Magazine article Risk Management

When Insurance Services Are Free

Magazine article Risk Management

When Insurance Services Are Free

Article excerpt

When Insurance Services Are Free

Since July 1 members of the European Community have been enjoying a new "freedom": The non-life Freedom of Services Directive has been added to freedom of capital transfer and freedom of establishment. However, for insurance services, there are restrictions when it comes to selling across national borders. Companies must exceed a certain size in total assets, sales or number of employees. Nevertheless, the great day of liberty has arrived. What will it mean for insurers or, more importantly, for risk managers in Europe?

Despite the euphoric reception given by the insurance and risk management communities, there is a downside to this new liberty. Looking at the effects of freedom of services, Rolf Huppi, president and chief operating officer of Zurich Insurance, said at a recent seminar in London: "Competition will become tougher, and in the initial stages this will put pressure on premiums and other contractual provisions affecting insurers' margins. Yet it is an illusion to expect that the free play of supply and demand will continue to make insurance cheaper in the long run. It is more likely that Continental Europe will in the future be faced with stronger price fluctuations--like those which are characteristic of the U.S. insurance market."

He continued, "Going by experience in the less regulated Anglo-Saxon markets, it is possible that the incidence of European insurers running into difficulties could increase. To date, these cases have been few and far between, as a result of strict supervisory provisions and their prophylactic effects. However, tougher competition will place greater demands on the financial strength and endurance of individual insurers."

Mr. Huppi also mentioned what we have all noticed during the past few years, namely the increasing number of takeovers and mergers in the European insurance industry due to changed regulatory conditions. Thus, as Europe becomes one large market, there is a need for larger insurers.

Although Zurich has already established a strong presence in the EC countries, Mr. Huppi said it was unrealistic to expect a homogenous, united market without national differences. He maintained that the legal and economic framework in which insurers operate will remain varied. This is due, he pointed out, to different employment conditions, taxation and social welfare policies and corporate and bankruptcy laws.

The diversity in Europe in terms of language, tradition and business practice will differentiate the individual national markets. Still, the EC represents a 100 billion [pounds] premium market for those insurers capable of meeting its changing needs. …

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