Passport to European insurance

Lovell White Durrant has led a breakthrough for international insurance business in its advising of insurance company Yasuda Kasai in the first portfolio transfer involving six continental offices.

Yasuda Kasai is a UK-based subsidiary of Kasuda Kasai Fire and Marine Insurance Company, Japan's second-biggest insurer.

The portfolio transfer is one of several options contained in last year's Third Insurance Directive for expanding its business without needing to go through the regulatory systems of each individual country.

Insurance lawyers among the City's top practices expect many more of the 800-plus UK insurers will now take the opportunity to use the streamlined system under the directive. These companies will do this either by opening new branches around Europe or transferring their portfolios to existing offices.

“It's very likely, certainly,” says John Young, the Lovell White Durrant partner who is heading up the Yasuda Kasai project. “This is the way that commercial insurance companies are likely to operate in Europe in the future. If a company wants to have operations throughout Europe, this is the way to do it.”

Clyde & Co partner Patrick Devine agrees. He says: “If they [insurance companies] were not doing so, they would be rather ill-advised. These opportunities will give a variety of ways for companies approaching a market and inevitably they will get to be more competitive.”

Young says: “We should be expecting European companies to be doing exactly the same and so it's likely to produce more competition in the area of commercial insurance.”

He adds that life insurers are less likely to take such advantage of this because of the additional business hurdles of establishing means of distribution abroad.

Marian Pell, who is a partner at Herbert Smith, comments: “It will make it much easier and to that extent, applications will increase.”

The Third Insurance Directive, which is aimed at harmonising the insurance market in the EU, was implemented in the UK on 1 July 1994 by amendments to the Insurance Companies (Third Insurance Directive) Regulations 1994.

The directive allows the insurance regulator in the EU member state in which an insurance company is based – in the UK's case, the Department of Trade and Industry – to be responsible for that company's business in each and every other EU state.

Under the old system, each member state's insurance regulator took responsibility for the insurance carried on in that member state.

The new regime, known as the 'single passport', puts an end to the duplicate regulation faced by insurance companies wanting to operate in other European countries.

Use of this directive presents potentially huge financial savings in fees to lawyers and accountants in the countries in which a company is setting up offices, in regulatory costs, and in doing away with the initial cost of applying for licences. Licences alone can cost tens of thousands of pounds for each country, says Young.

It is now much quicker, taking around six months through the DTI, as opposed to around 18 months by applying to foreign regulators.

Devine says UK lawyers could end up providing extra legal advice normally taken from continental lawyers. In addition, the directive paradoxically adds more complexity by forcing lawyers and clients to take into account the broader issues. “It will concentrate some of the work in the hands of London lawyers,” he says.

In Yasuda Kasai's case, the company used the directive's portfolio transfer procedure. This allows one insurance company to transfer a “book” of business to another, so the policyholders' rights and liabilities are automatically transferred.

Young says the Japanese company's aim was to cover its run-off liabilities in London market business, from which it wanted eventually to withdraw. Many insurers had taken big hits in this market.

Yasuda Kasai's aim was to pursue a new separate market of Japanese multinational companies' business around Europe, where the company already had some offices handling the old business.

To pursue the new market and ringfence it from the old market's liabilities, Yasuda Kasai set up a new subsidiary (Yasuda Kasai Insurance Company of Europe) and used the directive's portfolio transfer procedure to transfer the new business to its existing continental offices.

Young says the directive made this a straightforward task by only having to deal with the DTI. “Under the old system, we would have had six different applications to make and six sets of negotiations with different insurance regulators,” he explains.

A Yasuda Kasai spokesman says: “We are delighted by the ease with which we have been able to reorganise our operations throughout the EU under the new insurance regime.”