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Differences in national insurance contract laws play only a minor role in the supply of cross-border insurance of large risks. This is largely due to the bargaining position of the parties involved and the parties generally understanding their insurance needs and the nature of the contracts.
The main reason for the relatively minor impact of differences in national contract laws on cross-border insurance provision of large risks is due to the parties’ ability to negotiate and choose the relevant law (and jurisdiction) to apply to the insurance contract and, to a lesser extent, the application (by choice and custom) of supra-national conventions.
MAT insurance – the insurance of ships (damage and liability), aircraft (damage and liability) and goods in transit - is an important segment of large risk insurance. The insurance market for these risks is international and by definition entails cross-border trade in insurance.
MAT risks associated with EU member states constitute part of a larger, global whole and arrangements for their insurance do not differ substantially from those for the insurance of non-EU risks. MAT risks are often insured using the same policy forms whatever the risks’ national origin. There is no evidence of problems with the supply of MAT insurance products: indeed, the markets are frequently characterised by over-capacity and an excess of insurers willing to provide cover.
It is therefore reasonable to assume that differences in national insurance contract laws have little or no impact on the insurance of MAT risks.
Similar considerations apply to the insurance of large non-marine risks (property and liability).
Very large non-marine risks are often placed internationally on a subscription basis, by insurers based in more than one EU member state. Again, this necessarily entails cross-border trading. Differences in the insurance contract laws of EU member states are not an important consideration in this process.
International markets for large risk insurance are relatively open to the introduction of new capacity. Such capacity is driven by the search for profits and is heavily dependent on the state of the market. It is not affected by issues such as differences in insurance contract law within the EU.
The EU’s legal framework for insurance, as set out in insurance directives, makes it reasonably easy for EU insurance undertakings to carry on business from other member states on either a services or an establishment basis. It therefore encourages EU insurers to carry on such insurance.
An EU insurer considering whether to enter the large risk insurance market will consider very carefully whether this is likely to be profitable long-term. This will entail assessment of a range of factors: the ability to choose the law applicable to contracts may be a positive feature, but is very unlikely to make a material difference to the insurer’s business strategy.
Nor will it affect decisions on whether to carry on business on a services or establishment basis.
Differences in national insurance contract laws may have some impact on the supply of insurance of mass risks cross-border, however, other more important factors than contract law differences affect insurers’ decision to offer (or not to offer) such insurance contracts.
These other factors include ‘knowing your customer’, understanding the true risk proposed for cover (which will necessitate a thorough understanding of the applicable law, local legal interpretations in the courts, the interaction between different branches of law, and customs), language, culture (including expectations of the local policyholder), the form and prevalence of frauds (particularly in respect of motor insurance), the tax environment (particularly in respect of private pension products) and supervisory environment.
Although Rome I, Art. 7, sets out limits on the ability of parties to an insurance contract to choose the law applicable, it allows member states to grant greater freedom of choice of law.
It would be helpful to understand which member states have done this and whether it has affected the provision of mass risk insurance within those member states on a cross-border basis.
Insurance Europe is not aware that the current EU legal framework on choice of law in cross-border insurance contracts for mass risks poses an obstacle to the supply of such contracts.
This is because other factors such as language, culture, ‘knowing your customer’, local customs, and legal-, tax- and supervisory environments are likely to have a greater impact on the decision to provide cross-border insurance of mass risks than the ability to choose the law applicable to the contracts.
Some EU non-life insurers do carry on mass risk business on a cross-border basis. Rather than trying to sell the same contracts as they provide in their home state, they may work with insurance intermediaries in the host member state to offer insurance contracts that are in line with the expectations of local customers. Often the contracts will be subject to the law of the host member state, which is usually the member state where the risk is situated and the policyholder has his habitual residence. Not only does this comply with Rome I, Art. 7, it is generally in line with customer expectations.
Making the contract subject to the law of, say, the insurer’s home member state would mean that, in the event of a dispute, the customer would either have to bring a legal case in the insurer’s home member state, which is likely to be a costly process, or a court in the host member state would deliver a ruling based on the law of another member state, probably an unsatisfactory procedure. This is likely to affect the ability of the insurer to sell the product. So the choice of local law to govern a contract is not just a matter of legal compliance, but has a commercial motivation as well.
There are some cross-border contracts where this does not apply, for example, the insurance of holiday homes, where the policyholder may be resident in a different member state from that in which the insured risk is located. If the policyholder is resident in the same member state as the insurer, they may prefer the contract to be subject to the home-state law. Such contracts make up only a negligible proportion of total EU property insurance.
Defining the term “insurance contracts” remains the biggest obstacle to the analysis of whether contract law obstacles affect the provision of cross-border insurance.
Separate from pure national contract law provisions, national “general good rules” may also in some instances be used to discourage cross-border provision of insurance into a member state.
The extent to which a particular aspect of national contract law impacts the provision of cross-border insurance will vary between member states and from insurance product to insurance product. In the event that identified contract law obstacles were resolved, a host of other important factors would remain that impact the provision of cross-border insurance contracts.
These other factors include ‘knowing your customer’, understanding the true risk proposed for cover (which will necessitate a thorough understanding of the applicable law, local legal interpretations in the courts, the interaction between different branches of law, and customs), language, culture (including expectations of the local policyholder), the form and prevalence of frauds, the tax environment and supervisory environment.
For example, the provision of certain private pension products will depend on the relevant tax regime in place. Similarly, studies have found that consumers in some member states prefer national insurers as they are more trusted than foreign insurers that may not have previously had a presence in the market. Such consumer bias is unlikely to be overcome merely by addressing possible contract law obstacles.
Insurance Europe is not able to provide details quantifying the additional costs arising from differences in particular aspects of national contract laws.