The issue of long-tail insurance claims is back on the agenda of European insurance regulators following the default of several small insurers, which were underwriting 10-year construction liability insurance in France on a cross-border basis under the EU Freedom of Services provisions.
The situation in France occurred in the context of a very competitive market to place these complex risks at low rates to EU insurers outside France. The most recent failure was of a small Danish company Alpha Insurance, which also underwrote motor fleets in the United Kingdom.
In general, any extended liability coverage has the potential to raise similar issues when small insurers make use of Freedom of Services to sell insurance in other member states within the European Economic Area but rely on home state prudential regulation. Other examples include the 2016 collapse of the Gibraltar insurance group Enterprise Insurance with 14,000 Irish policy holders, and the Malta-registered Setanta Insurance, which was also selling motor insurance in Ireland, in 2014.
It remains difficult to measure and quantify the financial implications of the situation in France for corporate risk and insurance managers. Construction liability losses will become visible gradually over the next few years and could require funding by the insureds. In March 2018, the French FERMA member association AMRAE issued a press release calling its members to be vigilant about the financial strength and reputation when choosing a foreign insurance partner for long-tail liability coverage.
This issue is one of the FERMA topics for discussion within the stakeholder group of the European insurance authority EIOPA and with the other market participants. The insurance supervisory community and EIOPA are conscious of the risks, and in 2017 put in place “cooperation platforms” to resolve cross-border issues with a collaborative approach but no power for direct intervention.
In April 2018, EIOPA also issued its Supervisory Convergence Plan 2018-2019 which explicitly mentions cross-border insurance business as one of the priorities for supervisory convergence. EIOPA has published a decision on the collaboration of the insurance supervisory authorities.
Finally, the ongoing review of the EIOPA Luxembourg Protocol, which provides a framework for cooperation among insurance supervisors in the registration and supervision of intermediaries, could be another opportunity to achieve better supervisory convergence.
The protocol has to be aligned with the provisions of the new Insurance Distribution Directive (IDD), due for transposition by member states by 1 October 2018, and could include better information in the context of intermediaries’ registrations, including activities via Freedom of Services. EIOPA is expected to send a new version of the Luxembourg Protocol to the Commission with a possibility for FERMA to comment.