Market Scene : Europe’s Insurance Barriers May Soon Be Tumbling Down : But most American firms seem reluctant to look to the Continent where the European Community is pressing ahead with a sweeping deregulation of the lucrative market.
Metropolitan Life did not become America’s biggest life insurance company by passing up chances to sell its products.
So when it found a modern, industrialized country in which the average citizen carries barely one-fourth as much life insurance as the average American, it acted. The country was Spain, where the Met in 1987 established a joint insurance venture with Banco Santander. And already, enough Spaniards have decided that it pays to get Met that the U.S. company has burst into the top 10 life insurers in the country.
Many more such chances are waiting elsewhere in Western Europe. “We’re bullish on Europe,” said Metropolitan Life Executive Vice President William Poortvliet.
What is remarkable is that so few other American insurance companies can say the same thing.
The 12 nations of the European Community have embarked on a sweeping deregulation of their insurance markets, which are now encrusted with national laws and traditions that protect home-grown insurance companies from foreign competition--often at the expense of consumers.
Gone, for example, will be the German government’s monopoly in fire insurance. Belgium will no longer be able to set the rates that insurance companies may charge and to insist that their income be invested in government bonds.
Currently, it is practically impossible for, say, French companies to sell insurance in Germany. But in two or three years, if all goes according to plan, there will be fewer legal hurdles between France and Germany than between California and Arizona.
And foreign insurers will have the same rights as Europeans. Insurers from the United States and other foreign countries will be able to sell throughout the gigantic EC market--the community’s population is about one-third larger than America’s--merely by qualifying for a license in any one of the 12 member countries.
Yet remarkably few U.S. insurers are angling for a piece of the European action. So dependent is the U.S. industry on the giant American insurance market that only 2% of its income comes from abroad.
“Most U.S. insurers have been seemingly oblivious to the opportunities presented by the enlarged market,” said a recent report by the New York law firm of LeBoeuf, Lamb, Leiby & MacRae.
Henry G. Parker III, senior vice president of Chubb & Son Inc. and chairman of the International Insurance Council, shares the concern. “The current disinterest on the part of U.S. property-casualty insurers to study their opportunities in a $4-trillion economy will prove a strategic mistake,” he said.
The significance reaches far beyond the insurance business. If this view is correct, it adds evidence to the argument that the persistent U.S. trade deficit is rooted as much in American business practices as in restrictive trade barriers imposed by foreign countries to keep Americans and others out of their markets.
Service industries such as insurance have long been the hope of those who see U.S. manufacturers losing their global competitive edge.
Consequently, in the current round of international trade talks, U.S. negotiators are pressing hard to open foreign markets to U.S. insurance, banking and other financial services. Surely, in this view, the American insurance giants, if given half a chance to operate in foreign markets, could help offset the trade deficit in manufacturing.
Maybe not. EC companies are forming cross-border mergers to position themselves better for the deregulated market. Traditionally strong insurance companies from Switzerland, which is not a member of the European Community, are beefing up their operations in the EC countries.
And the Japanese are coming too, although for now they are mostly content to insure the Japanese manufacturers whose plants are springing up all over Europe.
“But I think the day might be coming,” said Guy Soussan, a lawyer in the Brussels office of LeBoeuf, Lamb, “when the Japanese insurers will extend their reach.”
Peter Smith of Ernst & Whinney Management Consultants in London found that the Japanese “are set on a path of gradual and cautious expansion in Europe.”
Regardless of who fills it, the European insurance market offers a huge opportunity. Europeans are insured to the extent of only $550 per person, according to LeBoeuf, Lamb, in contrast to $1,500 in the United States. When fire devastated a large section of the Portuguese capital of Lisbon in 1988, fewer than 10% of the houses were insured.
“There is an enormous unfilled market here,” said Ulick Bourke, a partner in the Brussels office of the British law firm Clifford Chance. “Especially the Greek, Spanish and Portuguese markets are wide open.”
Some American companies have been active in Europe for years. Unat, a subsidiary of the U.S. giant American International Group, sells property-casualty insurance to corporate customers in 17 European countries. Cigna Insurance Co. of Europe has 51 offices in 16 European countries.
Others are following. Massachusetts Mutual, following the Met’s approach, is looking for a joint venture partner somewhere in Europe. “We want a platform to watch how the European insurance market is changing,” said James E. Miller, an executive vice president.
ITT Hartford’s largest European subsidiaries are in Britain and the Netherlands, and Hans Miller is the head of a nine-person Brussels office whose role is to identify “strategic opportunities” for the insurer elsewhere in Europe.
Miller said many European insurance companies, protected in the past by national laws and practices that kept competition out, will now have to reduce their operating costs. In Belgium, for example, non-claim expenses--mostly sales commissions and office overhead--eat up an average of 40% of premium income. Hartford’s expense ratio in the United States, according to published reports, is 28.1%.
Protective national laws are not the only factor working against U.S. insurers that want to do business here.
“The European market has room for growth, but we will face stiff competition, and we will have to contend with cultural and linguistic differences,” said Gordon Cloney, president of the Washington-based International Insurance Council, which represents about 50 U.S. companies that sell insurance abroad. “This isn’t just going to be another California Gold Rush.”
It is only the laws, not the cultural and linguistic differences, that will soon come tumbling down. A pair of proposals by the European Commission, the EC’s executive branch, would rewrite the rules for selling insurance in the 12 member nations.
At their heart, the two proposals, one for life insurance and one for non-life, would provide what is known as a single EC “passport” for insurance companies in the European Community. An insurer licensed in one country could automatically do business in the 11 others.
Under this approach, the international European insurance market would become even more liberal than the U.S. market, where insurers are still required to be licensed in every state in which they operate.
It is all part of what is loosely known as the “1992” process: the effort by the EC to tear down barriers within its 12 nations and create a truly single market by the end of 1992.
Insurance will not meet that deadline. The European Commission’s proposals must still grind their way through the European Community’s own complicated legislative process. Then they need the approval of the legislatures of the 12 nations.
That leaves plenty of opportunity to water down the commission’s proposals. Liam Mulloy, an insurance specialist in the Brussels office of Price Waterhouse, noted that when the commission proposed in the late 1980s to open up the business of insuring large corporations, Spain and Portugal won postponements of the new regulations until the end of the 1990s.
At the earliest, the commission figures, the new non-life insurance proposal can become law by the end of 1993 and the life insurance proposal by mid-1994.
Even that may be optimistic. National legislatures were supposed to have implemented an earlier non-life insurance directive by last July 1, but legislatures in Ireland, Italy, Luxembourg and Portugal had not completed action, and no legislation had even been introduced in the Greek Parliament.
When the commission’s new proposals become law--as they eventually are almost sure to become, albeit with some modification along the way--they will revolutionize the insurance business in Europe.
Sir Leon Brittan, the EC commissioner for financial services, said they will open the European insurance market to far greater competition and offer consumers greater choice and lower costs.
“The creation of a single market,” he said, will be a major bonus for the (European) Community’s economy and will provide a marvelous launch pad for Europe’s insurance companies to sell in world markets.”
European insurers know that they need to protect their flanks. The European Insurance Committee wants to make sure that, if foreign insurers can play by EC rules when they operate in Europe, European insurers will then face no discrimination in foreign markets.
Among the 12 nations, Britain probably faces the least change because its regulation of insurance extends mostly to guaranteeing the solvency of insurance companies.
Most EC countries regulate more than Britain and will be forced to retreat by the new insurance policies. No country will have to change more than Germany, whose idea of consumer protection runs not to giving consumers more choice of insurance products but to protecting them from potentially insolvent insurers.
Joern Badenhoop, director of international affairs for the German Insurance Assn., said he worries about the quality of insurance policies sold in Germany by foreign firms. “How much will the country at risk be able to influence the home country of the insurer?” he wondered. “That is the key question.”
But Badenhoop acknowledged that there is no way to preserve Germany’s present high degree of government intervention to assure the soundness of German insurers. “This we will have to give up,” he said. “This is a revolution in Germany.”
Badenhoop added that Japanese insurance companies are showing an increasing interest in the German market. Some American companies also operate in Germany, he said, “but I don’t think they are coming here in a big way.”
That view, at least, is widely shared.
“If U.S. insurers are neglecting Europe in pursuit of Pacific expansion, they are taking a risk themselves,” said Smith of Ernst & Whinney Management Consultants. “As 1992 approaches, the remaining opportunities for sound acquisitions and joint ventures will diminish.”
Betting Against Catastrophe
Americans buy more than twice as much insurance as Europeans, so it’s not surprising that American firms make so much more money than their European counterparts. A BECKONING MARKET IN EUROPE
(Insurance payments per capita, 1988) European Community:
Life: 390
Non-life: 420 United States:
Life: $718
Non-life: $1,033
AND A HUGE U.S. INDUSTRY WAITING TO SERVE IT
(Insurance business, in billions of dollars, 1988) United States
Life: $177
Non-life: $255 European Community
Life: 128
Non-life:138 Source: Sigma/Swiss Re
