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BRUSSELS, Belgium -- Europe's insurance market today is more competitive, offering buyers a greater range of products at cheaper prices and better service, as a result of single market insurance legislation enacted in 1994, according to the European Commission.

The effects of a series of insurance directives, which took effect in the European Union just more than three years ago, "are beginning to be seen in the marketplace in the form of greater competition in national markets and the selling of new insurance products," says a memo the European Commission in Brussels released recently.

The so-called Third Life and Non-life Insurance Directives put in place the basic framework for a single market throughout the European Union for all types of insurance coverage. Effective July 1, 1994, the package of directives introduced a single system for the authorization and financial supervision of an insurance company by the member state in which the insurer has its head office. This provides insurance companies with a "European passport" enabling them to carry on insurance business throughout the European Union as long as they are regulated in one E.U. member state. The directives also required member states to abolish controls on premiums and rates and prior approval of policy conditions.

The effect of the E.U. regulatory liberalization is most marked in "those national markets that, before the inception of the single license regime, were characterized by strict controls over insurance policies and tariffs and a reluctance to introduce innovatory insurance products," the memo states.

Larger insurance companies are increasingly offering pan-European policies, particularly for multinational companies, the commission's memo observes.

Meanwhile, the number of companies that have notified their intention to provide insurance services throughout the European Union from a base in another member state has increased, which "will increase over time as the single market develops further," the memo says.

The E.U.'s single insurance market is the third-largest insurance market in the world, accounting for 25.4% of world's premium volume. The largest is the United States, with a 30.8% share, followed by Japan, with 30%, according to the commission.

In 1996, 4,800 insurance-related companies were present in the European Union, employing nearly 1 million people, according to the Comite Europeen des Assurances, a French insurance trade association. Global premiums were valued at 455 billion European Currency Units ($566.5 billion), or 7.1% of the gross domestic product of the combined E.U. member states.

Meanwhile, "the single market for insurance has not yet developed its full potential," the memo states.

"Without any doubt, the main impact of the single license regime . . . has been an increase of competition within different national markets," the memo states.

The abolition of prior approval of policy conditions and tariffs by supervisory authorities, which was the rule in many E.U. countries before enactment of the legislation, "has encouraged insurers to enter new markets, and so increased competition," according to the memo.

"It has also made possible the marketing of new insurance products in individual national markets, both as regards policy conditions and the price of insurance contracts. In many cases, customers have a much wider choice of insurance products than they had 10 years ago. Insurers are increasingly forced to compete in order to offer insurance products that meet customers' requirements, (which) is contributing to lower prices for insurance products," the memo continues.

Insurers also are improving the quality of their services and reacting more quickly to the demands of policyholders, the memo notes.

However, the memo confirmed that large price differentials still exist between member states for several reasons. This partly is due to different national characteristics -- such as life expectancy, lifestyle habits, cultural differences and differing compensation levels -- and because the trend toward increased competition following liberalization is only beginning to trickle down to buyers in the marketplace, according to the commission's memo.

Three years is too soon to see more changes, and there have been some delays in implementing the directives, the memo noted.

As far as implementation is concerned, the commission describes the overall level of implementation by member states of the directives now as "broadly satisfactory," though the measures have not been fully adopted by all member states (see related story).

Meanwhile, the European Commission is preparing to reinforce the insurance regulatory statutes laid down by the insurance directives and is examining whether solvency guidelines need to be revised to ensure the financial strength of insurance companies. In a related move, the Council of the European Union last month completed its first reading of a proposed directive on supervision of insurance companies that are affiliated with other insurance companies. This directive will require supervisory authorities to ensure the solvency of an individual insurance company, even if it is part of a larger insurance-related group of companies. Under the proposal, supervisors would be required to look beyond an individual insurance company to assess its financial strength.

In particular, double counting of capital among insurance companies would be eliminated, inter-company transactions within an insurance group would be more carefully monitored and financial information on all insurance companies in a group would have to be available, accessible and exchanged between supervisory authorities if necessary.

"The directive would enhance the protection of policyholders and reduce the risk of unfair competition between insurance (companies) within the community," said the commission's memo, adding that it "would also pave the way for a coherent E.U. approach towards the supervision of so-called financial conglomerates."

Other related work being carried out by the European Commission relating to insurance includes an examination of the impact on insurance legislation of the planned introduction of the Euro, or single European currency; an examination of E.U. members' national legislation on insurance intermediaries; and an examination of the consistency of members' tax regimes on insurance.