Overcoming contract law obstacles to the single insurance market
John Lyons looks at the progress being made in improving the rules regarding the cross-border life assurance market in Europe and analyses a report from the Association of International Life Offices on its recommendations for improving the process of selling into other EU jurisdictions. The drive to create a single market remains, he says, but don't hold your breath.

Those of us who entered enthusiastically into the cross-border life assurance market will be all too aware of the many difficulties involved in selling in other EU markets. Nevertheless the EU Commission as part of its Europe 2020 strategy continues to try to break down barriers to the single market and one of the chief of these is national contract law. Earlier this year the final Report of the Expert Group set up by the Commission in 2013 to review European Insurance Contract Law was published and the issue has recently been analysed in detail by John Beaney, the Legal and Regulatory Executive of AILO (the Association of International Life Offices).
John Lyons


In fact the Expert Group final Report only confirms in some detail what was already well known - that contract law differences in all the member states require insurers wishing to sell cross border to adapt their contracts to meet the requirements of the host states.

This can result in considerable cost and a consequent reluctance of companies to offer products across borders. In AILO’s view it would be an impossibility to get all member states to agree to amend their existing rules on contract law. They suggest instead the adoption of an alternative 2nd regime across the EU, based upon common mandatory rules found in most of the local legal systems, which could be applied in any member state on a voluntary basis instead of the local system. A draft of such a regime is already in existence, having been developed by an academic project called the Restatement Group, and it was proposed to the Commission as a model as far back as 2004. This model is called the Principles of European Insurance Contract Law (PEICL) and has been further developed and considered in the intervening years and is advocated in a Resolution of the European Parliament of June 2011. The next step is understood to be a Green Paper from the Commission expected in the third quarter of this year.

It would be optimistic to expect progress on this issue to be quick. A similar initiative to facilitate cross border sales of goods online, the Common European Sales Law (CESL), was approved by a large majority of the European Parliament in February and presented as a win-win solution in a gushing press release from the EU Justice Commissioner. However the CESL still requires adoption by the Council and it appears that a majority of member states are opposed to it including France, Germany and the UK. Among the reasons cited is the possibility of weaker consumer protection rules and it seems that if agreement on a final text is ever reached it is unlikely to be before 2015.

Beaney quotes the Expert Group’s Report as describing cross border life insurance as important, even though the volume is low (4.1% of EU gross premiums in 2007), because 'it provides a means to introduce innovative ideas and products to markets which might not be considered necessary or in their interests by incumbent domestic players'. It calls this meeting latent demand and gives as an example the successful introduction of unit linked products into Nordic Countries and Germany. It points out that contract law obstacles can be met at every phase of the duration of a policy and Beaney considers some of these:

• Pre contract disclosure rules can be very detailed and demanding and vary widely between countries
• Rules about how a contract is made and documented also vary widely
• Even cooling off rules can differ greatly
• Requirements in the event of non payment of premiums also vary from member state to state.

The Report also considers the situation of expatriates who want to purchase products from their home state. The basic principle is that the contract is subject to the laws of the state where the policyholder has his habitual residence, not where the insurer has its head office. For large risks there is a free choice of law but for mass risk insurance this is limited. A policyholder may elect to be subject to the laws of the state of which he is a national but any laws considered mandatory by the host state plus the “general good” will still apply. This latter concept is not precisely defined and means that contracts must accord with the public policy and moral requirements of the host state. In many instances this can be abused for purely domestic regulatory thinking. Beaney gives the example that in Belgium unit linked charges may not be taken by cancelling units whilst in France they must be taken by cancelling units.

Unless it is possible to resolve the issue of “general good” Beaney fears that a 2nd regime will not be of real practical value. Even if that issue can be resolved other obstructions to cross border business will remain, notably differences in taxation and the classification of business as insurance or investment which differs from state to state.

Nevertheless the drive to create a genuine single market remains. Beaney references a report by EIOPA for the Commission also published in February this year and entitled Towards an EU single market for personal pensions. In this report EIOPA recognises contract law along with taxation and social and labour law as major obstacles and acknowledges the role the PEICL could play in alleviating the contract issues. Beaney concludes that the need to deal with the savings deficit more than any other factor may be the incentive for member states to work towards a common framework. But don’t hold your breath.