Worldwide: Could The EU Single Market Dream Be Destined For Failure?

Last Updated: 13 February 2017
Article by Nigel Feetham

In strict legal theory, the European 'passport' should now be firmly established across the EU. It embraces the principle of free trade enshrined in EU law and Treaty rights.

In the case of an insurer licensed in one Member State (known as the Home State), the EU passport means it can operate on a freedom of services or establishment basis in other EU Member States (known as the Host State) without the requirement for separate licensing in each territory and on the basis of Home State prudential supervision. Of course, where the foreign insurer is licensed outside the EU, the 'passport' does not apply and instead each jurisdiction will enact its own regulations as to whether (if at all) foreign insurers are permitted to write local business.

A number of European jurisdictions (including Ireland) have developed their financial sectors (including in insurance) on the back of the EU passporting laws. These sectors have generated many tens of thousands of jobs and hundreds of millions in tax revenues.

Nevertheless, in some EU countries foreign companies passporting into their territory may not always be greeted with immediate enthusiasm. We may have seen a recent example of this played out in the Irish media in relation to alleged concerns of the Central Bank of Ireland (assuming that this does accurately reflect the views of CBI), as one newspaper put it, "about how Gibraltar continues to approve motor insurers that can passport services into Ireland". No factual evidence was presented (nor alleged) that the new Gibraltar insurers writing Irish motor business were less financially robust than domestic Irish insurers. As a matter of fact, the three new entrants into the Irish market are Solvency 2 compliant subsidiaries of highly rated and internationally recognised groups. No doubt, if they were established in any other jurisdiction they would be considered to be within the list of their top insurers, at least as far as the strength of the ultimate owners' balance sheet was concerned.

The alleged concerns reported in the Irish media certainly merit a number of observations.

First, even outside the Single European Market, standards in insurance regulation and supervision tend to be fairly uniform in many insurance domiciles (with the probable exception of capital requirements). This is because local governments and regulators apply the same core principles developed by the International Association of Insurance Supervisors (IAIS). Within the EU Single Market, however, those standards are intended to be uniform across all Member States.

Second, with the Solvency 2 regime (which came into force on 1.1.2016) now applying across the whole EU, insurers cannot establish, relocate or operate in a Member State simply to escape regulation in another. They may, however, do so for legitimate reasons, including speed to market and ease of access to the regulator.

Third, this is not to say that a Host State regulator may not raise legitimate concerns with a Home State regulator whilst respecting its supervisory function. Of course, if the Home State caves in under pressure without independent examination of the evidence, it could not only invite legal challenge from affected parties but weaken the very foundations of the EU Single Market. For sure, no regulator likes the responsibility for a failure of a regulated entity at its doorstep, but most Member States have had their own share of failures. If EU law prevails, all sides must be guarded against overreaction. The alternative is for policy-makers at a European level to change the rules although that would not necessarily make for better regulation.

Fourth, what should matter is not where a company is located and regulated but (principally) the level of capital it holds, its internal governance and controls, its underwriting expertise, market knowledge, and given all insurance companies are in the business of risk sometimes luck also plays a part. No regulator can regulate, and correspondingly no board of directors can be expected to manage, an insurer to a 'zero failure' tolerance level because you simply cannot take risk out of risk-taking. Insurance company failure and its potential causes is a subject I studied in my book "A Guide to Insurance: Combining Governance, Compliance and Regulation".

Fifth, if Member States are permitted to question the founding principle of the Single Market, whether in insurance, banking or investment services, the inescapable conclusion must be that this is no different to the UK Government's own stance on immigration controls. Of course, the UK Prime Minister (Theresa May) is being publicly chastised by her European partners who say this would breach the EU principle of free movement of persons - essentially she is being told, either the UK is in or out of the EU but cannot cherry-pick.

There is certainly a debate of fundamental importance here. The UK has always sought to 'play by the rules'. Where it has chosen not to, it has opted out as it did from the European Single Currency. Having not been able to reform the EU from within and failed to obtain any flexibility on free movement of persons, the UK has decided that it is better to leave. With the UK's exit, Member States should now take a long and hard look at whether they themselves genuinely believe in all the EU fundamental freedoms (goods, capital, services, and people) or whether they are simply paying lip-service to them until their own perceived national interests are at stake. If the latter is true, then the EU Single Market dream could well be destined for failure.

The views expressed in this article by the author are solely those of the author.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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