Are the life insurance laws different in the EU?

It's not necessarily that the life insurance laws are different in the EU, but more that the investment element of life insurance policies in the EU was far more restricted before the EU came into being. Life insurance funds in many European countries encountered numerous restrictions on where they could put their cash, which needed to be brought into line with the less restricted UK and US life insurance fund rules.

What was required was the unification of Europe's capital markets. Now, banks can operate throughout the EU because capital requirements for securities, firms and banks have been standardised. Stock exchanges are now able to put their trading terminals in any country within the EU and fund management firms are able to sell their products anywhere in the region. This is because of the "single passport" system in all member countries, allowing a firm to operate anywhere in the EU once registered in just one of its countries. A system of "consolidated supervision" means that the regulator in the country where the firm is based has primary responsibility for regulating it.

Progress in getting all this implemented was very slow. This is because within the EU there were wide variations in many areas prior to integration. There were variations in the requirements for disclosure when companies are issuing securities. There were also variations in trading rules such as how much companies had to reveal about their trades. Further variations came in accounting standards and the treatment in terms of tax of life insurance and pension products. An example of this variation is that Germany levies a 25% withholding tax on life insurance products, and Italy only 12.5%.

Then there are the laws that forced European life insurers into matching 80% of their assets with liabilities in the same currency.

Currency union in the EU removed currency risk between the member countries financial markets, so that a Spanish investor wanting to invest in Italian bonds would not have to worry about the peseta's variations against the lira.

But credit differences between countries remained and the European Central Bank can't bail out countries that run in to problems.

The union of the Euro as a currency means that investors were allowed to spread their wings, with small markets no longer being fragmented by currency. Since an investor in Holland would be able to buy Spanish bonds or German shares, both assets and liabilities would be denominated in Euros. This makes any restrictions on where life insurance companies are putting their cash redundant. The change means that life insurance portfolios in the EU, which used to be mostly in bonds, could start to match British and US portfolios, which are mostly invested in equities.

 

 

 

 

 

 

 

© AskFinancially.com 2008

Life Insurance

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