Regulation and Efficiency in European Insurance Markets

EU Policy towards insurance matters has not resulted in a move towards a common European market in insurance products. Ray Rees and Ekkerhard Kessner of the Staatswirtschaftliche Institute at Munich University reach this conclusion in a paper in the October issue of Economic Policy. There have been far-reaching changes in many insurance markets as a result of the directives of July 1994 which aimed to remove obstacles to competition, but in an examination of the British and German markets the two economists see two failures. There has not been any growth in ‘cross-border’ trade and there has been no influx of new entries from abroad into the profitable German market. “There is therefore no sign as yet of the growth of a 'single market’ in insurance products, and market analysts do not expect there to be.”

Germany and Britain are taken as the two key countries for not only are they respectively the largest and second largest markets for insurance in the European Union (together they account for almost 30% of premium income), they also had contrasting regulatory regimes at the time of the crucial European directives in 1994. The German industry was tightly regulated in such areas as reserve requirements, entry qualifications and contract conditions. In 1982 the British market underwent major changes leading to a light regulatory regime. The policy directive should have favoured a general move towards a British, and French, model in Europe because of the competitive advantages enjoyed by firms operating in more liberal environments. In their analysis of British and German firms, Rees and Kessner show that the former are more efficient.

But in spite of this, cross-border trade has not increased, nor has the foreign share of the German market. There are many reasons: insurance law, for example, means that a German buyer of a British life policy would have to pursue a legal disagreement through a British court. The authors say that for a wider market to emerge there has to be a standardisation of relevant laws, which is a matter of public policy. The fact that 80% of distribution of the German market is in the hands of insurance subsidiaries and tied agents helps keep foreigners out, as does the strength of German insurance companies. Allianz, for example, is the largest firm in Europe.

But European policy has had some effect in Germany – there is a more competitive market for auto insurance where prices are now falling. Life insurance policies are being offered with equity linked components.

The conclusion is that if European Commission policy aimed to create a single market in insurance, “it has been a failure and will continue to be so unless a legal framework is developed within which standardised insurance contracts can be brought and sold across national boundaries.” The authors demand that centralised premium setting should not be exempted from competition law. There also should be more information on the solvency of individual companies which would ultimately “transform the activity of solvency regulation into solvency rating” – in other words make the market more responsive to appropriate economic signals. 

Notes for Editors :

Economic Policy is published in association with the European Economic Association for the Centre for Economic Policy Research, the Center for Economic Studies of the University of Munich and the Département et Laboratoire d’Economie Théorique et Appliquée (DELTA), in collaboration with the Maison des Sciences de l’Homme.  

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The Authors :

Ray Rees and Ekkerhard Kessner are Professors at the Staatswirtschaftliche Institute at Munich University.