Committee Reports > List of Committees > Joint > 1990 > Committee on the Secondary Legislation of the European Communities (6th Committee) > Report No. 04 - Life Assurance and Motor Insurance

(6th December, 1989.)

A. INTRODUCTION

Proposals and Measures Examined

1.The Joint Committee has completed its consideration of the following:-

Second Council Directive on the coordination of laws, regulations and administrative provisions relating to direct life assurance, laying down provision to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC;

Council Directive amending, particularly as regards motor vehicle liability insurance, First Council Directive 73/239/EEC and Second Council Directive 88/357/EEC 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; and

Third Council Directive 90/223/EEC of 14th May, 1990 on the approximation of the laws of Member States relating to insurance against civil liability in respect of the use of motor vehicles.(1)

Consideration by Sub-Committee

2.A detailed examination of these Directives when they were in proposal form was carried out for the Joint Committee by its Sub-Committee on Statutory Instruments and Legal Affairs under the Chairmanship of Senator Hussey. The Joint Committee gratefully acknowledges its indebtedness to Senator Hussey and his colleagues for their painstaking work.

Acknowledgements

3.The Joint Committee wishes to express its sincere thanks to the Irish Insurance Federation and the Departments of Industry and Commerce and the Environment for the detailed briefing it received which proved invaluable in its deliberations. In particular it wishes to express its appreciation of the assistance received from Mr. Aidan Cassells of the Federation, Mr. Tommy Murray and Mr. John Kelly of the Department of Industry and Commerce and Mr. Michael McCarthy of the Department of the Environment who attended meetings of Senator Hussey’s Sub-Committee and gave it unstintingly the benefit of their expertise.

Background

4.Insurance companies established in Members States are subject to a common regime of authorisation and regulation laid down by the First Council Directives 73/239/EEC (non-life insurance) and 79/267/EEC (life assurance) which have been implemented in Ireland by the European Communities (Non-Life Insurance) Regulations, 1976, as amended, and the European Communities (Life Assurance) Regulations, 1984, as amended, respectively. To comply with Article 57(2) of the EEC Treaty these insurance companies must be allowed to provide insurance services in Member States where they are not established. However in Case No 205/84, Commission v Germany, the Court of Justice held that a Member State was, in the absence of Community legislation, entitled to subject the provision of insurance services in its territory by an insurance undertaking established in another Member State to official authorisation if such were objectively necessary to protect the consumer. Legislation at Community level was therefore necessary to settle when a Member State could insist on insurers outside its territory obtaining its authorisation for transacting business within its jurisdiction. The Second Non-Life Directive 88/357/EEC of 22nd June, 1988 which was the subject of the report of a previous Joint Committee dealt with the problem as far as non-life insurance is concerned. Broadly speaking this Directive which has not yet been implemented in Ireland distinguishes between insurance of large risks, as defined, and some other insurance which may be provided by way of the provision of services without obtaining the authorisation of the Member State where the service is provided and all other types of non-life insurance in respect of which that Member State may if it chooses require the provision of services to be authorised by itself. The Second Life Directive is principally concerned with the introduction of a corresponding regime for life assurance.

5.The Council Directive referred to above extends to motor insurance the regime of provisions of service introduced by the Second Council Directive 88/357/EEC. For a number of reasons motor insurance had originally been excluded from the Directive.

6.Third Council Directive 90/223/EEC continues a process begun by two earlier Directives of eliminating disparities between the level and content of compulsory motor insurance in the Member States. The objective is to ensure that motor vehicle accident victims receive comparable treatment irrespective of where in the Community an accident occurs so as to further facilitate the establishment and operation of the internal market.

B. LIFE ASSURANCE

Scope of Second Directive

7.The Second Directive amends the first Directive 79/267/EEC and also lays down the provisions governing the transaction of life assurance business on a services basis without having an establishment or permanent presence in the Member State where the commitment is covered. The latter provisions will apply to those types of life assurance to which the First Directive applies with the exception of the management of group pension funds and operations relating to the length of human life which are prescribed by or provided for in social insurance legislation, when they are effected or managed at their own risk by assurance undertakings. It is understood that the Commission intends to produce a separate draft Directive relating to the provision of services for the management of group pension funds. Where the transaction of assurance on a service basis is allowed the Member State on whose territory the service is to be provided may require the undertaking concerned to obtain from it an official authorisation except where the policy-holder takes the initiative in seeking a commitment from an undertaking.

Commitments on Initiative of Policy-Holder

8.Business transacted on the initiative of the policy-holder will be under the supervisory regime of the Member State where the assurance undertaking is established. As the activity involved is not to be subject to supervision in the Member State of commitment an undertaking intending to exercise the freedom to provide services there must furnish to the supervisory authority of that State a certificate issued by the supervisory authority of the Member State of its establishment that it possesses the minimum solvency margin for its activities as a whole required by the First Directive, that its authorisation enables it to operate outside the Member State of establishment, that its authorisation covers the activities involved and that the supervisory authority of the Member State of establishment does not object to its transacting business on a services basis. These provisions will also apply in the case of any other assurance business transacted by way of providing service where the Member State of commitment, in the exercise of its discretion, does not require an official authorisation.

9.A policy-holder will be deemed to have taken the initiative (i) where a contract is entered into in the Member State where the undertaking has its establishment or by each party in its own State of establishment or habitual residence and the policy-holder has not been approached in his State of habitual residence by the undertaking or its agent or through an intermediary or by means of a solicitation addressed to him personally or (ii) where the policy-holder in his own State approaches an intermediary to obtain information on assurance provided by undertakings in other Member States or with a view to entering into a commitment with such an undertaking through such an intermediary. In the latter case the policy-holder will have to sign a statement in a prescribed form requesting the information and indicating that he is aware that the undertaking is subject only to the supervisory arrangements of the Member State of its establishment. However, for a maximum period of three years a Member State may decide that the policy-holder is deemed to take the initiative only in the circumstances indicated at (i) above.

10.Before entering into a commitment on his own initiative the policy-holder will have to sign a statement or a further statement in a prescribed form acknowledging that he realises that the undertaking is under the supervision of the supervisory authority of its Member State of establishment and not the supervisory authority of the State where he has his habitual residence. Having entered into the commitment he is to be allowed a period of between 14 and 30 days within which he can cancel the contract.

Other Assurance Business

11.Except where the initiative is taken by the policy-holder the Member State where the services are to be provided may require the undertaking to obtain an official authorisation. To obtain such an authorisation an undertaking must submit certificates by its home supervisory authority that it possesses the requisite minimum solvency margin and is authorised to transact the relevant business and to operate outside its home State and that its supervisory authority does not object to its so doing. It must also submit a scheme of operations similar to that required of established undertakings. A refusal to grant an authorisation must indicate the precise grounds of refusal and be subject to an appeal to court. The activities of an undertaking operating under an authorisation will be subject to the supervisory regime of the Member State where the services are provided and the rules of that State will apply in relation to the amount of technical reserves, including mathematical reserves, profit sharing, surrender and paid-up values for contracts and the covering of reserves by equivalent and matching assets.

Established Undertakings

12.In the case of an undertaking established on its territory a Member State must permit it to provide at the least services from an establishment in another Member State covering (a) commitments entered into on the initiative of the policy-holder and (b) other commitments which are not covered by its local authorisation.

Proper Law of Contract

13.The Directive contains rules for determining what national law governs the contract. The law of the Member State of commitment will apply though if that law permits it the parties may choose the law of another country. If the policy-holder is a natural person the parties may choose the law of the Member State of which he is a national if he has his habitual residence in another Member State. Irrespective of which law applies the mandatory rules of the forum trying an issue and the mandatory rules of the Member State of commitment will not be superseded.

Other Provisions

14.The Directive amends the provisions of the First Directive in relation to the transfer of portfolios between undertakings to include specifically provisions concerning the transfer of portfolios of contracts concluded by way of freedom to provide services.

15.A Member State is empowered to deal with irregularities in the provision of services on its territory. If an undertaking fails on request to terminate an irregular situation the matter can be reported to its home supervisory authority which will take appropriate measures.

If these prove inadequate the Member State concerned may prevent the further covering by the offending undertaking of commitments by way of freedom to provide services within its territory and may withdraw any authorisation granted. Penal sanctions may also be imposed on the offending undertaking.

16.The supervisory powers of Member States over undertakings established on their territories are also being extended and strengthened.

Views of Insurance Industry

17.The Irish Insurance Federation is confident that irish life assurance companies will be able to compete successfully in the Community market in the provision of services and accordingly welcomes the Directive.

18.However, the Federation sees the Directive as a minor measure and it would welcome a greater liberalisation in the provision of assurance services as the industry would welcome the opportunity of expanding its services outside Ireland. In particular it draws attention to the advantages which collective investments in transferable securities (UCITA) will enjoy over unit-linked life assurance products with which they compete.

Views of the Joint Committee

19.Granted that the freedom to provide services is enshrined in Article 59 of the EEC Treaty the Joint Committee regards the Directive as a modest initial step towards making that freedom a reality in the field of life assurance. It trusts that in light of the experience of the operation of the Directive the Commission will be able to put forward further proposals for a greater liberalisation of the provision of services in the life assurance sector as soon as possible.

20.At this juncture the Joint Committee’s main concern is that Irish citizens who deal with life assurance companies are fully protected under Irish legislation. While the Directive allows a Member State to penalise an undertaking which is guilty of irregularities in exercising the freedom to provide services it leaves it to national law to determine the effect of irregularities on the contract between the parties. Article 4(1) of the European Communities (Life Assurance) Regulations, 1984 provides that “a person shall not carry on the business of life assurance in the State unless he is the holder of an authorisation under these Regulations”. Article 4(2) of these Regulations provides that “Section 9 of the Insurance Act, 1936 shall apply to an authorisation issued under these Regulations”. Section 9(1) of the 1936 Act reads:-

“9(1) It shall not be lawful for any person (otherwise than in the course of re-insurance) to effect or to endeavour to effect any contract of assurance with an assurance company or any other person which or who is not the holder of an assurance licence entitling such company or person to effect contracts of assurance of the kind so effected or endeavoured to be effected by such person.”.

Where a contract is effected with an insurer who has not the appropriate authorisation both the insurer and the policy-holder will have acted unlawfully and it would seem to follow that neither can enforce the contract.

21.Obviously these provisions will require amendment when foreign insurers will be able to operate in the State without a national authorisation and the only question is what form the amendment should take. The Joint Committee’s immediate predecessor clearly demonstrated (see Report No. 12, 26 April, 1989.) that corresponding provisions governing non-life insurance could have detrimental consequences for the policy holder which cannot be justified in present-day circumstances. It recommended that the law should be amended to provide that where an insurance undertaking enters into a contract for which it has not the requisite authorisation the policy holder should have the option of either enforcing the contract or recovering the premiums paid. This would now appear to be the law in the United Kingdom by virtue of section 132 of the Financial Services Act, 1986. The Joint Committee recommends that in the case of life assurance enforcement of the contract or recovery of premiums at the option of the policy holder should be allowed not only where the life assurance undertaking lacks the requisite authorisation but also where there has been a break of the technical rules when the undertaking is exercising a legitimate right to provide services.

C. MOTOR INSURANCE - PROVISION OF SERVICES

EC Directive

22.This Directive extends to motor insurance the provisions of the Second Council Directive 88/357/EEC which deals with the provision of services in the area of non-life insurance. The effect will be that an authorised insurer in one Member State can transact motor insurance in another Member State where it had neither an establishment nor presence without seeking an authorisation from the latter, provided that the business falls into the large risk category as defined by the Second Council Directive. Such business will be under the supervisory regime of the Member State of the insurer’s establishment. In the case of motor insurance falling outside the large risk category a Member State will be entitled to require the insurer’s to obtain an administrative authorisation from it for the transaction of motor insurance business within its territory. Where such an authorisation is required the business will be under the supervisory authority of the Member State where the service is provided.

23.Large risks are defined for the Community as a whole as those where the policy-holder fulfills two out of three of the following conditions:-

(A)Until 31 December, 1992:-

(B)From 1 January 1993:-

By way of transitional arrangement in implementing the Second Directive Ireland is permitted to (a) postpone the commencement of implementation until 1st January, 1993, (b) fix its own thresholds for the period 1st January, 1993 to 31st December, 1994, (c) apply the thresholds indicated at A above in the period 1st January, 1995 to 31st December, 1998 and (d) apply the thresholds indicated at B above from 1st January, 1999.

24.Under the Directive the insurer providing services must become a member of the Motor Insurers’ Bureau of the Member State where the services are provided and make a contribution to the Bureau based on its gross premium income volume from third party class 10 motor insurance business or the number of risks in that class covered in the Member State in which the service is provided. The latter Member State will be empowered to require an insurer providing services on its territory to appoint a claims settlement representative there.

Views of the Joint Committee

25.In the Joint Committee’s opinion the important question from the Irish viewpoint is whether the adoption of the Directive can contribute to controlling the continuing rise in the cost of motor insurance in this country which recent reforms have not succeeded in keeping in check. In principle exposing the local industry to greater competition should promote greater efficiency and so reduce costs. The Irish Insurance Federation, however, predicts that in the long term premium rates must remain high while the cost of claims and the rate of accidents remain high relative to those in other countries. In this connection the Joint Committee was informed that the cost of claims in Ireland is five times that obtaining in the cheaper countries and that Ireland’s accident rate ranks 17th among 24 OECD countries. It was put to the Joint Committee that non-Irish insurers providing services might be able to cream off the better risks by offering attractive rates for a few years but that in the longer term no general reduction in rates will be possible. The Federation pointed out that 70 per cent of the Irish market is in the hands of companies which are foreign owned.

26.The Joint Committee is of opinion that since motor insurance is compulsory it should be available to all who require it at the lowest rate of premium possible. It would be unfortunate if greater liberalisation subjected those considered high risks to exorbitant or even prohibitive rates. Subject to this the Joint Committee believes that serious consideration must be given to taking the opportunity of opening up the Irish market to more competition than implementing the proposed Directive will afford. In particular two questions need to be addressed, namely (a) whether the periods of derogation permissible in the case of large risks need to be availed of and (b) whether the writing of other motor risks by foreign insurers should be permitted without requiring them to obtain an Irish authorisation. The answers to these questions depend on the likely contribution to be forthcoming to a reduction of insurance premiums when taken into account with other factors affecting insurance costs which are outside the Joint Committee’s terms of reference.

D. MOTOR INSURANCE - COMPULSORY COVER

First Council Directive 72/166/EEC

27.This Directive which was adopted in April, 1972 before Ireland joined the Community required every Member State to ensure that the compulsory motor insurance required by its national legislation covered the minimum compulsory insurance requirements of all Member States. It also abolished the “green card” (international certificates of insurance) control between Member States so that a green card was no longer required by drivers from one Member State travelling in another Member State. This Directive was implemented in Ireland by the European Communities (Road Traffic) (Compulsory Insurance) Regulations, 1975 (S.I. No. 178 of 1975).

Second Council Directive 84/5/EEC

28.This Directive which was adopted on 30th December, 1983 aimed at reducing disparities between the laws of the Member States as to obligatory insurance cover. Notably this Directive set minimum amounts for which insurance is compulsory for personal injury and property damage, covered compensation for damage caused by unidentified or uninsured vehicles and rendered unlawful exclusions from insurance where vehicles are used without authorisation. In Ireland the Directive was implemented by the Road Traffic (Compulsory Insurance) (Amendment) Regulations, 1987 (S.I. No. 322 of 1987) and by the conclusion on 21st December, 1988 of a new agreement between the Minister for the Environment and the Motor Insurers Bureau of Ireland (MIBI). Under this agreement the MIBI pay compensation as of right to victims of road accidents involving unidentified or untraced drivers and compensation for property damage caused by uninsured (but not unidentified or untraced) drivers. The agreement also simplified the procedure for securing compensation from the MIBI.

Third Council Directive 90/233/EEC

29.This Directive provides for (a) compulsory insurance covering all passengers excluding the driver, (b) compulsory insurance to cover the entire territory of the Community, a motorist using his vehicle outside his home State never to have less than his home State insurance cover, (c) compensation from national motor insurance bureaux not to be dependent on the victims proving the inability or unwillingness to pay of the person responsible, (d) the Member State to designate who should pay in the first instance where there is a dispute between an insurer and a national bureau and (e) certain transitional periods for the implementation of certain provisions in the case of four Member States including Ireland which will have until 31st December, 1995 to comply with the requirement of compulsory cover for passengers on goods vehicles and until 31st December, 1998 to comply with the requirement of compulsory cover for pillion passengers on motor cycles.

Effect on Ireland

30.At present compulsory insurance is required in Ireland to cover passengers on buses, taxis and private cars but not passengers on goods vehicles and motor cycles. Apparently in practice cover against liability to passengers on commercial vehicles is not always granted and the cost of insurance of pillion passengers is regarded as prohibitive.

31.Implementation of the Directive will require amending legislation which will presumably take the form of a further statutory instrument. However, the Joint Committee was informed that a formal amendment of the agreement between the Minister and the MIBI of 21st December, 1988 will not be required.

Views of the Joint Committee

32.In the Joint Committee’s opinion the important question is how the periods of derogation will be utilised to keep increases in insurance costs to a minimum. As far as pillion passengers are concerned the Minister for the Environment has already made certain licensing provisions which are designed to reduce motor cycle casualties. However, on the evidence available to the Joint Committee the compulsory insurance of pillion passengers could be effected in present circumstances only at prohibitive rates. A great deal more has to be achieved by the end of 1988 unless it is decided to prohibit the carrying of pillion passengers altogether.

33.As far as passengers on goods vehicles are concerned the Joint Committee has been informed that only vehicles with passenger accommodation will be affected. Agricultural tractors with no passenger accommodation will not therefore come within the requirements of the Directive. The Irish implementing legislation should contain a specific provision to this effect. As far as the goods vehicles which will be affected are concerned the Joint Committee was informed that a 20 per cent increase in premium rates could be expected. In the Joint Committee’s view this is excessive and highlights the need for a concerted effort to reduce insurance costs generally before 1996.

(1) OJ L129, 19.05.90, pp 33-35