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Monday, May 1, 1989
Preparing for 1992

South African assurers who recently announced the establishment of offices in the UK are faced with more than the challenges presented by that country. European assurers and reinsurers are gearing up for significant changes following the introduction of a common market and free circulation of financial products in the European Community (EC) at the end of 1992.
A single insurance market will give players competitive advantages in the European market and the muscle to take on the United States and Japanese insurance giants.
Mercantile & General’s London-based parent office has produced a report outlining the background of the changes and implications for the industry. The main markets in the EC are West Germany, UK and France. But the Italian, Portuguese and Spanish industries have already shown the greatest potential.
The common market process, together with encroachment of foreign companies, has led to rationalisation. This has assisted firms in combining resources either to protect themselves against acquisition or to seize opportunities abroad. The trend is expected to continue with even the huge UK groups considering alliances.
The Allianz, one of Europe’s leading insurance companies continues to build its international network. Lloyd’s of London is already authorised to transact in France, the Netherlands and Ireland and recently got the go-ahead to operate in Italy. Further expansion into West Germany, Greece and other parts of Europe is planned.
With regard to smaller companies, M&G notes, “The indications are that the need to merge resources with similar sized operations, (across borders where appropriate) has been recognised as well as to develop products and outlets to match and compete with the larger units.”
Small and medium-sized regional operations are, however, expected to continue their role as national, linguistic and cultural influences provide a measure of protection, particularly in the initial stages. But consumers are expected to review their insurance position, “The power of the giants through the national and local media, and increasing price and product competition will cause many insureds to re-examine their protections.
“It will be on such aspects, plus critically, on service that the smaller players will have to base their defence and attack,” says Mercantile & General.
The prospect of 1992 is said to be especially exciting for life assurers. This line has overtaken motor business in several European countries as the most important source of premium income.
M&G notes that problems brought on by lower birth rates may be alleviated. “Throughout Europe pension schemes face funding problems as a result of the growing proportion of the retired to active population. Life assurance has already begun to exploit this shortfall and is widely predicted to expand in this area in the single European market.
“The keys to exploiting this vast potential beyond traditional national boundaries are distribution and the freedom of product development.”
On the other hand, reinsurers have effectively operated in an open market since 1964 and changes in the regulatory framework are not expected to have any immediate impact.
Looking ahead, M&G notes, “Changes may occur as a result of 1992 but these are only the kind of structural changes which constantly take place in response to changes in the underlying condition of economies, technology, mergers and groupings within direct markets.
“Furthermore, reinsurance markets are, from time to time, perceived as having interesting investment potential, thereby attracting newcomers to the market with a consequent effect on capacity, pricing and profitability.”

The foundations for an integrated European economic community started with the Treaty of Rome, signed in 1957. According to M&G the Treaty contains two Articles fundamental to the breaking down of existing barriers to trade and of particular importance to assurers.
Article 52 states: “restrictions on the freedom of establishment of nationals of a member state in the territory of another member state shall be abolished.” A further article says: “Restrictions on freedom to provide services within the Community shall be progressively abolished.”
For the insurance sector, progress towards these freedoms has been extremely slow.
Mercantile & General notes, “At the outset a timetable was laid down for the implementation, envisaging that freedom of services and establishment for reinsurers would be introduced by the end of 1963, followed six years later by life and non-life insurance business.”
Progress on the reinsurance side was fairly rapid and the objectives were achieved by 1964. However, developments in other areas have been slow and it took until 1973 before the Establishment Directive was adopted for non-life business. Six years later agreement was reached on the life side.
The economic recession of the 1970s has been blamed for the slow progress as member states concentrated on the protection of their national markets rather than tackle the question of a common European economic framework. The first positive step towards freedom of services came in June 1980 when the coinsurance of risks by member states was allowed.
Problems regarding coinsurance followed and these highlighted the difficulties involved in the creation of a common insurance market. However, June 1985 saw a breakthrough when the European Commission brought out its White Paper which reviewed the state of the common market and outlined a timetable to overcome problems.
Mercantile & General believes, “The new timetable created a renewed sense of urgency. Since 1986 some further progress has been achieved resulting in the Council of Ministers agreeing in December 1987 to a number of proposals which formed the draft Non-Life Services Directive which takes effect in 1990.”
The impact of “1992” will vary from one sector of the industry to another. The short-term market is expected to change dramatically while movements on the life side will be slower in the immediate future.

Copyright © Insurance Times and Investments® Vol:2.5 1st May, 1989
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