e.g. a second home located in another country or travel insurance covering risks for a short trip abroad). It 2

3 was noted that a broader definition of cross-border activity should be accepted, to the extent that the insurance product was necessary for the exercise of another activity on a cross-border basis. In relation to the definition of cross-border activity, a Commission representative clarified that it covered both the fundamental freedoms of establishment and provision of services. Both freedoms would have to be treated equally and on the same basis. Establishment and free provision of services represented the two main forms of cross-border activity, which underpinned the functioning of the Internal Market. Thus, the conditions for the exercise of both freedoms should be in place, so that economic operators could choose freely between either of the two freedoms when engaging in crossborder activity. This choice should however be left to each individual company or economic operator, depending on its individual needs. Thus, in its deliberations, the Expert Group was not expected to give preference to any of the two fundamental freedoms, but to consider them on an equal basis. Irrespective of which of the two freedoms was used, one of the relevant questions was whether insurers could sell the same product in different countries. The discussion then focused on the existence of a "latent demand" in the context of the potential scenarios for cross-border trade. Latent demand was deemed to be potential demand which may not be evidenced by statistics or other data, but which occurs and is mobilised when a new product is offered in a given market (e.g. i-phone). In particular as regards the survey data relating to prospects for consumer cross-border demand, it was noted that the figures were only indicative. On the one hand, consumers would not necessarily do what they were saying they would. An expert questioned the proof of latent cross-border demand by consumers and pointed out that consumer associations believed that consumers should not be deprived of the mandatory consumer protection in their countries. Another expert noted that a simple distinction could not be drawn between consumer demand and business demand. B2B insurance contracts often ultimately target consumers. For instance, in the case of motor insurances contracted by car-rental companies, the insurance products were ultimately offered to consumers. Another example referred to life insurances bundled with mortgage credits which could first be contracted by a bank and then offered to consumer customers. On the other hand, a second expert noted that consumers may not even realise that they could be interested and have needs until a given product was offered in their market. This was supported with an example of a successful offering of life insurance products in another Member State, which generated demand for a new type of product, which was not even available before in that country. Another expert added that customers were not so much concerned with the question whether a product may come from another country; they were rather looking for better and cheaper services. Following this line, the difference among the two freedoms lost its importance. In relation to the necessary adaptations of products offered on a cross-border basis, a couple of experts claimed that it was impossible to speak about "cross-border" trade in a proper sense, since the relevant insurance product to be sold in another country had to undergo a procedure of adaptation which could alter its nature. On the other hand, a third expert considered that although the product had to be adapted to the other country's legal system, it would keep its original features. A fourth expert 3

4 explained that this could be achieved through the so called "localisation" of existing products by adapting them to the extent necessary to local requirements. Another expert pointed out the importance of different mandatory rules thus underlining that the main difficulties for the development of cross-border trade in the insurance market should be identified in the differences among contract laws' mandatory rules, which cannot be derogated from by contractual agreement. Speaking about professional liability insurance, another expert pointed out that the main problems in this area were differences in liability systems. Another expert emphasised the importance of fundamental rights, such as the right to equal treatment. The expert considered minimum harmonisation as the best approach to safeguard these rights. It was then discussed what types of products were offered a cross-border basis. An expert pointed out that in the case of individualised products where the insurance agent would have to look into, for instance, the production processes of a company, offering the product at a distance would be difficult. On the other hand, in the case of more standardised products, they were easier to offer across different countries, including online. A simple questionnaire could be filled out online before the conclusion of the contract. A simple life insurance was given as an example. However, attempts to purchase an insurance policy online from another country would often fail. Some experts noted that there was a fundamental difference between selling life insurances and nonlife insurance contracts. In the case of life insurance what was offered was practically a contract, in the case of non-life insurance the situation was far more complicated because services had to be provided after the sale (e.g. claims management). This was identified as a reason for the lesser development of the non-life sector in cross-border trade. In the expert s view, these difficulties were often contract law related, for instance differences in prescription rules could affect the claims handling arrangements. It was noted that demand was often driven by the distribution models in a given country. In some markets the banc-assurance model played the leading role in product distribution. Since the market share of independent intermediaries was small, it was more difficult for foreign insurers to find distribution channels for their products in the relevant market. The importance of "trust" and a longterm relationship over the life cycle of a contract was also noted. This was another reason for insurers' preference for the freedom of establishment (especially concerning the non-life sector). An expert noted the main problems in cross-border distribution related to: 1) the technical impossibility, due to lack of statistics to estimate risk in other countries; 2) the absence of infrastructures to approach new markets; 3) distribution problems. The consequent result consists in the absence of any case of "perfect distribution" in the Internal Market. In the expert's opinion this was mainly due to existing contract law differences. Some other experts pointed out other problems linked to language, claims and enforcement, cultural factors, regulatory and tax regimes. Another expert disagreed that language was the key problem, providing examples of cases where products were not offered in another country sharing the same language, such as Germany and Austria or in culturally close cross-border regions, such as the Autonomous Province of Bolzano. Another expert noted that the two predominant problems were contract law related and building a brand. A couple of experts suggested also taking the intermediary's point of view. From an insurance intermediary's perspective it was noted that brokers would often avoid advising on foreign insurance products, due to a risk of liability due to lack of knowledge of foreign laws and jurisprudence underlying a foreign policy. 4

5 On the question whether the size of the company was an important factor for starting cross-border activity, many experts shared the opinion that, substantially for small and medium companies, entering a new market represented a greater challenge than for large companies. An expert noted that in particular medium-sized companies or companies specialised in a given product line could have an interest to offer services across border, but could find this too difficult. Another expert pointed out that 80% of insurance intermediaries were SMEs and acquiring the necessary knowledge on foreign systems was a huge burden for them. A third expert noted that it was obvious that large companies had greater resources. On the issue whether the level of cross-border supply to consumers and businesses differed, many experts confirmed that there were differences for different types of risks. While on the one hand some experts attributed this difference mostly to commercial disparities (e.g. differences in the underlying risks, language and "knowing-your-customer"), other pointed out the importance of regulatory differences: general contract law related issues, national liability law and tax law. A concern was raised about the insufficiency of the provided statistics to properly answer the question. In particular, for large risks, several experts confirmed that the market was working fine on a crossborder basis. An expert pointed out that, products from another country could even be the only option to ensure a given risk. This was supported by an example of a power plant in one Member State, which could not be insured by an insurer from that same country. A second expert offered statistics showing that some of the leading European insurers had a much higher level of international exposure than American insurers. In relation to mass risks, however, another expert noted that adaptations were necessary for products offered on a cross-border basis. CONCLUSIONS The EG reached consensus on the following conclusions: 1. Statistics were not comprehensive and contained gaps in coverage. It was important to explain in more detail what each figure referred to. 2. In relation to the definition of "cross-border activity", the two fundamental freedoms of establishment and free provision of services should be treated on an equal footing. If in a freedom of establishment situation products are sold on the market, they are not the same as the products of the head company; this transformation causes costs. There are also strong reasons to assume that contract law related costs are significant when insurance contracts are provided across borders not only on a freedom of establishment basis but also on a freedom of services basis. The cross-border provision of life insurance contracts in cross-border regions or the online distribution of standardised products could constitute examples. The definition of cross-border activity should also include situations in which both parties are resident in the same Member State, but the risk is located in another country. The inclusion of these situations in the definition of cross-border activity was justified, as these situations could influence the exercise of cross-border activities by citizens or businesses. 5

6 Finally the situation when a customer would stay in the insurer's country only in the short term (e.g. as a tourist), but approaches an insurer in that country in order to insure a risk in another country, should also be included in the definition of cross-border activity. 3. The demand is often driven by the supply and is often product led. Demand can be created by changing the parameters of an insurance product. 4. Irrespective whether the freedom of establishment or freedom to provide services modus is used, insurance products are transformed and adapted when they are sold cross-border. Thus, in a freedom of establishment situation, products sold on the market of a secondary establishment, are not the same as the products of the head company offered in the first country of establishment; this transformation causes costs. 5. There are also obstacles other than those which are contract law related which could hinder the development of cross-border trade (e.g. language, need for distribution organisation or local presence, tax regimes and know-your-consumer-rules). 6. The cross-border supply of large risks insurances does not seem to be impeded by contract law related obstacles. SCENARIOS FOR CROSS-BORDER DEMAND A Commission representative gave a short introduction on potential scenarios for future cross-border demand. They included consumers purchasing new insurance products from another EU country; consumers using the same insurance product in another EU country where they move to reside in the long term; consumers using an insurance product in multiple countries in case of short term travel; problems relating to the mandatory insurance coverage for service providers and the example of professional liability insurance; business demand for sophisticated products which are not available in all countries; professional users using insurance products for temporary activities in multiple EU countries and professional users with permanent activities and operations in multiple countries. The EG was invited to comment on the suggested scenarios and indicate which ones had a greater potential. The following general observations were made: - An expert pointed out that "insurance penetration" should be taken into account for all scenarios and products and not only in respect of one scenario, as stated in the discussion paper. It was notable that there was a significant difference between "new Member" States and "old Member" States of the EU with regard to insurance penetration. The political background was mentioned in this context, in particular that in Member States with socialist history, insurance used to be a state monopoly for decades. Furthermore, citizens tended to rely on the State and its strong welfare system rather than privately insuring their risks. As a result, the insurance penetration there is nowadays much lower than in other Member States. These observations were confirmed by another expert. - One expert emphasised that the providers' perspective should equally be reflected in the scenarios for potential cross-border activity. Insurance providers had the legitimate interest to access new markets, 6

7 achieve business growth and additional profits. Moreover, the demand from users would often arise in response to new offers of interesting products. An expert noted the basics of insurance to illustrate the environment of insurance provision: A payment of premium in exchange for an insurer taking on the risk of a specific event occurring. The premium is a function of the risk (severity and frequency) and supply and demand in the market, for example due to the risk appetite of a specific insurer. The expert noted that many of the examples for discussion however were merely examples of such commercial considerations at play and were not examples illustrating contract law obstacles. Another expert pointed out the potential for cross-border supply of certain products, based on an extended pool of insured persons. He noted that the pool could be extended by gaining new customers from other countries. Following this reasoning, he affirmed that the larger the pool, the less expensive the corresponding premiums could be (in particular he referred to life insurances for small sums, e.g /6.000 ). Another expert focused on the scenario of business demand for sophisticated products not available in all countries. In particular, with reference to one Member State's market it was noted that there was strong demand for specific insurance products (for natural catastrophes from business and consumer users and for technological and construction risks from business users) which could be difficult to find in that national market. For instance, the requirement for decennial insurance in construction was relatively new and the products available in that Member State's market were still very expensive. The attempts to obtain products from other countries however often failed. One of the reasons for the above described situations is complications following informal contacts with supervisors. While insurance companies are not legally obliged to submit their products to the supervisory authorities in the EU countries they targeted, in practice they often do so informally to make sure that their products comply with the local requirements. If supervisors consider that changes to the products would be necessary, companies would be cautious or even dissuaded from entering this market. Another example was given in relation to motor liability insurance. It was noted that the supply of certain types of motor liability insurance could be restricted due to general good rules, as confirmed in a recent case by the CJEU. A couple of experts questioned to what extent the intervention of supervisory authorities could be considered legitimate, as in effect it could create a barrier to the development of the Internal Market. They noted that different authorities often did not trust each other, which led to a useless and expensive double-checks system. Furthermore, another expert observed that in commercial transactions companies could require the other party to disclose their insurance contracts. However, it could be difficult to evaluate the scope of such a contract, which is based on a foreign insurance contract law. The discussion then moved to the scenario of cross-border business demand for mandatory insurance. One expert considered this issue as particularly important in those countries where the number of mandatory insurances was high (e.g. in Spain there were around 400 mandatory insurances, some of them characterised by great complexity). It was noted that mandatory insurance requirements differed substantially from country to country. While about 400 mandatory insurances existed in Spain, their number was around 100 in France and more than 180 in Germany. 7

8 In this context it was underlined that the system for mandatory insurances did not take into account the practical feasibility of such duties, but imposed such duties every time a risk was considered to occur. Insurance companies could even have problems in designing such insurance products. Problems were particularly felt in relation to certain obligations (e.g. insurances of dangerous dogs and bulls). It was noted that mandatory insurance could pose problems to foreign service providers. An expert noted that insurances were normally made mandatory if it was believed that this was the only way to make people subscribe to them or insurers to offer them. An example of compulsory insurance coverage for natural catastrophes in France was mentioned. While it was not mandatory to have a general insurance against fire and other natural events, if such insurance was subscribed, it was mandatory for it to cover also natural catastrophes, technological catastrophes and terrorism. In particular, 12% of any fire or water risk premiums paid by the policy holder would go into a special State fund. In the event of a catastrophe occurrence, it would then be the State fund covering the damages, if the insurer company would not be able to do so. In view of the variety of mandatory insurance requirements which differed from country to country, a number of experts suggested that the discussion on mandatory insurance should focus on simple mandatory insurances present in almost all the EU countries. The most common examples of insurances were liability, aviation, ships and environmental insurance. The discussion moved on to the aspect of problems of non-availability of mandatory insurance on a cross-border basis. According to an expert this was due to a mere commercial decision not to insure risks which were disproportionately high. Another expert argued that problems of non-availability were not due to contract law related issues, but to a commercial assessment of the risk. This view was seconded by another expert who referred to the problem of non-affordability of insurance. It was argued that the too high level of premiums was just a consequence of the market conditions. It was noted that some risks differed substantially from country to country, while others were rather similar. In the case when risks differed it was clear that differences in prices would be due to a commercial decision and not to differences in contract laws. The risk assessment played a key role for various types of insurance products and was central to the insurance activity in general. A Commission representative acknowledged that the commercial aspects played a major role in the risk assessment and asked whether the risk pools were developed on a cross-border basis or rather on a national one. Provided that the risk pool was developed based on risks from multiple countries, insurers would find it easier to insure risks based in those countries. Provided that the pools were rather nationally based, the question was whether this was due to obstacles to cross-border activity. The impact of contract law differences could be relevant and should be considered in this context. Several experts noted that they would need to collect further information in order to comment on this issue. An expert noted that the problem of access to liability insurance for lawyers did not only occur in case of temporary service provision, but also in case of establishment. Differences in local regulatory requirements and contract law could cause problems. For instance, in relation to professional liability insurance for lawyers it was noted that the host country would have to assess the lawyer's policy from the home Member State, while the insurer from the home country could refuse to extend coverage to activities abroad. It was observed that the problem could be more relevant for individual practitioners as large law firms could more easily afford liability coverage for their operations in multiple countries. It was noted that while professional liability insurances for lawyers covered legal opinions on their 8

9 national law, it was very hard or sometimes impossible to obtain a policy covering legal opinions on a foreign law. The discussion then focused on the scenario of a consumer moving to reside in another country in the long-term and willing to preserve the policy from the previous country of residence. An expert noted that insurers often used clauses requiring the contract termination once the policy holder moved out of the country where he had signed the contract. This approach was considered to reflect the insurers' concern that a claim could be brought in another court. An example out of the expert's own experience was provided in relation to liability insurance. In the absence of such a clause in his own policy the expert had kept his old insurance policy which he considered much more beneficial, than the policies he could have obtained in the new country of residence. An expert noted that what mattered even more than prices were the policy conditions, such as insured amounts and exclusions. The former expert observed in response that opening the market to foreign companies in the long-term, would always result in a combination of lower prices and better conditions for consumers. Considering the provider's perspective, an expert noted that insurers were indeed concerned about the need to take into account the liability regime of foreign countries. It was noted that the risk was more likely to materialise if the consumer resided permanently in a foreign country. Furthermore, in this context, the problem of policy renewal was noted. While Article 7 of Rome I was clear about the applicable law at the moment of the conclusion of the contract, a question on the applicable law arose in relation to the renewal. The question was whether the renewal would result in a new contract. In that case, the new contract could be subject to a change in the price and terms. A couple of experts noted that such problems would however not occur if there could be a single law applicable in multiple countries. Another expert inquired whether the problem could be removed by conflict of law rules. He noted that such problems did not exist in relation to large risks. It was noted that insurance contracts could be treated differently in different Member States, due to differences in the definition and formation of an insurance contract. Thus, a product considered an insurance contract in one country may not be treated as such when it arrives at another country, particularly for tax purposes. This was a large obstacle particularly for life insurance contracts (including pensions), particularly when there is an investment element. Pension products in particular depended largely on tax incentives and current tax provisions. Therefore, the product design would have to be changed due to tax requirements. Another expert noted that contract law could mitigate the impacts of the tax differences. A third expert agreed that different taxation rules could apply to the same product even within one Member State, as national tax rules could evolve over time, for instance with the change of government. Contract law could however help adjust to tax changes. The importance of tax incentives differed from country to country. Thus the first expert considered that a product could be developed only for those markets where tax did not play such a great role. With regard to the scenario of professional users with permanent activities and operations in multiple countries, an expert noted that large corporate groups could have an interest in obtaining a single policy, for instance covering different aspects of liability. CONCLUSIONS The EG reached consensus on the following conclusions: 9

10 1. The situation in "old" and "new" Member States differs substantially as regards the insurance penetration. This parameter should be taken into account for all scenarios for cross-border demand. 2. Companies may be dissuaded from offering certain products in a new country, following informal contacts with supervisory authorities leading to changes in their contracts. 3. Relating to mandatory insurances, three types of hindrances for cross-border supply could be identified: commercial considerations (based on insurers' willingness to insure higher risks); impact of contract law differences leading to adaptations in contracts and calculation of new prices; impact of various other regulatory differences (e.g. tax law, supervisory authorities' influence); 4. From a user's perspective, two scenarios for cross-border demand were considered of particular importance: - The scenario where consumers wish to use the same insurance product in another Member State in case of long term residence. This scenario was considered to gain in importance in the future. - The scenario for business demand for more sophisticated products which are not available in all countries. 5. From the provider's perspective a scenario of particular importance was when an insurer wanted to offer their products in a new market, thus generating new demand. 6. There is a latent demand among consumers for insurance products offering not only lower prices but also better terms and conditions. INSURANCE PRODUCTS WHICH COULD ADDRESS THE NEEDS IN VARIOUS SCENARIOS FOR CROSS- BORDER DEMAND A Commission representative gave a brief introduction of the three-classes of insurance products which could address the needs of cross-border demand and supply (products with no specific cross-border features; products with certain cross-border coverage features and pan-european products). The discussion focused on the current role of each type of product in cross-border trade, as well as their future potential. An expert noted that providing data on potential areas for future product development and offers was hard, as such plans were usually commercially sensitive data, which companies would not share with trade associations. The discussion then focused on the current state of play. In relation to the question whether the same product could be offered without adaptations in several countries the following views were expressed. An expert considered that it was not possible to offer mass products without adaptations. Even if a product could have pan-european coverage, the product would still be tailored to each market where it was offered. Another expert considered that while in theory it was possible, contract law differences made this very hard in practice. Finally, a third expert noted that it was possible to develop pan-european products for mass risks in B2B transactions. The policy could be based on default rules and could state explicitly that mandatory rules of other laws would prevail where relevant. Data on pan-european products were hardly available. Only one specific example was given, namely Community Co-Insurance, an insurance product for massive risks taking place in many countries. However, it was not clear whether the product was still available in circulation. Other experts noted that 10

11 they were not familiar with pan-european products. An expert noted that in his experience attempts to develop such products had failed in practice. An expert noted that the after-sales services in relation to the product also played an important role for products distribution. Notably, not all types of intermediaries could offer after-sales services for products developed on the basis of another law. In this connection, brokers were in a better position to advise on such products. 11