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Scenting the promise of the euro era

Until recently in Europe highly protective domestic regulatory regimes, such as in Germany and in Switzerland, insulated the continent's life insurers from cross border competition.

But despite protecting policyholders from the risks of insolvency, such an insular system, it is argued, resulted not only in lower investment returns for those insured, but also fostered a culture of inefficiency in the market itself.

Over the last few years, though, there has been a marked transformation on the European insurance landscape, particularly in the EU, thanks to the insurance directives. Trans-national mergers and acquisitions have become the order of the day, with companies scrambling to gain a foothold in each of the major European life markets.

The advent of Emu in 1999 is expected to further crystallise this process through the dismantling of national competition barriers and the push towards the goal of a single financial services market.

However, many companies using insurance products believe the European market is already relatively open, and some have been using cross-border providers for years with satisfactory results.

Both Rank Xerox and Group 4 in the UK cover different aspects of their life and pensions liabilities through Swiss Life, despite the strong UK-owned insurance presence in the home market.

And Malcolm Oliver, Rank Xerox group risk manager, feels a true cross-border European insurance sector is now operational: Our insurance tender process was open to foreign bids and we chose to liaise with Swiss Life on a purely competitive basis, so from my perspective I think things are fairly free and don't see the sector developing significantly in the future."

But, for the most part, companies such as Nedlloyd in the Netherlands, which insures through the New Rotterdam company, Henkel in Germany (through Goethar Lebensversicherung), and Cementia in Switzerland (Swiss Life), tend to stay within their national frontiers.

The issue of regulatory constraint is still very much the prime factor behind this decision.

Similarly, French companies, illustrated by the case of Gaz de France, stick closely to domestic insurers. However, the issue here is one of tax incentives from the French government to encourage domestic investment, rather than any overriding safety issues.

Willy Meier, vice director of human resources and pensions at Cementia, particularly notes the insolvency safety net for the Swiss market of the AHV as a good reason to 'stay at home'. "The service-to-price ratio is also very good in the Swiss insurance field," he says.

Significantly though, Meier also adds his belief that Swiss companies will nonetheless begin to shop cross-border if the price is right. And if, as predicted, the euro prompts greater competition in the sector, as most companies appear to concur, then migration to non-domestic insurers could be around the corner.

For the time being, though, in the words of Andrew Ritchie, insurance analyst at Fox Pitt Kelton, it is still extremely difficult to sell life insurance cross-border: "A local presence is essential, and until such time as we see tax and regulatory issues completely harmonised across Europe, it will remain so."

At present, most companies appear satisfied with the levels of costs being charged by their insurers, and with a few exceptions the flexibility and quality of the service being provided.

Many, such as Nedlloyd and Cementia, have insurer relations going back several decades, and show no sign of wishing to break such strong ties.

However, the other side of the European insurance coin shows a market which facing greater challenges and opportunities than ever.

The potential privatisation of European pension provision to meet an increasingly precarious demographic dilemma, alongside the Europeanisation of financial groups through consolidation, and changes in the regulatory environment, will almost certainly lay issues of cost and choice at companies' feet.

Wolfgang Lorz, benefits manager at Henkel in Germany, says these issues are already on the agenda: "We know it is becoming increasingly difficult to fund our pensions benefits, so more flexible investment returns, possibly through a DC scheme with greater equity exposure, could be the answer."

Undoubtedly, European insurance companies are already on the lookout for such business, and the euro will render some former competition barriers obsolete.

French companies may not at present be looking past the fiscal attraction of France, but even Thierry Sudret, head of the social finance sub-division at Gaz de France, proposes that the euro will "look promising in terms of insurer choice".

The issue from the perspective of insurance users at present appears not to be how limiting the market is at present, but how promising the post-Emu insurance sector will be. Hugh Wheelan"

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