The Single Market in Insurance

Breaking Down the Barriers

Andrew McGee

• Editorial: Routledge
• Año: 2019
• ISBN:
  9780429781551
• Edición: 1
• Categoría: Business
• Categoría: Business General

First published in 1998, this volume was formally completed in July 1994, but completing the structure of the market is not all the same thing as having a genuine Single Market. This book explores the difficulties inherent in the concept of the Single Market in Insurance, as well as the practical difficulties of implementation. It looks to the future of the Single Market as well as at the present.

It should be of interest to lawyers studying law or EC law, as well as to economists and political scientists interested in the development of Project Europe.

1 Introduction

1. INTRODUCTION

Insurance is a very prevalent feature of developed modem societies. If Benjamin Franklin were alive today he would surely have to amend his famous dictum that the only certainties in life are death and taxation by adding insurance as the third.

It is scarcely an exaggeration to say that few people get far into adulthood without having an insurance policy of some kind. At the simplest level this may be a motor policy (compulsory for those who drive) or a household buildings or contents policy, the latter normally being obligatory for those who buy a property on mortgage.

In the field of life assurance, many mortgages are endowment mortgages, supported by a life policy, whilst investment insurance policies are very widely sold as savings vehicles, often in connection with private pension provision. The latter has greatly expanded since the changes in the law introduced by the Income and Corporation Taxes Act 1988 in an effort to begin shifting the financial burden of pension provision away from taxpayers generally and towards individuals. The most recent proposal by the UK government to phase out the existing state retirement pension and replace it with a so-called ‘personal retirement account’, to which individuals will be required to contribute during their working lives, will further accelerate this trend. In these circumstances the quality of insurance provision becomes a question of considerable general importance, and attention is necessarily focused on the legal regime regulating the provision of insurance services. Instead of being merely an arcane matter of technical provisions, this becomes a subject of vital interest to a great many people.

At the same time as insurance law and regulation has achieved this social importance, the nature and context of the subject has undergone very significant changes. At a domestic level the Financial Services Act 1986 introduced a new scheme for regulating the marketing and selling of investment policies, but even this Act, important and controversial as it was, is overshadowed in importance by the development of the Single European Market in Insurance, a development which forms the subject-matter of this book. To date the Single Market has concentrated on the regulatory aspects of insurance, and the schemes which it has created are explored in later Chapters. Some attention will also be given to the limited and so far unsuccessful attempts to address issues of insurance contract law.

Detailed accounts of the Single Market in Insurance are as yet in short supply. Ellis’s book The Single European Market and Insurance Lcrw and Practice¹ provides a good descriptive account of the position as it stood immediately before the implementation of the Third Directives, but because of its date was unable to provide any account of how those Directives were implemented into national laws. There appears to be no other thorough account of the subject, though Fitzsimmons has written about Insurance Competition Law.² The 1994 ERA Seminar on the Single Market in Insurance gave rise to a book of papers³ which provides valuable insights into the subject. A limited,⁴ though now steadily growing, periodical literature supplements these works.

2. THE INSURANCE MARKET

In order to understand the workings of the Single Market in Insurance, it is necessary first to know a little about the way in which the insurance market has been organised and regulated. Insurance business is traditionally divided into a number of categories, though different categorisations may apply for different purposes. One very important division is that between long-term business and general business. Long-term business consists principally of life assurance, permanent health insurance and accident insurance, whilst everything else falls into the category of general business. The importance of this categorisation is that general insurance policies are normally for a period of not more than one year at a time, whereas long-term policies are normally capable of lasting and intended to last for longer periods. This has implications for the nature of the risk accepted by the insurer as well as for issues related to the formation of the insurance contract.

Another important division is that between indemnity policies and contingency policies. The former are those policies which are designed simply to make good losses suffered by the policyholder as a result of the insured peril. Contingency policies provide a specific sum on the happening of the insured event without reference to the loss suffered. To a large extent this division overlaps with that between general and long-term business, but permanent health policies are normally indemnity policies, as are some (but not all) accident policies. It should also be noted that in marine insurance, the universal practice, sanctioned by statute⁵ is for policies to be ‘valued’ policies, under which the value of the insured subject-matter is agreed in advance, that valuation being conclusive except in case of fraud.

Yet another way of dividing insurance is to distinguish between the compulsory and the non-compulsory policies. The former are found in those cases (of which driving a motor vehicle is the most important) where an activity may not lawfully be carried on without possession of liability insurance.

For other purposes marine insurance may be regarded as a separate category of insurance from all others because it alone has a codifying statute, the Marine Insurance Act 1906. However, it is clear that many of the principles set out in that Act apply equally to non-marine insurance, and the courts have been ready to refer to the Act for guidance even in cases not involving marine insurance.⁶

In the discussion which follows it will be seen that for regulatory purposes the distinction between life and other policies has been accorded by far the greatest significance.

3. THE REGULATION OF INSURANCE⁷

Insurance as a service exhibits distinctive features which give rise to specific problems. It is in the nature of insurance that the insurer will take the premium in advance. Traditionally the whole premium was paid at the outset (other than in long-term policies where payment by instalment has always been very common) though in recent years instalment payment of premiums for general insurance has become more common. Certainly it is to be expected that the premium will have been paid in whole or in part before any claim arises. It is therefore essential to secure that those providing insurance services will be of sufficient competence at managing risks not to become insolvent between the payment of the premium and the date of the claim⁸ and of sufficient probity not to misappropriate the funds which ought properly to be available to meet such claims. From a regulatory point of view these two concerns have been the major driving forces in legislation in the United Kingdom. That legislation began with the Assurance Companies Act 1870 and is now contained primarily in the Insurance Companies Act 1982 as amended, though some provisions of the Financial Services Act 1986 are also relevant.

The Insurance Companies Act 1982 imposes a regulatory system under which prior authorisation from the Department of Trade and Industry is required before carrying on insurance business. That authorisation will not be given unless the DTI is satisfied that the managers of the business are fit and proper persons for the purpose.⁹ Insurance business is divided into a number of classes,¹⁰ and separate authorisation is required for each class. It is possible and common to be authorised for only some classes of business.

The Act imposes requirements of financial solvency¹¹ on insurance companies in an effort to protect against the risk of insolvency. There are also ongoing accounting and supervisory arrangements, which may lead to the restricting or withdrawal of authorisation.¹² It is a criminal offence to carry on business without authorisation.¹³ The system operated in the United Kingdom is widely regarded as being in practice a rigorous one. The Department of Trade and Industry does each year remove a small number of authorisations, either in relation to specific classes of business or in extreme cases for all classes of business. Behind the bare statistics of removed authorisations lies a great deal of work by the DTI in dealing with ongoing regulatory problems by means of information, advice, exhortation and threat. The success of the system may perhaps be judged by the relative rarity in modem times of financial collapse or grave dishonesty affecting insurance companies.¹⁴ That perceived stringency, especially as compared with the attitudes in practice of the regulatory authorities in other Member States, exemplifies an important question about the development of the Single Market; if some Member States are thought by insurance companies to be more lenient in their regulatory practices than others, then there is, at least in theory, the danger that insurers will seek to operate in the most lightly regulated markets, thereby driving down regulatory standards.¹⁵

It can be seen from the foregoing discussion that the system adopted, the essential features of which were in effect incorporated into European law when the First Directives were adopted,¹⁶ is one of ex ante regulation, backed by ongoing monitoring requirements. Earlier legislation¹⁷ had required insurers to deposit sums of money with the regulator as a guarantee against the consequences of insolvency, but this scheme has now been abandoned in favour of a more qualitative judgment of the fitness of those managing the business.

There is of course another very important aspect to insurance law, namely the law relating to the insurance contract itself. In the United Kingdom this is still for the most part a matter of common law, though Marine Insurance has been codified in the Marine Insurance Act 1906 and there are some other statutory provisions such as the Third Parties (Rights Against Insurers) Act 1930 which significantly modify the common law position. The common law of insurance is often perceived as being weighted against the insured,¹⁸ a perception which has attracted the attention of the Law Commission, which in 1980 recommended reform of the most problematic part of insurance contract law, that relating to non-disclosure, misrepresentation and breach of warranty. In order to forestall this reform, the industry had to agree to the creation of the Insurance Ombudsman Bureau for the resolution of complaints involving personal lines policyholders.¹⁹

A second important point to be made is that English law, unlike the law of most other Member States, does not have requirements of ex ante approval of the terms and premiums applied to insurance policies. There is in this respect a clear contrast between the approach to questions of authorisation to carry on business and the approach to questions of insurance contract law. The validity of policy terms is not generally subject even to the scrutiny of the courts in England; the Unfair Contract Terms Act 1977 does not apply to contracts of insurance,²⁰ though the Unfair Terms in Consumer Contracts Regulations 1994²¹ may allow some terms to be challenged in a limited range of cases.²² For private policyholder the Insurance Ombudsman and PIA Ombudsman²³ systems may offer more prospect of challenging contract terms and/or the behaviour of insurance companies.

The approach of the EC to both the regulatory and the contractual aspects of the subject will be examined in later chapters.

4. THE SINGLE MARKET CONCEPT

The history of the Single European Market project is well known and need not be recited here.²⁴ It is appropriate, however, to discuss some difficult issues relating to that concept. It will be recalled that the Commission White Paper on Completing the Internal Market²⁵ envisaged a situation where doing business between London and Madrid or Milan would be as easy as doing business between London and Manchester. In order to achieve this objective it would clearly be necessary to dismantle the three types of barrier traditionally recognised as impeding inter-state trade within the EC, namely the physical, the technical and the fiscal. Physical barriers raise few issues in relation to services, but fiscal and technical barriers are of obvious importance. As to fiscal barriers, it may be observed that there are significant differences in the taxation regimes applicable to insurance policies in different Member States. At the simplest level this may include taxes such as insurance premium tax in the United Kingdom. More complex issues arise in relation to long-term policies, especially investment policies, where the capital taxation of long-term gains in an investment fund differs between Member States.²⁶ Reform in this area raises vexed questions relating to the harmonisation of tax systems, which is perhaps the area w...