1. By its application, the Commission of the European Communities seeks a declaration that, by introducing and maintaining in force a bonus-malus system which has automatic and compulsory effects on premium rates and applies to all motor insurance contracts concluded on Luxembourg territory by natural persons without any distinction being drawn between insurance companies having their head office in Luxembourg and insurance undertakings conducting their business there by means of branch offices or of the provision of services, contrary to the principle of freedom to set rates and of elimination of prior or systematic controls on scales of premiums and contracts which is established by Articles 6(3), 29 and 39 of Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive) (OJ 1992 L 228, p. 1), the Grand Duchy of Luxembourg has failed to fulfil its obligations under that directive. Legal context Community legislation
2. Article 6 of Directive 92/49, which is in Title II headed ‘The taking up of the business of insurance’, provides: ‘Article 8 of Directive 72/239/EEC shall be replaced by the following: “Article 8 …
3. Nothing in this Directive shall prevent Member States from maintaining in force or introducing laws, regulations or administrative provisions requiring approval of the memorandum and articles of association and communication of any other documents necessary for the normal exercise of supervision. Member States shall not, however, adopt provisions requiring the prior approval or systematic notification of general and special policy conditions, scales of premiums and forms and other printed documents which an undertaking intends to use in its dealings with policyholders. Member States may not retain or introduce prior notification or approval of proposed increases in premium rates except as part of general price-control systems. …”.’ 3. Article 29 of Directive 92/49, which is included in Title III headed ‘Harmonisation of the conditions governing the business of insurance’, states: ‘Member States shall not adopt provisions requiring the prior approval or systematic notification of general and special policy conditions, scales of premiums, or forms and other printed documents which an insurance undertaking intends to use in its dealings with policy-holders. They may only require non-systematic notification of those policy conditions and other documents for the purpose of verifying compliance with national provisions concerning insurance contracts, and that requirement may not constitute a prior condition for an undertaking’s carrying on its business. Member States may not retain or introduce prior notification or approval of proposed increases in premium rates except as part of general price-control systems.’
4. In Title IV of Directive 92/49, headed ‘Provisions relating to right of establishment and the freedom to provide services’, Article 39(2) and (3) states: ‘2. The Member State of the branch or of the provision of services shall not adopt provisions requiring the prior approval or systematic notification of general and special policy conditions, scales of premiums, or forms and other printed documents which an undertaking intends to use in its dealings with policyholders. It may only require an undertaking that proposes to carry on insurance business within its territory, under the right of establishment or the freedom to provide services, to effect non-systematic notification of those policy conditions and other documents for the purpose of verifying compliance with its national provisions concerning insurance contracts, and that requirement may not constitute a prior condition for an undertaking’s carrying on its business. 3. The Member State of the branch or of the provision of services may not retain or introduce prior notification or approval of proposed increases in premium rates except as part of general price-control systems.’ National legislation
5. The Grand-Ducal Regulation of 20 December 1994, adopted in implementation of Article 17(2) and (3) of the Law of 7 April 1976 as amended relating to insurance for third-party liability arising from the use of motor vehicles and laying down the conditions which contracts for third-party motor-vehicle insurance must meet ( Mémorial A 1994, p. 2776; ‘the Regulation’), introduced into national law inter alia a system for determining the amount of insurance premiums under which policyholders have the amount of their premium reduced after several years of accident-free driving whereas it is increased following an accident (a bonus-malus system).
6. Article 3 of the Regulation states: ‘It is prohibited for an insurance contract to contain any clause whose aim or effect would be: … 5. to frustrate application to the contract of the bonus/malus scale as set out in Articles 7 and 8 below.’
7. Article 7 of the Regulation lays down binding criteria applicable to every insurance contract covering third-party liability entered into by a natural person in respect of a motor vehicle normally kept in Luxembourg.
8. Under that system, a new policyholder is placed at point 11 on the bonus-malus scale (0% bonus). If he has no accident in the course of a reference period he descends one point on the scale. The bonus-malus scale ends at point ‘-3’, which is the level at which the policyholder pays only 45% of the amount of the basic premium.
9. On the other hand, every accident in the course of a reference period results in a rise of three points. The highest level on the bonus-malus scale is point 22, at which the policyholder pays an amount equivalent to 250% of the basic premium.
10. The compulsory bonus-malus scale applies only to contracts entered into by natural persons. Also, the bonus-malus system affects only the premium relating to insurance in respect of third-party liability. The other constituents of the total premium for motor-vehicle insurance, such as risks relating to broken windscreens and windows, theft, fire and legal protection, are not subject to that system. Pre-litigation procedure
11. On 25 July 2001 the Commission sent a letter of formal notice to the Grand Duchy of Luxembourg in which it expressed the view that the system for determining the amount of insurance premiums infringed certain provisions of Directive 92/49, in particular Articles 6(3), 29 and 39.
12. Since the letter of formal notice remained unanswered, on 20 December 2001 the Commission sent a reasoned opinion to the Grand Duchy of Luxembourg calling on it to take the measures required to comply with the opinion within a period of two months from notification thereof.
13. The Luxembourg Government responded to the reasoned opinion by letter of 6 March 2002. It maintained that, even accepting that the freedom to set rates is a principle established by Directive 92/49, determination of the basic premium rate was a matter left in the present instance to the discretion of the insurance undertakings. It also stated in its response that the bonus-malus system helped to protect consumers and prevent accidents.
14. Since the Commission considered that the measures needed to comply with the obligations resulting from Directive 92/49 had not been taken by the Luxembourg authorities, it decided to bring the present action. Substance Arguments of the parties
15. The Commission contends that the Luxembourg bonus-malus system is contrary, first, to the principle of freedom to set rates flowing from Directive 92/49, which prohibits the Member States from requiring notification, prior approval or systematic disclosure of premium rates which an insurance undertaking intends to apply, or of increases in those rates which it intends to implement, in a Member State and, second, to the very objective of that directive, which is designed to secure freedom to market insurance products within the Community. It submits that its interpretation is borne out by the judgments in Case C-296/98 Commission v France [2000] ECR I-3025 and Case C-59/01 Commission v Italy [2003] ECR I-1759.
16. The Commission does not dispute that it is open to Member States to establish a scale which takes account of the accident record of policyholders or even a uniform bonus-malus system. However, such arrangements are, in its submission, contrary to Directive 92/49 where their effect on premium rates is automatic, which is the case with the Luxembourg bonus-malus system.
17. The Commission accepts that in Luxembourg insurance undertakings may in principle freely determine the amount of the basic premium. However, in order to comply with the principle of freedom to set rates, not only the basic premium but also all the constituent components of the insurance premium must be freely determined by the insurance companies.
18. Freedom to set premium rates could remain largely illusory if insurance companies were able to adjust premiums in the light of a criterion as fundamental as the policyholder’s accident record only by observing predetermined requirements. That is all the more true as the adjustment imposed would not have a marginal effect on the amount of the premium, but could increase it to more than double the basic premium.
19. The Luxembourg Government refers to paragraph 29 of the judgment in Commission v Italy and contends that the Regulation is consistent with the principle of freedom to set rates as it does not require the premium scales of insurance companies to be notified to a supervisory or monitoring authority before they are applied, or that authority to approve the scales prior to their use.
20. The Luxembourg Government states that the bonus-malus system enables insurance premiums to be adjusted on the basis of the policyholder’s record and the number of accidents for which he has been responsible. It is a system of subsequent personalisation of the premium which concerns only the variation of the insurance premium. On the other hand, the system leaves insurers absolutely free to determine all the components in the price calculation for the vehicle insurance. Findings of the Court
21. As the Court observed in paragraph 29 of its judgment in Commission v Italy , the Community legislature meant to secure the principle of freedom to set rates in the non-life insurance sector, including the area of compulsory insurance such as insurance covering third-party liability arising from the use of motor vehicles. That principle implies, as the Court stated in the same paragraph of that judgment, the prohibition of any system of prior or systematic notification or approval of the rates which an insurance undertaking intends to use in its dealings with policyholders. The only derogation from that principle allowed by Directive 92/49 concerns prior notification and approval of ‘increases in premium rates’ in the framework of ‘general price-control systems’.
22. In Commission v Italy , the Court held that the principle of freedom to set premiums was infringed by rate-freezing rules affecting both the fixing and the altering of the rates for insurance policies covering third-party liability arising from the use of motor vehicles in relation to risks situated within Italy ( Commission v Italy , paragraphs 32 and 48).
23. The Luxembourg bonus-malus system with which the present action is concerned is, as regards its impact on insurance undertakings’ rates, different in nature from the Italian legislation which was at issue in Commission v Italy . It is true that the Luxembourg system has effects on changes in the amount of premiums. However, the system does not result in the direct setting of premium rates by the State, since insurance undertakings remain free to set the amount of the basic premium. In those circumstances, the Luxembourg bonus-malus scheme cannot be equated with a system of approving premium rates that is contrary to the principle of freedom to set rates, as defined by the Court in paragraph 29 of the judgment in Commission v Italy .
24. Full harmonisation in the field of non-life insurance rates precluding any national measure liable to have effects on rates cannot be presumed in the absence of a clearly expressed intention to this effect on the part of the Community legislature.
25. It is accordingly not possible to uphold the proposition upon which the Commission’s action is founded, which consists in contending that, despite the fact that the basic premium may be set entirely freely, the Luxembourg bonus-malus system is contrary to the principle of freedom to set rates on the sole ground that it has effects on the alteration of that premium.
26. Nor does the Commission claim that that system is tantamount to imposing a requirement of prior or systematic notification of the scales of premiums which an insurance undertaking intends to use in its dealings with policyholders or a system of approval of such scales.
27. It follows that the Commission has not demonstrated that, by introducing and maintaining in force its bonus-malus system, the Grand Duchy of Luxembourg has acted in breach of the principle of freedom to set rates and of elimination of prior or systematic controls on scales of premiums and insurance contracts which is established by Articles 6, 29 and 39 of Directive 92/49.
28. Since the Commission confined the subject-matter of the reasoned opinion and of the present action solely to the finding of a breach of the principle, as arising from the provisions referred to in the preceding paragraph, of freedom to set rates and of elimination of prior or systematic controls on scales of premiums and insurance contracts, the present action must be dismissed.