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COMMISSION
OFTHE
EUROPEAN COMMUNITIES
GeneralSecrétariatCOM(81)449 final
Brussels,10thSeptember 1981
FOROFFICIAL USEONLY
EFFECTS ONCERTAINFINANCIAL REQUIREMENTS ONTHESITUATION
INTHEINSURANCE MARKETSINTHEMEMBERSTATES
(ReportfromtheCommission totheCouncil)
COM(81)449final

Non-lifeν
insurance
ReportbytheCommissiontotheCouncilunderCouncil
Directive73/239/EEC,Article34,andCouncilDirective
76/580/EEC.Article3.
Summary
Article34ofCouncilDirective73/239/EECcallsupontheCommissionto
reporttotheCouncilontheeffectsofthefinancialrequirements imposed
bytheDirectiveonthesituationintheinsurancemarketsoftheMember
States.
TheenquirycarriedoutbytheCommissiontofulfilthisobligation shows
thattheresultssofararegenerallypositive,althoughitmustbestressed
thatforsomeMemberStatesdelaysinapplyingtheDirectivehavemeantthat
theobservationperiodhasbeenrathershort.Atleastitcanbesaidthat
certainfearsexpressedwhentheDirectivewasintroducedhaveproved
groundless :itisonlyinexceptional casesthatinsuranceundertakings
havehadproblemsinmeetingtt?efinancialrequirements .Ontheotherhand,
theserequirements andthemachineryforautomaticintervention contained
intheDirectivehavecontributedtothehealthoftheCommunityinsurance
market.
Withintheframeworkofthisgeneralobservation,thefollowingpointsmay
benoted.
1.Themainpositiveresulttoemergefromtheenquiryisthat,inthe
lightoftheirexperiencesofar,thesupervisoryauthoritiesare
satisfiedwiththecriteriaforthesolvencymarginandtheguarantee
fund-laid downinArticles16and17oftheDirective.
InmostMemberStatesonlyafewexceptional insuranceundertakings have
haddifficultyincomplyingwiththesolvencymarginrequirements .
ItwasonlyinItalythattheaveragemargincalculated byreference
tothenetasset/premiumsratiowasbarelyadequate.Moreoverthe

-2-
settingofaminimummarginhasnotLedtoatendencyforthehigher
marginsprevailinginmanyMemberStatestobereduced.
2.InmanyMemberStates,changesinthemarketstructurecameabout
throughundertakings givingupbusiness,transferring portfolios,
mergingandsoon.ThemaincausewasthattheDirectivemadesuper­
visioncompulsoryforallclassesofnon-lifeinsurance.Whilstthe
natureandextentofthechangesvariedfromonecountrytoanother,
theywerenowherefelttobeseverelydisruptive.
3.InsomeMemberStates,thenumberofauthorizations fortheestab­
lishmentofbranchesoragenciesofCommunity-based insurersincreased
markedly.Inmanycases,however,thisrepresentstheformalauthori­
zationofalreadyexistingbranchesoragenciesornewestablishments
which,underthealreadyliberalpolicyoftheMemberStateconcerned,
wouldinanyeventhavebeenauthorized.Itisstilltooearlytotell
howsignificanttheeffectoftheDirectivewillturnouttobeinthis
respect.
InaccordancewiththeobligationlaidonitunderCouncilDirective
76/580/EECof29June1976,theCommissionproposesthatthereshould
atpresentbenochangeintheamountsexpressedinunitsofaccount.

<' REPORT
TheFirstCouncilDirectiveof24July1973onthecoordination oflaws,
regulationsandadministrative provisionsrelatingtothetakingupand
pursuitofthebusinessofdirectinsuranceotherthanlifeassurance
(75/239/EEC,hereinafterreferredtoas"theDirective")provides,in
Article34(1),that"theCommissionshallsubmittotheCouncil,within
sixyearsfromthedateofnotificationofthisDirective,areportonthe
effectsofthefinancialrequirements imposedbythisDirectiveonthe
insurancemarketsoftheMemberStates".Furthermore CouncilDirective
76/580/EECof29June1976,whichamendstheDirective,providesthat
everytwoyearstheCommissionistomakeaproposaltotheCouncilon
thebasisofwhichthelatteristoreviewtheamountsexpressedinunits
ofaccountandifnecessaryalterthem.
Withaviewtomeetingtheseobligations,theCommissionsentthequestionn
aireappearinginAnnex1totheinsurancesupervisoryauthoritiesofthe
MemberStateson31May1979.Thepresentreportisbasedonthereplies,
thelastofwhichwasreceivedon29April1980.
TheprincipalfinancialprovisionsoftheDirectivearethoseconcerning
theestablishment ofasolvencymarginandaguaranteefund(seeArticles
16and17and,forinsuranceundertakings whoseheadofficeisoutside
theCommunity,Articles25and26).Itmustbeborneinmind,however,
thattheDirectivecontainsotherprovisionsofanon-financial nature
whoseeffectscannot,incertaincases,bedisentangled fromthoseofthe
strictlyfinancialrequirements .Seenfromthispointofview,themost
importantsuchnon-financial provisionsarethefollowing:
-therequirementthatallclassesofnon-lifeinsuranceshall
besubjecttosupervision (certainclassesofinsurancehad
previouslynotbeensubjec.ttosupervision incertainMember
States);
-therequirementforinsuranceundertakings toadoptoneof
thelegalformsprescribedinArticle6(1)(a);
-theprovisioninArticle6(1Kb)thatanundertaking
carryingoninsurancebusinessmustlimititsactivities
tosuchbusinessandoperationsdirectlyarisingtherefrom
totheexclusionofallothercommercialbusiness.

-2-
Theremainderofthisreportdealswithparticularmattersintheorder
inwhichtheyappearinthequestionnaire .
1.Application oftheDirective
Article35,secondsubparagraph,laysdownthattheDirectiveshouldcome
intoforceon1February1976,butmanyMemberStateswerelateinintro­
ducingthenecessarylegislative andothermeasures,whichevenwhenadopted
didnotnecessarily haveimmediateeffect.DetailsaregiveninAnnex2.
ItwillbenotedthattheNetherlands hasevennownotyetadoptedthe
appropriatelegislation,althoughitisinpracticegivingdirecteffect
tothemainprovisionsoftheDirective.
AllMemberStateshaveremarkedthattheobservation periodistooshort
forconclusionsreachedabouttheeffectsofthefinancialrequirements
oftheDirectivetobeotherthanprovisional .
2.Effectsuponinsuranceundertakings
(a)NoMemberStateconsideredthattheapplicationoftheDirectivehad
led,saveinexceptionalcases,toanappreciableincreaseinthefree
assetsofundertakings,aconsiderable increaseintariffsora'slowing
downofbusinessexpansion.Wheresuchchangeshadoccurred,theywere
attributedprimarilytootherfactors.OnlyFrancereportedthatsome
fifteenundertakings hadexperienced somedifficultyinadaptingthemselves
tothenewrequirements .
IntheUnitedKingdom,wheremanycompanies,havingexperienced afall
insolvencymarginsduringtheyears1973-1975 (thoughnotbelowthe
levelsprescribed bytheDirective),raisedadditionalcapitalthrough
newshareissues,withoutcallingupcorresponding funds,itwasnoted
thatadvantagewastherebybeingtakenoftheprovisioninArticle16(1),
secondindent,underwhichone-halfofthenon-paid-upsharecapitalmay
betakenintoaccountincalculatingthesolvencymarginoncethepaid-up
partreaches25%.Somecompanieswereinconsequenceoperatingwitha
lowerpaid-upcapitalthanwouldhaveoccurredpreviously,andsomedoubt
wasexpressedwhethershareholders wouldpromptlymeetacallforadd­
itionalcapital.Stepswereenvisagedtorectifythissituation.

-3-
(b)Thesolvencyofinsuranceundertakings ismeasuredprimarilybythe
proportion whichtheirfreeassetsbeartotheannualpremiumincome.
TheDirectivelaysdownaminimumof16%or18%(Article16(3),first
result).Whilstundertakings whosesolvencymarginfellbelowthislevel
clearlyhadtobringaboutanincrease,therewasperhapsapossibility
thatthosewhosesolvencymarginhadpreviouslybeenwellinexcess
mighttendtocomedowntowardstheminimumrequirement .Thereplies
makequiteplainthatnosuchmovementhasbeenobserved.Inanumber
ofMemberStatessolvencymarginswere,andcontinuetobe,considerably
abovetheminimumprescribed bytheDirective.(Forexample,30-32%in
Germany,andinFrancefiguresrangingfrom21;58%to24.15%overan
eight-yearperiod).OnlyinItalyhadaveragesolvencymarginstended
tobebelowthelevelprescribed bytheDirective,butin1978had
increasedto16.97%.
(c)Undertakings whichraisetheirsolvencymarginincreasetheircapacity
bysodoingandarethusabletounderwritelargerrisks.Since,as
notedunder(a)above,theapplication oftheDirectivehasnotledto
awidespreadincreaseinundertakings' freeresources,itisnotsuprising
thatthisconsequence hasnotbeenobserved.
(d)Ontheonehand,thefearisoftenexpressedthattheheightened ,
competition expectedtoresultfromthecreationofacommonmarket
ininsurancemayLeadtodumpingpractices,whichwouldbeallthemore
easilycarriedoutwhereanincreaseincapacityresultedfromaraising
ofthesovencymargin.Ontheotherhand,however,itisassertedthat
thisfearisunjustified inthatinsurers,havingachievedtherequired
solvencymargin,mustthenstrivetomaintainitiftheywishtoavoid
intervention bythesupervisoryauthorities .
WhilstMemberStates,intheirreplies,continuetospeculateonthis
matter,theyallreportthattheyhaveinfactexperiencedlittleorno
dumping.Italydoesindeedremarkthat,withinitsinternalmarket,
certainenterprises hadengagedinaprice-cutting warwhichwent
againsttheprinciplesofsoundmanagementandhadresultedinthe
authoritiesforcingthewindingupoftenorsoundertakings,butthis
doesnotappeartobeacaseofdumpingasordinarilyunderstood.

-4--
Thegeneralviewofthesupervisoryauthoritiesisthatthesolvency
marginrequirementisusefulinpreventingwidespreaddumpingover
aprolongedperiod,whiletherearedoubtsaboutitseffectiveness
forthispurposeinlimitedcircumstances .
(e)Anumberofstudieshavebeenmadetocalculatetheprofitwhichan
insuranceundertakingmustmakeifitistomaintainitssolvency
marginat16%ofpremiumincome.Accordingtotheassumptions made
abouttherateofbusinessexpansion,taxationrates,reinsurance
policy,andsoon,thefiguremaybeasmuchas4%ofpremiums.Doubts
havebeenexpressedastowhethersuchaprofitmarginisrealisable
inthelongterm.
Thesupervisoryauthorities onthewholeadmitthatmanyinsurershave
expressedsuchdoubtswithregardtolong-termprospects;buttheydo
notsharethemunlessexceptionalcircumstances areenvis-aged.Their
generalviewisthatwell-managed businesseswithasuitablebalance
ofportfoliosoughttobeabletomaintainthemarginwithoutdiff­
icultyiftheyavoidexcessivefluctuations ofreceiptsandsucceed
inmakingasufficiently highpartoftheirinvestmentincome
availableforthispurpose._Thereisgeneralagreementthatthehigher
thelevelofinflation,thegreateraretheproblems(see11,below).
Anumberofcountriesremarkthatmaintenance ofthesolvencymargin
putspressureoninsurerstoseekgreaterproductivity andprofitability ,
inparticular byreducingtheirgeneralexpenses.Thisisseenasa
beneficialeffectoftheDirective.
ItalydrawsattentiontoaparticularproblemconfrontingItalian
insurerswithalargeshareofmotorinsurancebusiness.Premium
ratesinthissectorarecontrolled bytheState,whichkeepsthem
aslowaspossibleandsogreatlyrestrictsthepossibilities which
suchinsurershaveinmeetingsolvencymarginrequirements,especially
inaperiodofhighinflation.

-5-
3.Effectsonmarketstructure
Itwassometimessaidthatthesolvencyrequirements oftheDirective
wereexcessive,atleastforsomecountries,andthatalargenumberof
undertakings wouldbeunabletosatisfythem.Itwasthereforenecessary
toexaminetheextenttowhichsuchfearswereprovedjustified.
Itisinthisareain.particularthatitisdifficulttoseparatethe
effectsofthefinancialprovisionsoftheDirectivefromthoseofthe
non-financial provisions,referredtointheintroduction .
Moreover,theinformationrequestedunderthelettersCa)to(d)in
thequestionnaire isheretreatedglobally.
Belgiumisthecountrywhichreportsthemostpronouncedchanges.Of
445undertakings operatinginBelgiumbeforethelawapplyingthe
Directivecameintoforce,145werenolongerpresentby1979'.There
hadbeen83transfersofportfolios andanumberofmergers..Butit
mustbenotedthatbeforetheintroduction ofthenewlawtheonlyclasses
ofnon-lifeinsurancesubjectedtosupervision werethird-party motor
liabilityandaccidentsatwork.Moreoverthefiguresgivenabove
includeundertakings whosehead,officesweresituatedinotherMember
Statesandwhichwerethereforeunaffected bytheapplication ofthe'
solvencyprovisionsinBelgium.
InGermany,transportinsurancewasnotsubjecttosupervisionuntilthe
provisionsoftheDirectivewerebroughtintoapplication .Aconsequence
wastheexistenceofinsurersengagedsolelyintransportbusinessbut
associatedwithotherscarryingongeneralbusiness.Oncetransport
insurancewasbroughtundersupervisionthereasonforthisseparate
existencedisappeared anditisthis,ratherthanthefinancialprovisions,
whichprobablyaccountsforthetransfersofportfoliosobservedinthis
field.CertaintransportinsurersbasedinotherMemberStatespreferred
torenouncebusinessratherthansubjectthemselvestocontroL.
InotherMemberStates,thecessations,transfersandmergersrecorded
appearalmostentirelytorepresentthecontinuation ofanalreadyestab­
lishedtrend,althoughitisnotexcludedthattheapplicationofthe
Directive,includingitsnon-financial provisions,mayhavegivenafurther
impulse.IntheUnitedKingdomatendencyforcompaniesbasedinnon-
MemberStatestooperatethroughsubsidiaries ratherthanbranchesmay
havebeenaccelerated throughapplication oftheDirective.Thistiesup

-6-
withtheBelgianobservationthatcertainbranchesinBelgiumofnon-Member
Statecompanieshavebeenreplacedbybranchesofsubsidiaries ofthose
companies,thesubsidiaries havingtheirheadofficeswithinotherMember
States.
4-Otherfactorshavinganinfluenceoninsurancemarkets
Referenceismadetothese,whereappropriate,throughoutthereport.
5.Freedomofestablishment
TheDirectivehadthepurposeofbringingaboutagreaterinterpenetration
ofinsurancemarketswithintheCommunity.Itisthereforepertinentto
examinetheextenttowhichinsurersmadeuseofthefreedomofestablishment
facilitated bytheDirective.
(a)InsomeMemberStates,thenumberofauthorizations grantedforbranches
oragenciesofCommunity-based undertakings hasshownaclearincrease
intheperiodcoveredbythereport.Incertaincasesthisrepresents
authorizations issuedtoundertakings whichwereinfactalreadyestab­
lishedbeforetheDirectivecameintoforce,whereitwasmerelynecessary
inapplyingits.provisionstogiverecognitiontoanalreadyexisting
situation.Insomeothercases-suchasFrance,forexample-theunder­
takingsopeningbranchesoragencieswouldhavebeenabletodoso,owing
totheliberalauthorization policyofthehostcountry,eveninthe
absenceoftheDirective.Itwouldthereforebewrongtoattachtoomuch
weighttotheaccumulation ofsuchcasesintheperiodcoveredbythe
report.
Thisisparticularly trueoftheFederalRepublicofGermany.Overthe
periodfrom1971to1975onlysixauthorizations weregiventoinsurers
fromotherMemberStatestoestablishthemselvesinthatcountry,whereas
from1976to1979therewerenofewerthanforty-ninesuchauthorizations.
Thisveryhighfigureishoweveralmostentirelyexplainedbytheneed,
referredtoabove,forinsurersalreadyestablished intransportinsur­
ancetoobt'inofficialauthorization oncethenationallawapplyingto
theDirectivecameintoeffect.Similarly,asubstantialincreasein
thenumberofauthorizations inBelgiummustbeattributedlargelyto
theextensionoftherequirement forauthorization toareaswhereit
previouslydidnotapply.

-7-
Wheresuchspecialfactorsdonotapply,theviewgenerallyexpressed
byMemberStatesisthatitisstilltooearlytosayhowgreatachange
isbeingbroughtaboutbytheDirective.
(b)Asregardstheauthorization ofestablishment byinsurersbasedin
countriesoutsidetheCommunity,thesamefactorsappearlargelyto
haveapplied,butbecauseofthesmallernumbersitisevenharderto
drawconclusions .
(c)Ifthequestionislookedatfromthepointofviewnotofhost
countriesbutofthosewhoseinsurerswishtoestablishthemselves
inotherMemberStates,itisequallydifficulttodrawfirmconclusions.
ThusalthoughDenmark,Germany,Ireland,ItalyandtheUnitedKingdom
allappeartohavebeenawarethattherehadbeensomeincreaseinthe
numberofauthorizations issuedbyotherMemberStatestocompanies
basedintheirterritory,itispracticallyimpossibletodistinguish
thegenuinecasesofnewestablishment fromthoseresultingfrom
extensionsofcontrol.ForexampletheUnitedKingdomreportedno
fewerthan37newcases,butthesignificance ofthisisgreatly
diminished whenonerealisesthat29ofthesewereinGermany,where
theydoubtlessrepresentforthemostparttheformalauthorization
ofbranchesoragenciesalreadycarryingontransportinsurance.
6.Reinsurance .
(a)TheDirectiveprovidesthatincalculatingtheminimumsolvencymargin,
whetherbyreferencetopremiumsreceivedortotheclaimsexperience,
areductionistobemadetotakeaccountofamountsreinsuredtothe
extentthattheydonotexceed50%ofthegrossfigure.Therearose
thequestionwhether,inthelight,ofthis50%rule,thefinancial
provisionsoftheDirectivehadhadanyeffectonthereinsurance
policyfollowedbydirectinsurers.
Itwasnotpossibletoarriveatanyfirmconclusion.OnlyGermanyand
Denmarknoteaslightincreaseinreinsuranceinsomeisolatedcases
andonlyGermanyspecificallyattributesthisincreasetotemporary
difficulties createdbytheneedforundertakings toobservethere­
quirementsregardingthesolvencymargin.

(b)Sincereinsurance maynotbetakenintoaccount,forthecalculationof
thesolvencymargin,insofarasitexceedsthe50%limit,itwasthought
interestingtoascertaintheextenttowhichundertakings continuedto
cedemorethanthispercentageoftheirportfoliobywayofreinsurance.
ItappearsthatinallMemberStatesapartfromLuxembourgthere'are
insurerswhoreinsuremorethan50%oftheirportfolios.Ireland
considerssuchcases"abnormal"andinDenmarktheyarerare,typical
instancesbeingsmallmutuals,newlyestablished companieswhichhave
notyetbuiltupabalancedportfolio,orcompaniesseekingtorestore
asoundfinancialposition.
InFrance,theNetherlands andtheUnitedKingdomsuchreinsurance
isfoundmainlyinsmallercompanies,althoughintheUnitedKingdom
therehavealsobeencaseswheremembersoflargegroupshaveceded
100%oftheirbusinesstotheparentcompanyunderarrangements which
arenowbeingmodified.InGermanyinstancesofmorethan50%reinsurance
arenotuncommon,particularly amongspecialistinsurershavinghigh-
riskbusiness,whileinBelgium28%andinItaly26%ofundertakings
reinsuremorethanhalftheirbusiness(1).
ι
MinimumGuarantee Fund
Thequestionexaminedherewaswhethertheamountsoftheminimumguarantee
fundsetoutinArticle17(2)wereconsideredashavingeffectnotmerely
withregardtothepowersofintervention ofthesupervisoryauthorityunder
Article20(3)butalsoasestablishing aharmonised minimumcapitalrequire­
mentfornewlyestablishedbusinesses.
(1)TheBritishandIrishdelegations intheEuropeanInsuranceCommittee's
CommonMarketWorkingGroupemphasizedtheirfirmconvictionthatthe
wayinwhichreinsuranceisdealtwithintheDirectivedidnotappear
appropriatetothemandthatinparticularthe50%limitadoptedseemed
tothemtoraiseseriousdifficulties incertaincases,especiallyas
regardssmallandnewly-founded insuranceundertakings .

Thisturnsouttobeafalseproblem.Whilstviewsonthetheoretically
correctanswerdiffer,allMemberStatesagreethatinpracticenewly
establishedcompaniesneedfundswellinexcessoftheminimumguarantee
fundfigure,whetherornotthisisstatedinlegislation.Thedifference
intheoreticalinterpretation hasthusnotgivenrisetoanypractical
difficulties.
Appropriateness oftheamountslaiddownforthesolvencymarginandfor
theguaranteefund
(a)Solvencymargin-ThegreatmajorityofMemberStatesgivetheir
provisionalapprovaltothepercentagesfixedbyreferencetopremium
income(16/»and18%)andtoclaims(23%and26%),althoughseveral
remarkthatalongerobservationperiodisneededbeforeafirm
conclusion canbereached.
Denmarkremarksthattheadequacyofthesolvencymargindependsupon
theconstitutionofadequatetechnicalreserves,including,inits
view,equalizationreserves.Francedeclaresthatitcouldnotenvisage
areductioninthepercentagesandexpresslyurgestheretentionofboth
methodsofcalculation,eventhoughthatbasedonthevolumeof.claims
isseldomapplicable.TheNetherlands,whilstacceptingthatthepei–
centagesappliedinthecaseofinsurerswithasmallvolumeofbusiness
oughttobehigherthanforthosewithalargevolume,wouldliketo
seeaprogressivetransitioninsteadoftheabruptstepbetweenthe
percentages setoutintheDirective.
Germanyisaloneinconsideringthepercentagesappliedtopremium
incometobetooLow.InBelgium,theauthorities,whiledecliningfor
»thetimebeingtogiveanopinionthemselves,reportthattheinsurance
industryintheircountrythinksthesolvencymarginfigurestoohigh
unlesstaxreliefisgiven(seepoint12below)andthinksthatdis­
tortionsofcompetitionwillresultunlessthepremiumnetofcommission
istakenasthebasisinsteadofthegrosspremium.

-10
*\
(b)GuaranteeFund-Germany,FranceandIrelandfavouranincreaseinthe
guaranteefundrequirements,whereastheUnitedKingdomthinksthatthey
areunnecessarily highforsmallspecialistcompanies.
9.Relaxations
(a)Germany,FranceandtheUnitedKingdomaremakinguseoftheextended
timelimitsprovidedinArticle30(2)(a),andtheNetherlandsintends
todoso.Thenumberofcasesconcernedishoweververysmall.
(b)OnlyBelgiumandtheUnitedKingdomareavailingthemselvesofthe
dispensation providedinArticle30(2)(b).Thenumberofundertakings
concernedintheUnitedKingdomisashighas57buttheyoperateon
averysmallscaleandareofminimaleconomic ,importance.
10.Mutuais
TheDirectiveprovides,inArticle16(1),thatindrawingupthelistof
assetswhichrepresentthesolvencymarginformutualassociations there
shallbetakenintoaccountboththeeffectiveinitialfundandalsohalf
ofthepartoftheinitialfundwhichisnotyetpaidup,oncethepaid-up
partreaches25%ofthefund.Theseprovisionscorrespondtothoserelating
tothesharecapitalofcompaniesconstituted onanon-mutualbasis.In
addition,however,itisprovidedthatinthecaseofmutualassociations
withvariablecontributions thereshallalsobetakenintoaccount,subject
tocertainlimits,anyclaimsagainsttheirmembersforsupplementary
contributions .
Furthermore,inArticle17(2)(c),itisprovidedthatMemberStatesmay,at
theiroption,reducebyaquartertheamountoftheminimumguaranteefund
thatisrequiredofmutualassociations .
Severalreplies,althoughnotamajority,indicatedthatmutualassociations,
especiallythosewithvariablecontributions ,werethoughttohaveanadvan­
tage,comparedwithotherundertakings .
ThefollowingsumiTiaryindicatesthediversityofviews.

Belgium TheoptioninArticle17(2)(c)isexercisedinfavouronly
onlyofmutualswithvariablecontributions,whichthushave
anadvantageoverothers.
Denmark
Germany
France
IrelandTheprovisionsoftheDirectivecorrespondbroadlywith
previousDanishlawandarenotregardedasdiscriminatory.
Mutualswithvariablecontributions haveanadvantagein
beingabletotakeintoaccountsupplementarycontributions,
whichinanycaseenableamorerapidrestorationofthe
margintobebroughtabout.
Ingeneralmutualsdonothaveanadvantage,andthe
reductionintheminimumguaranteefundhashadnoinfluence
onthelegalformadoptedbynewundertakings.Butmutuals
withvariablecontributions havetheadvantageofgreater
flexibilityofmanagement;andnotaxischargedonthe
supplementary contributions .
NomutualinsurershavetheirheadofficeinIreland,but
itisfeltthatthesystemtendstofavourthosewithvariabl
contributions .
Italy Neitherkindofmutualassociation isthoughttoenjoy
advantages.
Luxembourg ApartfromtwoPandIClubs,aspecialcase,thereareno
mutualsinLuxembourg.
Netherlands Mutualswithvariablecontributions arethoughttohavean
advantageinconstitutingthesolvencymargin.Forthat
reason,theNetherlandshasnotmadeuseoftheoptional
reductionintheguranteefundprovidedinArticle17(2)(c).
UnitedKingdomAlltheUnitedKingdommutualassociationsareofthevariabl
contributiontype.Theyarenotconsideredtoenjoyanadvan
tage.
OntheotherhandallMemberStatesconsiderthatthelimitofonemillion
unitsofaccountsetoutinArticle3(1),thirdindent,asoneofthe
conditionsofexemptionforcertainmutualcompanies,isreasonable *

-12-
11.InfIation
MemberStateswhichhaveexperienced highratesofinflationareunanimous
inthinkingthatthismakesthemanagementofinsurancecompaniesmore
difficultandsubjecttogreateruncertainty .TheFrenchandIrishreplies
pointoutthatthisveryuncertainty makesthemaintenanceofthesolvency
marginallthemorenecessary.
Thedifficulties createdfortheinsuranceindustrybyinflationareby
nomeanslimitedtotheconstitution ofthesolvencymargin.Themain­
tenanceofadequatetechnicalreserves,inparticular,isalsoaproblem,
especially,aspointedoutbytheUnitedKingdom,inthecaseof''long-
tail"businesssuchasproductliability,wheretheamountoftheclaim
ultimatelytobemetmay,inmoneyterms,bemuchgreaterthanoriginally
providedfor.
4
Insuranceundertakings adoptvariousmeanstokeeppacewithinflation.
Premiumshavetobeincreased,butitmaynotalwaysbeeasytoraisethem
asrapidlyasmaybedesirable.Italyhastheparticularproblem,already
mentionedinSection2(e)above,thatthelevelofmotorliabilityinsurance
premiumsiscontrolled bytheState,whichforreasonsofwiderpolicywishes
tokeepthemaslowaspossible.Insurersmayalsochangetheirinvestment
policyinordertoplacetheirresourcesinassetswhicharelikelytoresist
monetaryerosionbothoftheassetvalueandoftheyield,andrevaluation
ofassetsispractisedasfarasitisprudentandispermittedbythe
authorities .
Finally,severalrepliesindicatethatthedifficulties ofkeepinguptech­
nicalreservesandthesolvencymargininaperiodofinflationleadtoa
morevigorouspursuitofgreaterefficiency andreducedcosts.
«
Germany,theMemberStatewhichhassufferedleastfrommonetaryerosion,
considersthatthishashadneitheranadvantageous noradisadvantageous
effectonitsinsuranceindustrybyreferencetocountrieswithhigh
inflationrates.Thosecountriesthemselves,however,thinkthatthey
havesufferedadisadvantage atleasttotheextentthatmanagementhas
hadtocontendwithgreaterdifficulties anduncertainties .

-13-
12.Taxation
NoMemberStategrantsanyexemptionorsuspensionoftaxonthepartof
aninsurer'sprofitsthatis,ormightbedeemedtobe,usedtoprovide
theannualincreasewhichinpresentcircumstances willusuallyberequired
intheamountoftheminimumsolvencymargin.Acleardistinctionisthus
drawn-betweenthesolvencymarginandthetechnicalreserves,whichare
normallyconstitutedundersuspensionoftax.
TheEuropeanInsuranceCommittee'sCommonMarketWorkingGrouphassubmitted
that,becauseoftheobligatorynatureofthesolvencymarginrules,anamount
ofprofitsequaltotheincreasefortheyearintherequiredminimumofthe
solvencymarginshouldinallcasesbeexemptedfromtax.Ifprofitsinany
yeararelessthantherequiredincrease,theamountoftheshortfallwouldbe
exemptedintheearliestfollowingyearinwhichprofitsweresufficientfor
thepurpose;ontheotherhand,anydecreaseintheobligatorysolvencymargin
4
wouldbringtheamountofthedecreasebackintotaxation.
WhilstMemberStatesdidnothavetheopportunitytocommentonthisproposal
intheforminwhichitwasputforwardbytheEuropeanInsuranceCommittee,
anumberofthemwereawareofsuchadesireonthepartofinsurers.
ι
13.UnitofAccount
TheoriginaltextoftheDirectivedeterminescertainthresholdsbyreference
tounitsofaccount(seeArticle3(1),thirdindent,Article16(3)andArticle
17(2))."Unitofaccount"wasdefinedforthepurposesoftheDirectivein
Article5(a)as"thatunitwhichisdefinedinArticle4oftheStatueofthe
EuropeanInvestment Bank".
Followingtheintroduction ofthenewEuropeanunitofaccount,thisdefinition
wasamendedbyCouncilDirective76/580/EECof29June1976(1)toreadas
follows:"UnitofaccountmeanstheEuropeanunitofaccount(EAU)asdefined
byCommissionDecision3289/75/ECSC(2).WhereverthisDirectiverefersto
theunitofaccount,theconversionvalueinnationalcurrencytobeadopted
shall,asfrom31Decemberofeachyear,bethatofthelastdayofthe
precedingmonthofOctoberforwhichtheEUAconversionvaluesareavailable
inalltheCommunitycurrencies."
(1)OJL189of13.7.1976
(2)OJL327of19.12.1975,p.4

-14-
Directive76/580/EECfurtherprovided:
-thateverytwoyears,theCouncil,actingonaproposalfromtheCommission,
shallreviewandifnecessaryamendtheamountsexpressedinDirective
73/239/EECinunitsofaccount,takingintoaccountchangesintheeconomic
andmonetarysituationoftheCommunity;
-thatasatransitional measureanduntiltheamountsexpressedinunitsof
accountinDirective73/239/EEChavebeenamendedforthefirsttime,the
amountsexpressedinnationalcurrencyforconversionoftheunitofaccount,
asdefinedinArticle5(a),shallnotbelessthanthosederivedaccording
totherateofconversionapplicabletotheunitofaccountbeforethe
adoptionofDirective76/580/EEC.
«
SincethegreatmajorityofMemberStatesaresatisfiedthattheamountslaid
downforthesolvencymarginandfortheguaranteefundaresatisfactoryfor
thetimebeing(seesection8above)andallarecontentwiththeincomelimit
whichisoneoftheconditionsofexemptionforcertainmutualcompanies(see
section10above),theCommissionproposestotheCouncilthattheseamounts
remainunchanged,untilthenextreviewismade.
IftheCouncilacceptsthisproposal,itwillfollowthatthetransitional
measureoutlinedinthesecondindentaboveremainsinbeing.Thereason
forintroducingthisprovisionalmeasureinthefirstplacewasthatwithout
itthechangeovertoEUAswouldhaveledtoareductionintermsofnational
currencyoftheamountsexpressedinunitsofaccountintheDirective;such
areductionwasfelttobeundesirable initselfandallthemoreunattractive
inthatanychangeintheamounts,expressedinEUAs,whichmightresultfrom
theprovisionforarevieweverytwoyearswouldprobablysimplybringthe
figures,expressedinnationalcurrencies,backupagain.
Atthetimewhentheyrepliedtothequestionnaire thefollowingMemberStates
wouldhavehadtoreducetheamountsofthethresholdsinquestionifthe
transitional measurehadbeenabolished:Belgium,Denmark,Germany,Luxembourg,
theNetherlands.TheseStatesallreportthattheywishthemeasuretobe
retained.
NoMemberStatehasexperienced anydifficultyintheapplicationofDirective
76/580/EEC.

Conclusions
Whilstitisevidentlystilltooearlytosaywithanycertaintywhateffect
theDirectiveishavinginbringingaboutanincreaseinthenumberofbranch
oragenciesopenedbyinsurersinMemberStatesotherthantheirhomeState,
itisneverthelessalreadyclearthatthefinancialrequirements haveproved
realistic.Theyhavenotledtoaviolentupsetofexistingstructuresbut
haveassistedtheinsuranceindustryandsupervisingauthoritiestomaintain
healthystandards.
TheCommissionproposestotheCouncilthatthereshouldatpresentbeno
changeintheamountsexpressedinunitsofaccount.

ANNEXI
Questionnaire
concerning
certainaspectsoftheapplication oftheFirstCoordination Directive
Application oftheDirective
1.SincewhatdatehavetherulesintheDirectiveconcerningthesolvency
marginandtheguaranteefundbeenappliedinyourcountry?
Effectsofbusiness
2.a)DoyouconsiderthattheprovisionsoftheDirectiveconcerningthe
solvencymarginhaveledto:
-asubstantial increasein"ownfunds"?
-asubstantial increaseintariffs?
-alimitationontheexpansionofbusinessoftheundertakings ?
b)Whatchangeshaveoccurredintherelationship betweenownresources
(companycapital,reserves,undistributed profits)andthenetpremiums
oftheundertakings subjecttoyoursupervision
-from1970untiltheentryintoforceoftheadaptinglaw?
-sincetheentryintoforceoftheadaptinglaw?
c)Havetheseprovisionshadanyeffectonthedirectunderwriting oflarge
risks?
d)Hastherequirementofthesolvencymarginledinyourcountrytoany
noticeablereductionindumpingprocedures (salesataloss)?
Ifnot,doyouconsiderthattherequirementofthesolvencymargin
mayingeneralhavesuchaneffect?
e)Doyousharetheviewthatinthelongtermthemaintenanceofthepresent
solvencymarginwillbecomeincre'asinglydifficult,forexamplebecause
theundertaking cannotmaintaintheprofitmarginsnecessarytocon­
tributesufficiently tothesolvencymargin?

-2-
Effectsonthestructureofthemarket
3.HavetheprovisionsoftheDirectiveconcerningthesolvencymarginand
theguaranteefundLedto:
a)theclosureofinsuranceundertakings ?
b)transfersofportfolios ?
c)regroupingofundertakings ?
d)mergersofundertakings ?
Isitpossibletogivefiguresonthesematters?
4.istherereasontobelievethatotherfactors-forexampletheextension
ofsupervisiontoinsuranceactivitieswhichpreviouslywerenotsubject
tosupervision-havecontributedtotheeffectslistedinparagraph3?
5.WhathavebeentheinitialeffectsoftheDirectiveasregards:
a)theestablishment inyourcountryofundertakings fromotherMember
*
Statesbymeansofthecreationofnewagenciesandbranches?
b)theestablishment inyourcountry,bythesamemeans,ofundertakings
fromthirdcountries?
c)theestablishment inotherMemberStatesofundertakings whichhave
theirheadofficeinyourcountry?
Reinsurance
6.a).JHavetheprovisionsoftheDirective,especiallythoseconcerningthe
solvencymargin,ledtoanincreaseoradecreaseinthenumberof
cessions?
b)Arethereinyourcountryundertakings whichcedemorethat50%oftheir
businessforreinsurance ?Isthisanormaloranexceptional phenomenon?
Minimumamounts,stepsandpercentages ..
7.Cantheinitalcapitalofaninsuranceundertakinginyourcountrybefixed
byreferencesolelytotheamountsindicatedinArticle17(2)ofthe
Directive,orisitsometimesrequiredtobegreaterbyvirtueofother
provisions-forexampleprovisionsconcerninglimitedcompaniesgenerally?

-3-
8.a)Asregardsthesolvencymargin,doyouconsiderthatthedifferent
stepsexpressedinunitsofaccount(Article16(3))andthepercentages
indicated(18%and16%forthepremiumsand26%and23%fortheclaims)
aresatisfactory ?
b)Asregardstheminimumguaranteefund,doyouconsiderthattheamounts
of400000,300000and200000unitsofaccountaresatisfactory ?
Reliefs
9.Towhatextenthasusebeenmadeinyourcountryoftheprovisionsof
Article30(-2)oftheDirective?
Mutualassociations
10.a)DoyouconsiderthatthesolvencysystemprovidedforintheDirective
favoursmutualassociations ratherthancompanies?
b)Doyouconsiderthatthissystemfavoursmutualassociations with
fixedcontributions (i.e.withoutthepossibilityofcall-ingup
additionalcontributions )orthosewithvariablecontributions ?
c)Doyouconsiderthatthethresholdofamillionunitsofaccount
providedforinArticle3'(1),thirdindent,issatisfactory ?
InfIation
11.a)-Whathavebeeninyourcountrytheeffectsofinflationonthe
constitution ofthesolvencymargin?
b)Whatstepshavebeentakenbytheundertakings tocounterthese
effects?
c)Doyouconsiderthattheratesofinflationinyourcountryare
advantageous ordisadvantageous fortheundertakings ofyourcountry
inrelationtothoseofotherMemberStateswhoseratesofinflation
havebeendifferent?

-A-
Taxation
12.Asregardstheconstitution ofthesolvencymargin,havetherebeenin
yourcountryanyspecialtaximplications tobetakenintoaccount?
Unitsofaccount
13.a)Haveyouanypointstomakeconcerningtheapplicationinpractice
ofDirective76/580/EECof29June1976?
b)IfyourcountryisamongthosetowhichArticle2ofthe"unitsof
account"Directiveof29June1976isapplicable,whatwouldbethe
effectsinyourcountryoftherepealofthistransitional provision?
Doyouconsiderthatsucharepealisdesirable?

ANNEXII
Dateswitheffectfromwhichtheprovisionsof
Articles16and17ofCouncilDirective73/239/EEC
(theFirstNon-lifeInsuranceCoordination Directive )
havebeenappliedinMemberStates
Belgium
2April1976/byvirtueoftheRoyalDecreeof12March1976settingthe
dateonwhich'certainArticlesoftheLawof9July1975onthesupervision
ofinsuranceundertakings enteredintoforceandcontaininggeneralregula­
tionsonthesupervision ofinsuranceundertakings (Moniteurbeigeof23
March1976).
Denmark
1October1975,byvirtueofthe"Bekendgrirelse omKoncessiontilforsik­
ringsselskabers solvensmargen ogkapitalgrundlag ."
Germany
1February1976,byvirtueofthelawapplyingtheFirstCouncilDirective
of24July1973onthecoordination ofLaws,regulations andadministrative
provisionsrelatingtothetakingupandpursuitofthebusinessofdirect
insuranceotherthanlifeassurance.
France
16July1976,byvirtueofregulations no.76-666andno.76-667of
16July1976inthe"Codedesassurances".

Ireland
Atthebeginningofthefirstaccountingperiodofeachinsuranceundertaking
commencingafter31May1976,byvirtueoftheEuropeanCommunities (NonLife
Insurance)Regulations,1976.
Italy
31July1978,byvirtueoftheLawof10June1978,no.295,publishedin
theOfficialJournaloftheRepublicofItalyof26June1978.
Luxembourg
2August1976,byvirtueoftheLawof7April1976amendingtheLawof
6September1968oninsurancesupervisionandtheGrand-DucalRegulation
of21July1976madeunderthesaidLawof7April1976.
Netherlands
TheNetherlandshasnotyetadoptedaformallegalmeasuregivingeffectto
theprovisionsinquestion,butisapplyingtheminadministrative practice.
UnitedKingdom
31July1978,byvirtueoftheInsuranceCompanies(Solvency:General
Business)Regulations 1977no.1553.