Expert Group on European Insurance Contract Law. Meeting of November 2013 DISCUSSION PAPER 7: MOTOR INSURANCE.

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1 Expert Group on European Insurance Contract Law Meeting of November 2013 DISCUSSION PAPER 7: MOTOR INSURANCE GDV s comments Questions for discussion Preliminary remarks Motor insurance is a mass market business. In Germany each year, around 10 million motor insurance contracts are concluded and more than 9 million claims are settled, with 20 billion Euros in claims expenditures. With stiff competition, these contracts are highly adapted to the prevailing conditions in each case. This high degree of adaptation and optimization applies to all segments of the motor insurance product: all business processes (concluding contracts, reviews, terminating contracts, dunning, texts etc.), communication with customers, service providers and government agencies (documents, special closed communication systems, e.g. with motor vehicle registration and tax authorities, call centers, employee assistance systems), calculation, marketing and sales, product design with a view towards customer needs and habits, claims processing and settlement (claims management), possible assistance services, and much more. These conditions in the motor insurance market are largely determined by: (1) Motor vehicle registration procedures The form of furnishing proof of insurance, administrative rules for the registration of motor vehicles and fully automated processes for communicating with motor vehicle registration authorities determine key business processes in motor insurance. This includes rules in administrative law for the cessation of liability once the insurance contract comes to an end. In Germany, for example, the insurer is required to notify the motor vehicle registration authority electronically that insurance coverage has expired ( 25 of the Motor Vehicle Registration Ordinance). Specific requirements for the registration of motor vehicles in Germany also state that each motor liability insurance contract must begin with provisional coverage, which is not customary in other member states. Without a 1

2 standardized procedure for the registration of motor vehicles, uniform policy conditions are inconceivable. (2) Risk calculation and pricing With stiff competition, accurate and precise risk calculation is the indispensable core of the motor insurance product. Erroneous risk calculation could lead, in the worst case, to the insurer's insolvency. Just based on the conditions in effect in Germany, far more than 20 criteria are taken into account for pricing: the type of vehicle (type class), the place of residence of the vehicle owner (regional class), the length of time without a claim, mileage, the number of users, the ages of the users, their profession, the age of the vehicle upon purchase, etc. Different combinations of these criteria also result in different actuarial measurement and, ultimately, pricing. Given these criteria, premiums owed for the same vehicle may differ by several hundred percent. Insofar as the statistical material indispensable to insurers is even available to insurers for cross-border activities, this information relates to just one member state in each case. Insurers in each member state must be able to make their own calculations using the same, as well as different, parameters and criteria. Even if information is available concerning pricing criteria, it cannot be generalized. It has to be examined and calculated separately for each country in which cross-border motor insurance is being offered. With its differentiated pricing criteria, the pricing system in motor insurance is able to factor in the various risks with a great degree of precision because conditions are comparable and the pricing criteria are based on the differences specific to that system. Member states have completely different systems of civil liability (damages for loss of household management, damages for pain and suffering, etc.) and very different living conditions (e.g. thefts in Denmark or Italy) which would result in completely different claims expenditures even with identical pricing criteria. Accordingly, an insurer seeking to offer motor insurance products Europe-wide would require separate market expertise and information for risk calculation and pricing in each member states, as well as pricing systems which have been adapted for each country. Offering a single pricing system for multiple countries would be negligent from an actuarial perspective. In the context of calculation, it should be pointed out, by way of example, that some member states require insurers to provide motor liability insurance coverage at the applicable rate, and this circumstance must also be taken into account. 2

3 Accordingly, this aspect, which is the real essence of the motor insurance business, has to be handled entirely separately for each member state. The legal principles governing insurance contracts cannot alter this circumstance. (3) Different legal frameworks The relevant framework for the motor insurance product is the entire legal system, including not only the laws governing compensation of damages and rules of evidence and civil procedure, but the entire system of civil law, including the civil code, laws governing general terms and conditions of business, commercial law, etc. Questions of access, errors and appeals, the enforcement of damage claims by injured parties and the enforcement of claims by the insurer, differ from member state to member state. The social security systems in the various countries are also different, which has a substantial impact on the insurer's damage and recourse payments in case of personal injury. Different tax systems also require fundamentally different and costly business processes for each individual country in which the insurer seeks to operate. For differences in the insurance tax systems, see ordsfilter=1&cntnt01hidepublicationsyearsfilter=1&cntnt01limit=20&cntnt01orderby=published_on %20DESC&cntnt01category=3&cntnt01type=Publication&cntnt01returnid=72. As a result, motor insurers need a completely different market surveillance mechanism for each legal system in which they operate in order to enable a timely response to changes in legal and factual conditions, such as court rulings, future legislation and the behavior of relevant market participants. (4) Market requirements, customer behavior in the market Requirements differ from market to market, and motor insurance products have to be individually designed to meet them. In Germany, aside from motor liability insurance, motor insurers offer not merely full or partial comprehensive cover, but also e.g. roadside assistance, passenger accident insurance, coverage for drivers and foreign travel coverage, to varying degrees. The scope of coverage for each individual insurance type has to be determined for each market in accordance with the circumstances in each market, taking into account the actuarial risk in each case, and under competitive conditions. As a result, separate product development is needed for each member state. Customer behavior in motor insurance is determined in part by the recognition of the individual brand, which needs to be developed separately in each market. 3

4 (5) Claims settlement and claims management Certainly in member states without direct settlement, the business results of motor insurers depend on their ability to settle claims quickly and efficiently. This can only be done if local networks are in place with service providers such as repair shops. In this case as well, pan-european activities offer hardly any potential for rationalization. On the contrary, added costs generally accrue if insurers are required to use a local service provider for claims settlement purposes. In summary, it is therefore demonstrated that further promotion of cross-border business in the EU cannot be expected from the harmonization of insurance contract law. Such a result is opposed by the diversity of legal systems. Of particular importance for motor insurance are, above all, the procedure for registering motor vehicles and the laws governing the compensation of damages, including the enforcement of claims in civil proceedings. Pan-European motor insurance activities require completely different business processes in each member state, to the extent that completely different data processing systems are required for each country. This results in the insurer's activities ballooning, without any significant rationalization effects to counteract the impact. Consumers will only choose a company based abroad if the price is much lower or if the product is much better. This can only be achieved through a high degree of adaptation to market conditions. As a result, only large motor insurers operate in multiple member states. Because calculation and business processes cannot be combined across national boundaries, the most expedient way of doing so is to form or acquire a separate company in the relevant country. The nature of insurance contracts as continuing obligations and the difficulties faced by insurers, e.g. in Germany, with respect to terminating motor insurance contracts, also indicate this course of action. Moreover, the market share of international conglomerates operating in the German motor insurance market is 30%. Concerning the questions in particular: 1. Are there other contract law areas which have not been mentioned in this paper and where differences are particularly relevant for motor insurance? As stated above, motor insurance is a mass market product which is organized by means of automated business processes, and conditions are determined not so much by insurance contract law in particular, but by the legal framework as a whole. 4

5 In particular, aside from the specific mandatory national rules for motor liability insurance (in Germany, not only the Compulsory Insurance Act but also, above all, the Motor Vehicle Compulsory Insurance Ordinance), the laws governing the registration of motor vehicles (e.g. the requirement for provisional coverage in Germany and the system for furnishing proof of insurance) also have a substantial impact. 2. Are there contract law differences which particularly affect the cross-border supply of motor comprehensive insurance? See above under No Is there a need for adaptations of the contract terms because of different rules if a policy is offered in different Member States? Yes, entirely separate contract terms are needed for each member state. Uniform European policy conditions in motor insurance are impossible due to differences in specific rules for compulsory motor insurance (particularly the German Motor Vehicle Compulsory Insurance Ordinance), differences in the rules governing motor vehicle registrations (e.g. aside from the various requirements for furnishing proof of insurance, driving with an invalid license plate, special types of license plates, suspended coverage when a vehicle is taken out of operation and many more), differences in various pricing-based rules, different court rulings in connection with general terms and conditions of business, etc. 4. If relevant, what is the extent of the necessary adaptations? Completely separate policy conditions and pricing systems (including all business processes) are needed for each member state, regardless of the legal principles governing insurance contracts. In addition, adjustments have to be made for marketing channels, commissions, etc. 5. Do the adaptations affect the contract terms alone? No, the adaptations do not affect the contract terms alone, but rather all business processes. 6. Do the adaptations also affect the product characteristics and lead to changes in the product design? Yes, completely separate products are needed for each member state given the reasons mentioned above (registration procedure, risk calculation and pricing, different overall legal frameworks, needs of customers, claims settlement and claims management). 7. Do the adaptations lead to a re-assessment of the risk on a different actuarial basis? Yes. Administrative expenses and necessary claims expenditures differ significantly depending on differing conditions in the various member states. 5

6 8. If relevant, what are the costs for adaptations in this area (including time and legal costs)? Costs are multiplied for each member state in which cross-border motor insurance coverage is offered. Separate business processes, separate calculation, separate product design, separate market surveillance, separate marketing, separate sales, a separate legal department and separate claims settlement are required for each country. On the other hand, the rationalization effects which are attainable through cross-border activities are negligible, with or without uniform European laws governing insurance contracts. 9. Does it make a difference whether the relevant provisions are mandatory or not? Whether or not legal conditions are mandatory is not of primary importance. Business processes in motor insurance must examine all actual conditions in order to estimate costs or adaptation expense. Moreover, mandatory provisions are inevitable in motor liability insurance. Government supervision is necessary in order to keep uninsured vehicles off the road. Efficient supervision of liability insurance coverage in particular is of growing importance in an enlarged Europe. 6