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Plotting the next step in creating a single European insurance market Back  
The European Commission recently convened a group of insurance industry experts to review progress made on completing the single European insurance market and to put forward proposals to assist European insurers to transact business on a pan-European basis. Aidan Cassells was a member of that group, and in this article he discusses the findings of a major report they released.
TThe insurance group was one of four expert industry advisory groups set up by the Commission: the other three covered banking, securities and asset management. Each consisted of market practitioners and industry representatives from all parts of the EU, including the accession states.

The insurance group met on four occasions, and came to a clear consensus on the way forward.

The group’s conclusions can be summarised as follows:
• A ‘regulatory pause’ is critical to give the industry time to digest existing EU legislation already agreed or currently in the pipeline
• Short-term focus should be on making sure existing legislation is properly implemented and any inconsistencies or abuses removed. A key step, in this regard, would be reducing or eliminating unnecessary host country rules and options that act as barriers to cross-border business
• Streamline current supervision, especially for groups, conglomerates and pan-European players and remove barriers (such as VAT on inter group services) that hamper companies developing a genuine European ‘shared services’ model
• Establish an overall EU target (e.g. 30 per cent) to reduce regulatory/supervisory costs
• Simplify and clarify identified tax issues
• The next stage in the evolution of the single market should focus on fostering the organic development of such a marketplace rather than seeking to regulate it into existence
• Any new EU policy initiatives must be justified by rigorous evidence-based justification and quantitative cost-benefit analysis

The process of consultation was positive and led to an open and constructive dialogue between market participants and EU policymakers. It was initiated under the new consultative procedures laid down by the new ‘Lamfalussy Process’ and is a good omen for the future, though it remains to be seen how much heed the Commission will take of the Group’s recommendations.

I would like to focus on two issues, which are of particular importance to the Irish insurance sector:

Streamlining current supervision of EU groups, conglomerates and pan-European players: It makes no sense whatsoever for pan-European groups to have a multiplicity of supervisors with varying rules based often on diverging interpretation of the same EU legislation. Whilst an overall EU prudential framework is in place there is a considerable degree of divergence in practice due to the fact that the implementation and day-to-day interpretation of this legislation remains the preserve of each Member State. Needless to say such duplication can add considerably to costs. It can also be argued that the current situation undermines the overall effectiveness and quality of the regulatory environment for those groups, as no one regulator has an overall responsibility for group supervision.

The work currently underway in the Solvency II discussions is likely to exacerbate these problems as the focus of regulation moves to identifying and controlling operational risk in each operating unit.

The potential for significant variance in practice between supervisors is significant, unless this is addressed effectively by CEIOPS. The possibility also of individual supervisors ‘gold plating’ solvency II should not be ignored.

The solution to these problems requires streamlining and increased centralisation of supervision for pan-European groups. For groups operating in two or more Member States (via subsidiaries, branches or freedom of services) the regulator of the parent company should be appointed as the single European regulator for that entity with defacto and de jure responsibility for regulating all Group entities.

The key advantages of this approach would be:
• Streamlined regulatory reporting
• More efficient one-stop-shop for all regulatory issues impacting on trans-national companies at a European level
• More effective regulation as one regulator has a complete overview of the Group and how it operates
• More efficient use of capital and resources both for the companies concerned and regulators

There are clear implications for the regulatory landscape in Ireland as and when the inevitable move towards more centralised European supervision takes place. The challenge for Ireland is how to position itself to be an attractive location for international insurance groups to locate their European headquarters. In the recent budget we made a positive step forward in changing our tax rules. We must also make sure that our current status, as a pro-business location is not undermined by the way in which IFSRA and government approach the regulation of the financial services sector in Ireland over the next few years.

Fostering organic development of EU marketplace: Market convergence will be slow to evolve given the different starting points of existing market practices and methods of conducting business. It is not possible to regulate a single market into existence, this can only happen through individual operators exploiting business opportunities where they clearly exist. However, markets will converge over time driven primarily by the influence of European operators who will seek to exploit commercial opportunities by developing a European business model that will produce economies of scale and increase convergence of practice.

The international financial services sector in Ireland has a key role to play in this regard. Insurance companies based in Ireland have been to the fore in showing how business can be transacted across borders under existing EU legislation. We have the practical experience and know what the real difficulties are in doing business in different markets. This experience will be invaluable to the Commission in seeking to optimise the existing legislation by challenging and removing national provisions that frustrate the ability of insurers to do business across borders.

We have come along way over the past few years in increasing and improving the degree and quality of the interaction between the insurance industry and the EU authorities.

There is now general acceptance of the need for and importance of regular consultation with the industry on future legislative and supervisory changes. However this change imposes significant responsibility on the industry consultation is a two way process and the industry must deliver timely, well thought out and relevant input which reflects the views of commercial operators.

To shape the future regulatory landscape for the European insurance sector is a huge opportunity and challenge. The European Commission needs to know what the real practitioners want, how we see the EU single market evolving, what sort of business models we wish to use to exploit the opportunities of the new marketplace. If we as insurers don’t have a clear vision of what we want, then others outside our business will create the future for us.

So, what happens next? Following publication of the reports, the Commission has invited comments by the end of September. As part of the public consultation process, a conference will be held in Brussels in June.

In the autumn, the Commission will publish the reactions to the Reports. Following that, sometime early in 2005, the Commission staff will then present their own proposals based on the expert groups’ reports, public reactions to them, and the views of Member State governments. A final plan should be adopted in the spring of 2005.

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