Draft Communication on the Third Insurance Directives

United Kingdom
Following hot on the heels of the recently-published Communication on the Second Banking Directive, the Commission has published a draft Communication on two of the issues which cause most difficulty to insurers wishing to do business in other Member States: the general good and what amounts to cross-border services business.

The Third Insurance Directives introduced from the middle of 1994 a new system known as the "single passport regime". EU insurers now only need one authorisation from the Member State in which they have their head office (the home State). Part of this passport regime means that, where insurers wish to conduct activities across borders (right to provide services) or to establish a branch in another Member State (right of establishment), they need only comply with a streamlined notification procedure.

Subject to one major exception, an insurer's EU-wide activities are subject exclusively to supervisory control by its home regulators. So, for UK insurers, it is for the DTI to supervise the insurer's authorisation, financial position and the fitness and properness of its directors and officers.

Host Member States (those Member States where an insurer exercises its right of establishment or right to provide services) can no longer subject an EU insurer or its branches to a separate authorisation as a condition of doing business in their territory. Instead, all that insurers need to do is to comply with the notification procedure. Host States have very limited supervisory functions. They can only insist that a "foreign" insurer operating there complies with certain rules - rules which they have to justify as being "in the general good".

In the course of its monitoring how insurers take advantage of single passport regime, the Commission has concluded that there is significant uncertainty about the meaning of the basic concepts of (a) the freedom to provide services and (b) the general good. It thinks that this uncertainty is deterring insurers from exercising their freedoms granted by EC law to market their products throughout the EU. It has therefore prepared a draft Communication, to which it requests responses, explaining its understanding of these basic concepts in the hope that some of the uncertainty will be removed. It analyses the relevant legal principles and case-law of the European Court of Justice (ECJ) and applies them to the Third Insurance Directives.

Branch or services?

The Communication begins by trying to shed some light on the murky distinction between a branch and providing services. Different notifications are necessary depending on whether the insurer wishes to set up a branch in the host State, or whether it wishes to conduct cross-border services business there. But distinguishing the two is not always easy. Referring to the ECJ's case-law, the Communication highlights the main conceptual difference. Providing services is more temporary in nature, whereas establishing a physical presence in the form of a branch has an element of permanence. The Communication refers to one of the leading cases on the freedom to provide services (Commission v Germany), in which the ECJ held that a branch includes an office managed by either the insurer's own staff or by independent persons who are authorised to act on a permanent basis for an insurer as an agency does as the case of an agency. The problem is that this definition is extremely wide and would seem to cover any permanent office staffed by someone who has the power to bind the insurer in relation to third parties. The draft Communication seeks to lessen the impact of this very wide definition by pointing to other case-law.

Grey areas

The Commission focuses on two particular "grey areas", the use of independent intermediaries and the permanent presence of an insurer's own staff. From its analysis of the case-law, the Commission considers that, for an independent intermediary to be seen as an extension of an insurer:

  1. the intermediary must be subject to the management and supervision of the insurer it represents;

  2. it must be able to commit the insurer; and

  3. it must have a permanent brief.

Only where an intermediary acts as a genuine extension of the insurer should that intermediary be considered a branch.

As the Communication points out, reliance only on the principles in Commission v Germany leads to the situation where an intermediary which has the authority to bind various insurers could be seen as a branch of all of those insurers, a conclusion it seems unhappy with. Accordingly, it considers that, in order to be treated as a branch, an office must be subject to the insurer's control.

The Commission also points out that an insurer ought to be able to call on the assistance of various service providers without necessarily being deemed to have a branch. Such services include loss adjusters, canvassers, local lawyers, medical services and a permanent structure for collecting premiums. It also considers that, if an insurer sets up a representative office, which it calls "a flexible structure traditionally regarded as a means of reconnoitring the market, establishing contact and examining to what extent establishment in the country might prove viable", then this should not be treated as a branch either.

The draft Communication confirms the view that advertising should not be considered as providing cross-border services in a particular Member State. This is entirely consistent with both the Life Insurance and the Non-Life Insurance Directives which contain detailed provisions about when an insurer is defined to be providing cross-border services business. In most cases, this will involve providing insurance cover to a person or a company resident in the Member State concerned. Accordingly, for a host Member State to equate advertising with providing cross-border services would be contrary to the Directives.

Finally, the Commission considers that the notification procedure laid down in the Insurance Directives for both branches and the provision of services is simply an administrative procedure with the simple objective of exchanging information between national supervisors. Accordingly, failure to comply should not affect the validity of an insurance policy.

The general good

As for the general good, the Commission repeats the case-law as to the limitations on the ability of a Member State to impose restrictions on incoming insurers. Such measures must:

  • not come within a field which has been harmonised (such as financial and prudential supervision);

  • pursue a legitimate objective of the general good (such as consumer protection);

  • be objectively necessary;

  • be non-discriminatory;

  • not duplicate rules which already exist in the home Member State; and

  • be proportionate the objective pursued.

The draft Communication outlines the areas which the ECJ has recognised as legitimate objectives. These include the protection of consumers, the cohesion of the tax system, the protection of creditors and preserving the good reputation of the national financial sector.

What is particularly helpful is that the draft Communication then looks at various types of national rule and assesses whether or not they are likely to be in breach of the general good principles. These include:

  • Prior notification of policy conditions
    The Commission considers that maintaining a system of prior or systematic control of insurance policies is inconsistent with the Third Insurance Directives, unless this is explicitly permitted, as in the case of the compulsory third party motor insurance.

  • Compulsory no-claims bonus scales
    Some Member States set out exactly how no-claims bonus schemes are to be calculated. Since this amounts to a compulsory method of calculating premium, the Commission considers that such schemes are "tariff measures" and contrary to the spirit of the Third Directives.

  • The language of the policy
    Some Member States require that insurance policies taken out or performed in their territory be drafted exclusively in their official language. The Commission considers that this is unjustifiable in the case of large commercial risks and may not be justifiable even in the case of mass consumer risks. For example, if the policy is issued to someone who is a national of a different country to that in which he is resident (such as a French national living in Italy), then national rules should be flexible enough to allow policies to be marketed to the French national in his mother tongue.

  • Prohibition of cold calling
    The Commission considers that a prohibition on cold calling is likely to be compatible with EC law.

  • Compulsory surrender values and/or bonus
    The Commission considers that, since details of a life insurance policy's surrender value must be disclosed to the investor, obligatory surrender values are likely to infringe the general good principles.

Choice of law and the general good

As it did in the Communication on the Second Banking Directive, the draft Communication also discusses how mandatory (public policy) rules impact on EC law guaranteeing both the freedom of establishment and the freedom to provide services.

Where an insurer in one Member State concludes a contract with a policy-holder in another, even if the parties agree to subject the contract to the law of the insurer's Member State, in some circumstances, the contract must respect the mandatory rules of the Member State where the policy-holder is resident. The Commission confirms that such mandatory rules must comply with the case-law on the general good.


The Commission's decision to issue a draft Communication for consultation is to be welcomed. It should lead to a better text. Nevertheless, there are difficulties with the text as it stands. If you would like to make your views known, but wish to remain anonymous, you may wish to channel your comments through us. If so, please contact Nick Paul.