COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(91) 55 final 
Brussels, 22 February 1991 
REPORT OF THE COMMISSION TO THE COUNCIL CONCERNING 
THE OPERATIONS REFERRED TO IN DIRECTIVE 79/267/EEC OF THE 
5TH MARCH 1979 AND UNDERTAKEN BY COMPOSITE AND SPECIALISED COMPANIES 
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REPORT OF THE COMMISSION TO THE COUNCIL CONCERNING 
THE OPERATIONS REFERRED TO IN DIRECTIVE 79/267/EEC OF THE 
STH MARCH 1979 AND UNDERTAKEN BY COMPOSITE AMD SPECIALISED COMPANIES 
Introduction 
Tho roport 
Article 39 paragraph 2 of directive 79/267/EEC of 5th March 1979 
(subsequently referred to as the first life directive) says : 
"Following a period of 10 years from the ratification of this 
directive, the Commission shall submit to the Council a report 
dealing with the operations of the two types of undertakings 
covered by this directive : that is to say, those undertakings 
which carry on simultaneously the activity covered by the first 
coordination directive (non-life insurance) in addition to the 
activity covered by this directive and those undertakings which 
carry on only the activity covered by this directive." 
In addition, Article 18 of directive 90/619/EEC of 8th November 1990 
(the second life directive) specifies the regime for free provision of 
services in life assurance which is to apply to composite companies. 
Paragraph 2 of this article reads as follows : 
"This article will be reviewed In the light of the report to be 
prepared by the Commission in accordance with Article 39(2) of 
the first directive." 
In accordance with these provisions, this report reviews : 
the operation of specialised companies in the Community since 
1979 ; 
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the application by Member states of the arrangements required for 
composite companies ; 
whether the restrictions of directive 79/267/EEC can still be 
justified. 
The initial leflaj regime 
The first life directive established a legal regime which at the time 
was intended to protect the interests not only of life assurance 
policyholders, but also of non-life policyholders, it was also 
intended to be a significant step forward in coordinating the 
requirements for authorisation and conduct of business in life 
assurance and in the creation of agencies and branches in other 
Community countries in a coordinated manner. 
This directive established the principle of specialisation, that an 
insurance company can only carry out one of the two types of business, 
either life, or non-life business. 
However, it restricted the application of this principle to new 
companies, by forbidding the creation of new composite companies. It 
allowed Member Statee either to permit existing composites to continue, 
or to require that they convert to specialised companies. 
Some Member States, such as Germany, Greece and Denmark, have chosen to 
impose specialisation, but it is worth noting that they were not 
obi iged to do so. 
Some requirements were also laid down concerning the relationship 
between the) life and non-life activities within a composite company or 
between separata but related life and non life companies. For the 
former, separate management and accounting were required, and for the 
latter the supervisory authorities were to ensure that the accounts of 
the companies concerned were not distorted by agreements between the 
companies or by any arrangement which could affect the apportionment of 
expenses and income. 
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The leoal and economic environment 
Any report which aims to review the management of composite and 
specialised companies In those activities covered by the first life 
directive, cannot be prepared 'in abstracto', but must take into 
account the changes since 1979 in the legal and economic environment 
for life assurance in the community. 
a) The overall programme for the completion of the single market by 
31.12.1992, described and outlined in the 1985 White Paper, was 
approved by the Member States and incorporated into the Single 
European Act in 1986. This eased the adoption of the necessary 
texts in particular by extending the use of qualified majority 
voting. The emphasis is now on mutual recognition of the systems 
in different Member States and on the freedom of consumers to 
choose between products and companies throughout the Community. 
in this perspective, the second life directive laid down the 
means for the introduction of free provision of services and the 
proposal for a third life assurance directive extends this 
freedom and createe the single licence system. 
These important changes to the texts mean that It is necessary to 
examine closely whether the restrictions on composite companies 
are still justified. 
b) In the wider area of financial services, the last ten years have 
seen major developments in the direction of despecialisatIon, and 
the creation of large financial groups, often with very complex 
structures. This Is certainly the case in the investment 
services sector, but also in the banking sector, where 
despecialisation has already been accepted in the 2nd banking 
coordination directive, which requires ail Member States to allow 
access to their market for 'universal banks' approved in another 
Member State. The insurance sector has also been affected by 
similar developments. All sorts of different financial services 
may now be offered by different specialised companies within a 
group, or in some cases by a single company with separate 
managements or 'Chinese waI Is'. 
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In several countries, insurance companies that are subsidiaries 
of banks are taking an Increasing market share in life assurance 
and financial groups are thus being formed covering several areas 
of financial services. Within a single group it is now possible 
to find companies offering life assurance, non-life assurance, 
banking services and stockbroking. The insurance products may 
actually be sold by a bank within the same group. The staff may 
be shared between the different companies, sometimes even 
employed by a separate company whose only activity is to provide 
services to the other group companies. The assets of the group 
companies may all be managed by a single company. 
In parallel with these developments, technological progress in 
the last decade has made it much easier to operate systems of 
separate management and accounting for composite companies. 
This kind of economic and technological development must be taken 
into account In reviewing the position of composite companies. 
It would not be appropriate for legislation to hinder a natural 
development of the market, if this is not necessary for 
prudential or consumer protection reasons. 
The Second life Plrefitlv* of 9.11.199Q 
This directive gave full freedom for the provision of services In life 
assurance to existing composite companies until 31st December 1995. 
From this date, in the absence of any further legislation stemming from 
the report requested in the first Directive, composite companies would 
no longer be* able to operate by free provision of services in those 
countries»«filch are 'specialised'. 
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Preparation of the, roport 
In order to prepare the required report, Directorate General XV sent 
out a questionnaire to the Member States in February and March 1990. 
Although satisfactory replies were received, they showed that the 
subject deserved a more thorough investigation. As a result, it was 
decided that a more detailed survey should be carried out by an 
independent body. The Commission Consultative des achats et marchés 
(CCA.M.) of the Commission chose Price Waterhouse from amongst the 
many bodies who indicated their availability for this type of survey. 
This company carried out a large number of interviews with supervisory 
authorities and with the Insurance industry representative bodies in 
all Member States In addition to submitting written questions. 
The Commission would like to thank the many people in supervisory 
authorities and in professional associations who replied in person or 
in writing to the questions put by the consultants and who organised 
meetings with them. 
The roam ta of the survey 
The consultants were particularly asked to look at the following 
questions : 
Are the current regulations sufficient for the control of 
composite companies ? 
— Should they be either reinforced or relaxed 7 
Can the current restrictions on composite companies still be 
justified 7 
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A large amounf of work was done by means of interviews, research and 
analysis, and this led to consideration of three major areas. These 
are the financial position of companies, the practical problems of 
allocating Income and expenses in composite companies, and the problems 
of winding-up. 
1- The financial position of life assurance companies 
The first important observation is the very high level of 
financial security offered by companies offering life assurance 
products in the Community. Over a ten year period, out of the 
more than 4000 companies authorised within the Community, there 
have only been 4 cases of winding-up. At I of these were 
specialised companies. There have been therefore no cases of 
winding-up of a composite company, although over the same period 
there have been several failures of specialised non-life 
companies. Overall it must be said that there are very few 
instances of failure. 
There is then the more general question of whether composite or 
specialised life assurance companies have experienced financial 
difficulties. The replies of Member States show that in several 
cases, supervisory authorities have felt it necessary to 
intervene to ask for additional information or to take 
appropriate measures to deal with financial difficulties. 
However, these cases have been resolved efficiently without 
needing to invoke the procedures for withdrawing authorisation. 
Thes# observât Ions, which are covered in more detail in the 
iltanta' report, show that : 
the control systems In life assurance, based on the system of 
prevention and resolution of problems, set out in the first 
directive, but organised in different ways in different 
Member States, have proved their effectiveness over the last 
ten years. 
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life assurance policyholders with a composite company, 
together with lives assured and beneficiaries, are no less 
mLLOLaXflclfld than with a specialised company. 
2. The practical working of the arrangements for composite companies 
imposed by the first directive 
In order to protect the interests of life policyholders within a 
composite company, the first life directive required such 
companies to adopt separate management and accounting and in 
particular to separate all Income and expenses as appropriate 
between the life and non-life branches. It also laid down strict 
rules regarding the transfer of solvency margins between the life 
and non-life sectors of a composite company. 
in general the regime laid down for composite companies by the 
first life directive appears to have worked well. All the Member 
States have correctly implemented the requirements in their 
legislation and there have been no major difficulties in 
installing separate management and accounting systems in 
composite companies. The possibility of transferring the 
solvency margin between the life and non-life sectors has been 
used rarely; where it has been used, no difficulties have 
occured. 
However, several Member States did indicate some difficulty in 
the allocation of items to one sector or the other, not as a 
result of the European regulations, which seem to be sufficiently 
precise, but simply on a practical level. 
The split of items between the two eectors and the control of 
this allocation can indeed be y^ry complex, because distribution 
channels, computer installations, investment departments and even 
the administrative staff are often shared between the two 
sectors. 
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However, this problem Is not peculiar to composite companies 2nd 
occurs in Just the same way where two specialised companies, one 
in life, the other in non-life, belong to the same group. In 
this case there is also the risk that the accounts of the 
companies could be distorted by agreements between them or by any 
arrangement which could influence the allocation of income and 
expenses. This possibility is foreseen explicitly by Article 13, 
paragraph 2 of the first life directive. 
The requirements for separate management have also led to 
cooperation between supervisory authorities in the Community. 
This has taken the form of exchanges of view and communication of 
the national texts applying, within the framework of the 
Conference of Insurance Supervisory Authorities of the EEC 
countr ies. 
This Conference does indeed seem to be the appropriate body to 
tackle these practical problems. 
3. The problems of winding-up of life assurance companies 
Although the statistics show that the risk of winding-up of 
either a composite company or a specialist life assurance company 
is very small, as a result of the general economic environement 
and the existence of a we 11-organised supervisory system, amongst 
other factors, it is nevertheless important to consider the 
position of life policyholders in the event of a winding-up. 
In tha event of a winding-up of a composite company, full 
separation of assets and proper allocation of income and 
expenditure would be of great importance to ensure the 
contractual rights of policyholders. However, as the report 
shows» these practical questions are not confined to composite 
companies but also concern specialised companies, in particular 
when they form part of a group, it is a!so necessary to ensure 
that the assets covering life policyholders' liabilities are 
allocated to life policyholders, and thai Ucy have as high a 
ranking as possible in their claim on otu^r assets, and in 
particular rank above the unsecured credit:;-* of ;:ha insurance 
company. 
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Ali of these questions are part of a wider problem, that is 
whether policyholders are sufficiently protected in the event of 
the winding-up of an insurance company. These issues should 
therefore be examined in the context of the proposal for a 
directive concerning the winding-up of insurance companies 
(Amended Commission proposal of 18th September 1989 - O.J. N' C 
253 of 6th October 1989). Taking into account the very limited 
number of cases of winding-up during the period considered in the 
report, this should however not be regarded as a prior condition 
for reviewing the current position of composite companies. 
conclutlona 
These observationa and analyaea lead to the following conciuaions : 
1. The Current rujes on separate management and accounting are 
being correctly and seem to be sufficient, it does not seem 
neceesary either to reinforce or to relax them. 
2. There la no evidence that the system of specialisation may offer 
in practice greater protection to life policyholders than the 
composite system. 
There is therefore no Justification for maintaining the current 
restrictions on composite companies either in respect of the 
freedom of establishment or free provision of services. 
a) Compoalta companies should therefore be allowed to create 
composite branchée and agencies throughout the community. 
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b) Similarly, they should be able to operate by free provision 
of services throughout the Community, even after 31st 
Oecember 1995. 
c) For the same reasons, it also seems necessary to Iift the 
current ban on the creation of new composite companies, or at 
least allow Member States to lift this restriction for 
companies created within their territory. 

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