THE SECOND COUNCIL DIRECTIVE ON THE COORDINATION OF LAWS, REGULATIONS AND ADMINISTRATIVE PROVISIONS RELATING TO DIRECT INSURANCE OTHER THAN LIFE ASSURANCE AND LAYING DOWN PROVISIONS TO FACILITATE THE EFFECTIVE EXERCISE OF FREEDOM TO PROVIDE SERVICES AND AMENDING DIRECTIVE 73/239/EEC
Provision of Insurance Services
1.The Joint Committee has completed its examination of the Second Council Directive 88/357/EEC of 22nd June, 1988 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of the freedom to provide services and amending Directive 73/239/EEC (First Directive). The First Directive, as amended, deals with the right of a non-life insurance company to establish itself in a Member State by setting up its head office or a branch or agency there and makes the exercise of that right subject to the grant of an authorization by the supervisory authority of the host Member State. It has been implemented in Ireland by the European Communities (Non-Life Insurance) Regulations, 1976 [S.I. No. 115 of 1976] as amended. The main purpose of the Second Council Directive is to regulate the provision of services by non-life insurance companies, namely, the covering by a company situated in a Member State of risks in another Member State without setting up a branch or agency in the latter Member State. It has not yet been implemented in Ireland. The Second Council Directive does not apply to insurance contracts covering accidents at work, motorboats and boats, land motor vehicles, nuclear civil liability, pharmaceutical products liability and compulsory insurance of building works.
2.The right of establishment of life assurance companies is regulated by Council Directive 79/267/EEC which has been implemented in Ireland by the European Communities (Life Assurance) Regulations, 1984 [S.I. No. 54 of 1984], as amended. On 23rd December, 1988 the Commission published proposals for the provision of services in this area and the Joint Committee proposes to consider these proposals in due course.
3.At present Irish law permits the writing of marine, aviation and goods in transit insurance by way of the provision of services by insurance companies which are not established in this country. In the case of all other types of insurance, business may only be lawfully transacted in Ireland by insurers which are established in the country, hold the required authorisation from the Minister for Industry and Commerce and are under the supervision of the Minister’s Department. The Second Council Directive when implemented will alter this situation as far as the classes of non-life insurance to which the Directive refers are concerned and will enable those classes of business to be written by an insurer which holds the required authorisation in any Member State.
4.Article 59 of the EEC Treaty provided within the framework of Chapter 3, Title 111 of the Treaty for the progressive abolition during the transitional period of restrictions on freedom to provide services “in respect of nationals of a Member State who are established in a State of the Community other than that of the person for whom the services are intended”. Article 60 provides that services fall within the Treaty “where they are normally provided for remuneration in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons” and that they include industrial, commercial and professional services as well as the activities of craftsmen. Article 60 also provides that “the person providing a service may, in order to do so, temporarily pursue his activity in the State where the service is provided, under the same conditions as are imposed by that State on its own nationals.”.
5.The scope of these provisions as far as the provision of insurance services is concerned was considered by the Court of Justice in Case 205/84 Commission v Germany  2 CMLR 69 which is known as the Schleicher case. The Court accepted that national laws regulating the provisions of services were not incompatible with the Treaty “if it is established that in the field of activity concerned there are imperative reasons relating to the public interest which justify restrictions on the freedom to provide services, that the public interest is not already protected by the rules of the State of establishment and that the same result cannot be achieved by less restrictive rules”. In so sensitive an area as the insurance sector the Court recognised the right of the host State to protect policy holders though it pointed out that no need for such protection arose in some cases of commercial insurance. On this basis it upheld the right of Germany to subject foreign providers of insurance services to official authorisation but declared a German requirement that such insurers must set up an establishment in Germany to be incompatible with the Treaty. On the latter point the Court stated:-
“If the requirement of an authorisation constitutes a restriction on the freedom to provide services, the requirement of a permanent establishment is the very negation of that freedom”.
6.The Second Council Directive is based on Articles 57(2) and 66 of the Treaty which empower the Council to issue Directives to facilitate the exercise of the freedom to provide services. However it also has regard to Article 8C which was inserted by Article 15 of the Single European Act and which permits regard to be had to “the extent of the efforts that certain economies showing differences in development will have to sustain during the period of establishment of the internal market” and allows for temporary derogations to take account of that situation. The Second Council Directive does allow for derogations in the case of Ireland, Greece, Spain and Portugal. It should be noted that in signing the Single Eurpean Act Ireland entered a formal declaration calling for sympathetic consideration should she require special provision being made for the insurance industry in Ireland.
Consideration of Directive
7.A detailed examination of the Second Council Directive was carried out for the Joint Committee by a Sub-Committee under the Chairmanship of Deputy M. J. Nolan which considered memoranda submitted by the Department of Industry and Commerce, the Irish Insurance Federation and the Confederation of Irish Industry and also met with representatives of these bodies. The Joint Committee is deeply indebted to Deputy Nolan and his colleagues for the painstaking and exhaustive work carried out by them on its behalf.
8.The Joint Committee wishes to express its appreciation of the considerable assistance received from the Department of Industry and Commerce, the Irish Insurance Federation and the Confederation of Irish Industry in the consideration of the Second Council Directive. A special word of thanks is due to Mr. Tommy Murray of the Department, Mr. Mike Kemp, General Insurance Executive and Mr. Gus Hatch, Managing Director, Irish National, representing the Federation and Mr. Liam Connellan, Director General and Mr. Michael Jacob, Chairman, Economics and Taxation Committee of the Confederation who all attended a meeting of Deputy Nolan’s Sub-Committee and gave the Sub-Committee unstintingly the benefit of their expert advice.
B. SECOND COUNCIL DIRECTIVE
9.The Directive requires each Member State to permit EEC insurers to provide cover within that State by way of the provision of services from another Member State for (a) large risks and (b) other risks for which the insurer’s establishment in the State has no authorisation. Large risks include the following types of insurance:-
(i)Railway rolling stock, aircraft, ships, goods in transit, aircraft liability and liability for ships;
(ii)Credit and suretyship for industrial, commercial and professional policy holders, and
(iii)Fire and natural forces, other damage to property, general liability and miscellaneous financial loss in so far as the policy holders exceed the limits of at least two of the following three criteria:-
10.Mass risks are those risks which do not come within the large risks category described above and comprise personal insurance and commercial insurance which do not meet the criteria set out in paragraph 9 above. For covering mass risks by way of the provision of services the insurer may be obliged to obtain an “administrative authorisation” in the Member State where the services are to be provided and to obtain the authorisation (if it is required) the insurer must provide certificates from its home State that it possesses the requisite minimum solvency margin and has the requisite authorisation and approval of the supervisory authority of its home State and must submit a scheme of operations containing specified particulars. Non-compliance of that scheme with local requirements will be a ground for refusing an authorisation. When an administrative authorisation is required the amount of the technical reserves relating to the contracts concerned will for the present be determined by the host State and the covering of those reserves by equivalent and matching assets and the localisation of those assets will be under its supervision. In the case of mass risks the policy holder must be informed, before he enters into any commitment, of the Member State of the insurer with whom he is contracting. The only obligation imposed by the Directive on a Member State in relation to mass risks is to provide that an insurer established within its territory may cover by way of services from outside its territory at least those mass risks for which the establishment holds no local authorisation but in respect of which an authorisation is held in another Member State.
11.No local authorisation will be required for the covering of large risks and insurers providing such services will remain under the supervision of their home Member State. However an insurer doing such business may not commence operations until the supervisory authority of the Member State where the services are to be provided is supplied with certificates of the home authority relating to the insurer’s minimum solvency margin, its authorisation and permission to operate outside its home State as well as particulars of the nature of the risks it proposes to cover.
Control by host Member State
12.The host Member State will be entitled to keep the activities of an insurer providing services within its territory under review. It can request the insurer to cease any illegality and if necessary report the matter to the supervisory authority of the insurer’s home Member State. If this is not enough to remedy the situation it can prevent the insurer from entering into new contracts and, where applicable, withdraw its authorisation. The host Member State will be entitled to learn from the home Member State the extent of the insurer’s business within its territory and where that business exceeds a specified limit a separate underwriting account will be required.
13.The Second Directive provides detailed rules for determining what national law will govern the contract between the insurer providing services from another Member State and the policy holders.
Amendments of First Directive
14.The Second Directive adopts new rules relating to the matching of assets for the purpose of applying the relevent provisions of the First Directive. It also relaxes the requirements of the scheme of operations to be furnished by an insurer establishing a subsidiary, agency or branch in another Member State. Moreover it obliges Member States to strengthen the powers of their supervisory authorities to enable them to investigate the state of each insurer’s business, ensure that insurers comply with national rules, prevent irregularities prejudicial to the interest of policyholders and enforce any measures considered necessary. The Second Directive also amends the provisions of the First Directive dealing with the transfer of portfolios of contracts between insurers.
Derogations for Ireland
15.Until the end of 1992 Ireland (as well as Greece, Spain and Portugal) will be entitled to operate for all risks the the regime other than that for large risks. From 1st January, 1993 to 31st December, 1994 Ireland (and the other three Member States) will have to apply the regime for large risks set out in the Second Directive to class (i) and (ii) of the large risks and also to class (iii) (see paragraph 5 of this memorandum) but in the latter case the thresholds may be fixed by national legislation. From the 1st January, 1995 to 31st December, 1998 the thresholds of the first stage as set out in the Second Directive and from 1st January, 1999 the thresholds of the second stage will have to be applied by Ireland, Greece and Portugal (for Spain the derogation is for a shorter period) in the case of class (iii).
C. VIEWS OF THE JOINT COMMITTEE
16.The Joint Committee finds it perfectly understandable that in light of its experience with PMPA and ICI the Government should approach the opening up of the Irish market with a degree of caution. The Committee has been informed by the Department of Industry and Commerce that “the transitional period negotiated for Ireland ties in with the broad timescale for the recovery of the PMPA to normal trading”. The important question in the Joint Committee’s view is how the breathing space allowed by the transitional arrangements is to be utilised so that Irish business is not adversely affected under the new regime. In one respect the transitional arrangements serve no purpose as far as Ireland is concerned for marine, aviation and goods in transit insurance may already be written in this country by insurers which are not established here. As far as other classes of insurance covered by the derogation are concerned the Committee has been informed by the Department that it is proposed to avail of the transitional arrangements permitted but that as these arrangements are optional “the phasing in process can be speeded up by the Government, if necessary, in light of improving circumstances in the 1990s”. As it now seems likely that the administration of the PMPA may end much sooner than was anticipated there should be available to the Government a greater freedom of choice as to the extent to which the transitional arrangements permitted by the Directive are availed of.
17.The Joint Committee is satisfied on the evidence presented to it that the transitional period must be utilised to reduce insurance costs in this country. The Confederation of Irish Industry is strongly of the view that a key element in this process is the reduction of legal costs and the award of damages and it would like to see the measures already taken and pending extended over the whole area of civil liability. The Joint Committee is of opinion that it has yet to be established that the measures already taken and pending in the legal area will produce the reduction in insurance costs hoped for and in this connection it was informed by the Irish Insurance Federation that as yet it is too early to assess the results of the enactment of the Courts Act, 1988. It believes that there may be danger of over emphasis on the effect of legal costs and damages awarded and considers that there are other aspects of the insurance industry that have to be reviewed while the transitional arrangements are in force such as commission and administration costs and profits or losses on underwriting and general accounts. The Irish Insurance Federation has expressed confidence that Irish insurers will be able to compete under the new regime unless faced with unfair competition from more powerful foreign competitors. This suggests to the Joint Committee that consideration might be given to the question of whether any strengthening of Irish legislation is necessary to supplement the competition rules of the EEC.
18.The Irish Insurance Federation stressed the need for tax relief on profits transferred to reserve in line with relief available in other Member States and for an alignment of the rate of corporation tax with the UK rate. This raises the wide question of how far the establishment of the single market requires tax harmonisation. Until there is agreement within the Community on this issue the Joint Committee is of opinion, particularly in light of current problems relating to the public finances, that Irish tax rates have to be determined by reference to national fiscal requirements. The Federation also urges the abolition of the levy on insurance premiums. The Joint Committee understands that there are levies on premiums in several Member States as, for example, 33% on French motor premiums. Disparities between levies, it seems to the Joint Committee, raise a problem which, if if it is to be solved, must be solved by harmonisation at Community level.
19.The Confederation of Irish Industry is opposed to the transitional arrangements being continued after 1992. It’s view is that Irish firms should not be denied access to the cheaper insurance which is expected to be available to its overseas competitors after 1992. While the Confederation accepts that some firms with connections with overseas companies may have the benefit of cheaper group insurance Irish firms with no such connections will not. The Joint Committee was impressed by the case made by the Confederation and it feels that everything possible must be done to reduce the transitional period to a minimum. It recommends that it be made clear to the insurance industry that there is no guarantee that the full transitional period will be available and that the position will be kept under active review in light of comparison between Irish insurance costs and those prevailing in other Member States.
20.A contract of insurance entered into by an insurance company which does not hold the requisite authorisation for the type of insurance involved is not enforceable by the company. It would also seem that it is not enforceable by the person effecting the insurance. The Joint Committee is advised that this is one effect of section 9 of the Insurance Act, 1936. Article 4(1) of the 1976 Regulations prohibits an insurer from carrying on business except in accordance with his authorisation and Article 4(5) provides that, generally, section 9 of the 1936 Act will apply to such an authorisation. Breaches of these provisions are punishable by fines but the Joint Committee is advised that they also have the effect that a contract of insurance entered into with an insurer who does not hold the requisite authorisation for the type of insurance involved is not enforceable by either the insurer or the person effecting the insurance. The Joint Committee accepts that it is perfectly proper than an insurance company which does business for which it is not authorised should not have the benefit of it but it does not think it equitable that it should be able to avoid obligations undertaken to its customer who may have acted quite innocently.
21.There are now 18 different classes of non-life insurance. The Joint Committee does not find any justification for imposing on the customer an obligation of ensuring that the insurer has the requisite authorisation for the particular class of insurance in which he is interested. The obligation of ensuring that his authorisation is in order should rest on the insurer alone and he should not be given the opportunity of repudiating obligations entered into if his authorisation is not in order. Moreover it seems to the Joint Committee that penalising the innocent customer is hardly consistent with the policy of the EEC Directives of protecting those who deal with insurance companies. Accordingly the Joint Committee recommends an amendment of the law so as to provide that in the case of a contract of insurance not covered by the requisite authorisation the party effecting the insurance should have the option either of enforcing the contract against the insurer or of recovering any premiums or other payments made to the insurer.
22.The Joint Committee has been informed by the Department that the Second Council Directive will be implemented by a statutory instrument under the European Communities Act, 1972. The Joint Committee finds it unsatisfactory that the main legislation dealing with the control of insurance companies should be found only in statutory instruments which have never been considered by the Houses of the Oireachtas. There is a clear need, in the Joint Committee’s view, for producing a consolidating statute on this subject when all the relevant EEC legislation has been implemented. The Joint Committee doubts if this would be denied by the Department which has promised to consider consolidation during the transitional periods of the Second Council Directive. The Department’s problem seems to be a lack of resources at present but in the Joint Committee’s view it ought to be possible to allot sufficient resources to the work of consolidation when the pressure of implementing EEC legislation has eased. It proposes to continue to pursue this matter and in due course will report further to the Houses.
23.In its Report No. 3 of 20th January, 1988 the Joint Committee recommended that certain banker’s guarantees be excluded from the ambit of the Insurance Acts and it is pleased that this is being done as far as Irish banks are concerned by an amendment of the Insurance Bill, 1988. However it seems to the Joint Committee that the terms in which the amendment is being effected will necessitate a further amendment when the Second Banking Directive is being implemented.