13 March 2014

CRE: Revision of European insurance contract law on the cards but large risks may dodge change

This would inevitably be a drawn-out, complex and contentious effort. But Europe’s corporate risk managers may not need to panic and go scurrying to their lawyers for expensive advice as large risks could be regarded as a special case. This is because the report conceded that the existing array of national insurance contract law may create barriers and unnecessary costs for so-called mass risks such as life and motor but that large corporates tend to be less affected mainly because the legal jurisdiction is agreed at the start of the contract.

The EC’s expert group indentified other differences as:

• ‘Knowing the customer’ and understanding the true risk proposed for cover
• Language differences
• Variations in culture, including the expectations of local policyholders
• The need for local claims handling
• The form and prevalence of fraud, particularly in motor insurance
• Tax and labour laws, particularly for private pension products
• A country’s legal, regulatory and supervisory environment
• Cross-border redress options.

Those risk managers who are keen to avoid having to deal with another big and expensive change in the way they construct their cross-border coverage will be pleased to hear that the expert group is fully aware of the significant differences between mass risks and large risks. This could mean that any future attempt to harmonise European insurance contract law will see an exemption for large risks as with the block exemption ruling on cooperation between insurers to allow for the co-insurance and subscription markets.

The report states: “With regard to large risks, the cross-border provision of insurance cover is already now a common occurrence; it rarely encounters obstacles arising from differences in insurance contract law since the parties are free to choose the applicable law. By contrast, the law applicable to mass risk insurance can be chosen only in limited situations. Rome I [the EU regulation which governs the choice of law in the European Union] calls for the application of the law of the member state in which the risk is situated which in most cases of mass risk insurance is the member state in which the policyholder is habitually resident. The legislator has adopted this system in order to protect the weaker party.”

The different position of large risks was further affirmed later in the report when it stated: “In the market for large risks the supply of, and demand for, cross-border insurance is not impeded by contract law. Here, choice-of-law clauses tend to be negotiated allowing the insurer to have risks located in various states being governed by one and the same law. The level of demand for mass and large risks differs as mass risks are typically consumer-related and large risks are typically industry-related. Nevertheless it was also recognised that even large risks are subject to the overriding mandatory rules of Member States.”

One interesting point raised in the report that will spark interest in many European risk managers is that the existing divergent national insurance laws do, apparently, inhibit product innovation.

“Barriers to cross-border trade can have an impact on product innovation. Insurers contemplating to offer new products in more than one Member State must take time to work around differences in, amongst other barriers, the general good rules of the various target markets. They cannot simply offer products in the context of mass risk which have been successful in one member state to another without adaptation", concluded the expert group, albeit again referring primarily to the mass risk market.

Another interesting point raised by the expert group that could potentially spark some badly needed regulatory interest in the plight of all those risk managers keen to see a more coherent regulatory, legal and fiscal playing field for global programmes, was the section on cross-border demand.

The EC, other regional and national governments and regulators have shown little interest to date in the demand for a more level insurance and fiscal playing field for cross-border business coverage. But this report at least recognised the existence of such demand.

“There is hardly any statistical data on business demand. Regardless of the lack of statistical data, the approximate level of cross-border demand from consumer and business users could differ given their different interests and their different approaches to dealing with risks. The experts were generally of the view that businesses would wish to simplify their insurance arrangements by not having to take out multiple insurance contracts to cover their operations in different member states; this implies the basic demand for cross-border insurance in respect of some of those risks. Business demand is more proactive in its nature than consumer demand as business users have to actively consider insurance as part of their risk management processes. With the help of specialist intermediaries business users can tap into the international market", it stated.

Full article

See also article on Omnibus II vote, 11.3.14

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