Legislation consisting of five directives on motor insurance that was adopted by the European Community (EC) is widely perceived as a major contribution to the free movement of vehicles (and thus individuals and goods) within the European Union. The first three directives, adopted between 1972 and 1990, established a single market in the field of motor insurance and required all motor vehicles to be covered by third-party liability insurance. Moreover, the directives abolished the inspections previously conducted at EU internal border points to verify civil liability insurance for motor vehicles. The fourth of the five Motor Insurance Directives adopted by the European Parliament (Parliament) and Council of the European Union (Council) in 2000 focused on “visiting victims,” i.e., people who have had accidents outside their EU Member States of residence. The directive streamlined claim and compensation procedures and provided for the quicker settlement of claims. The latest Motor Insurance Directive in 2005 modernized the provisions contained in the previous directives on motor insurance and took steps to further protect victims.
Regulation 864/2007 of the Law Applicable to Non-Contractual Obligations, also referred to as “Rome II,” entered into force in January 2009 and has significant implications for motor insurance. Article 4(1) of Rome II states that, in the case of a non-contractual obligation arising out of a tort, the laws of the country where the damage occurred shall be applicable. For motor insurance, this means that people who suffer road traffic accidents outside their Member States of residence are obligated to comply with the provisions of foreign law (if they do not fall within the exceptions contained in Article 4(2) and Article 4(3)).
The application of foreign law, especially in terms of compensation schemes and limitation periods, can pose problems for “visiting victims.” Recognizing the difficult positions of cross-border victims, the European Commission (”Commission”) attached a statement to Rome II on road accidents, expressing its intention to provide a study to the Parliament and the European Council by the end of 2008, which would examine the specific problems inherent to cross-border accidents, including available policy options to improve the situation of victims. As indicated in the initial statement attached to Rome II, the study was intended to form an integral part of a subsequent “Green Paper” containing future policy options to be released by the Commission.
Rome II Study on Compensation of Cross-Border Victims in the EU
In accordance with its statement in Rome II, the Commission published the relevant study on compensation of cross-border victims in the EU (”the Study”) on January 29, 2009. The Study focuses on the national practices of Member States regarding compensation awards and limitation periods. Furthermore, to facilitate the right to claim, the Study proposes several policy options to address potential disadvantages stemming from the significant differences in national compensation systems.
One of the differences between Member States is the use of compensation systems based on either strict liability or fault, or a combination of the two. The Study further highlights the significant differences in compensation levels between Member States. The type of loss or damage eligible for compensation, as well as the amount of compensation, vary among the Member States. In addition, differences in compensation levels do not only exist between the Member States but also between regions within Member States, further complicating matters. The Commission points out in its Study that differences in compensation awards can contribute to over- or under-compensation of victims depending on the location of the accident and on the victim’s “state of habitual residence.”
In the section of the Study that addresses limitation periods, the Commission made similar findings. Highlighting the wide variety of limitation periods, the Study identified several areas of difference between Member States, including: the event triggering the start of the limitation period, the events and circumstances that may suspend or interrupt the limitation period, and the length of the limitation period depending on the type of damage. Recognizing the limited knowledge and understanding that “visiting victims” have of respective national practices in regard to limitation periods, the Commission warns of the effective preclusion of a right to claim.
The Study suggests various policy options to address multiple national practices in compensation schemes and limitation periods, and to mitigate the negative impact of these divergent practices on persons having cross-border accidents. The proposed measures range from abstention from any action at the EU level to the introduction of EU-wide systems prescribing the treatment of “Visiting Victims” in relation to issues of compensation and limitation periods. For example, regarding compensation awards, the Commission proposes to introduce compulsory insurance for drivers - also known as first-party insurance. Under this specific type of coverage, the policyholder (i.e., the driver of a vehicle), would be able to obtain insurance coverage for his own injuries and the injuries of his passengers.
Public Consultation on Compensation of Victims of Cross-Border Accidents in the EU
Through June 30, 2009, the Commission conducted a public consultation on compensation of victims of cross-border accidents in the EU (”the Consultation”), for which the Rome II Study served as the reference document. The objective of the Consultation was to obtain comments from stakeholders on the results of the Study and on the viability of the proposed policy options. The Commission is expected to publish the results of the Consultation in the coming weeks.
Solvency II Framework Directive
In May 2009, the Council of the European Union, meeting in the configuration of the Economic and Financial Affairs Council (ECOFIN), adopted the text for the Solvency II Directive, which had been endorsed by the European Parliament one month earlier. This Framework Directive involving the (re)insurance business needs to be transposed into national law by 2012 and further refines the reforms introduced by the preceding directives under Solvency I.
Solvency II establishes control and supervision mechanisms for insurance and reinsurance entities based on a three-pillar approach. The first consists of capital requirements, specifically the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR). The second and third pillars institute reporting and disclosure requirements, as well as qualitative requirements related to risk management. With these requirements the European regulatory framework aims to guarantee the financial soundness of insurance companies and, thereby, to protect policyholders and beneficiaries. After the adoption of the Framework Directive by the European Parliament, the focus of the policy-making process is now on implementing the necessary measures.
The European Insurance and Reinsurance Federation (CEA) has endorsed the legislative reforms initiated under the Solvency II Framework Directive and has expressed its support for achieving modern and effective legislation. In particular, the CEA welcomes the benefits expected to result from the Framework Directive, such as improved policyholder protection, greater consumer confidence, more innovative and competitive products, and, in general, the creation of a financially sound EU insurance market.
However, given that the details of implementing the Framework Directive have yet to be worked out, the exact regulatory impact of this legislation on insurance companies remains to be seen.