| | TACIS Insurance Advisory Services II I. THE UNDERLYING REASON FOR CLASSIFICATION 1. Classification is principally related to Supervision In all the principal legal systems all insurance companies, in order to work legally, need to have two authorizations, which can be issued together. As a non personal but capital company (company limited by shares), an insurance company must fulfil certain requirements provided for all capital companies. This is due to the fact that as companies limited by shares their assets and liabilities to third parties are separated from the assets and liabilities of their shareholders. The solvency of the shareholder is of no benefit in creating security for a third party, since third parties are only satisfied by the assets of the company. The main but not the only task of state control is to secure as a very minimum that the share capital is at least deposited and that during its life the company possesses assets at a satisfactory level. However, if the company wants voluntarily to be registered with a higher share capital, the third parties must be not misled if the assets have no relation at all with this capital. But also the state supervision aims to guarantee the same function of the capital company at the real separation of shareholders and management, as well as the protection of minority shareholders. If the capital company is an insurance company (joint-stock company or mutual corporation) there is also detailed regulation, which is linked with the licence for the conduct of business. 2. Different Requirements per Class of Insurance In the European Union insurance companies enjoy equal treatment. The intention is to distinguish between classes of risks because there are significant differences as regard the characteristics of the risks. From the risks that can form the object of insurance, classification of risks takes place according to the common characteristics of each group of risks. The common characteristics of the identified group of risks demand that the insurance company has different capacities regarding solvency requirements, reinsurance, technical provisions and matching assets, insurance investment, but also different obligations vis à vis the insured persons. State control does not need to insist that all insurance companies fulfil all the requirements which are needed in order to cover all risks, because of the reason that one company may specialize in one risk only; this company should in such a case meet only the specific requirements that are proportionate and appropriate for this risk. Those different requirements which are due to the difference of types of insurance lead also to specialization in the insurance business and also in the work of insurance supervision. This is positive. Classification is a requirement of our times because it leads to specialization of supervision in fields as diverse as fire, civil liability, transport. Of course the supervision can be done by the same members of staff in the supervisory authority, but most countries have found that as a parallel consequence of the progress and growth of the insurance industry, supervision also grows in terms of specializations. This is a benefit, because specialization makes supervision more effective. 3. Criteria for Adoption of Insurance Classes The criteria are dependent on the degree that risks have similar characteristics. In some other states like Australia, Canada, and currently in the Russian Federation the law provides for fewer classes of insurance than in the EU. It is advisable to have a wide variety of classes, because there is only benefit to be gained from this. The criteria must however be broadly the same on a global scale in particular in relation to large risks because of the international character of insurance and also of reinsurance. In order for Russian insurance companies to access the international reinsurance market, they need to show the nature of their business. This is greatly assisted by the use of an internationally accepted classification system. It would be useful to have a closer look at the example of Canada, as an initial starting point of our comparisons. Canada is, like Russia, a large, federal country, and has a classification system not dissimilar to Russia’s. For Canada the largest category is the insurance of persons, as is the case with the Russian Federation along with property and liability insurance. We notice in the comparison with the EU system only small differences in the Canadian classification system. Canadian property and liability insurance includes insurance for fire, business interruption, transport, liability, legal aid, theft and embezzlement, agricultural, hail and livestock, catastrophe, credit and caution, technical, miscellaneous and motor vehicle. Personal insurance includes workers’ compensation, personal injury, private health insurance, life insurance and pension funds. Finally the Canadian classification system provides for a separate private insurance for social security. The criterion for classification is not only the homogeneity of risks but also the frequency of the insurance and the importance of the business or the risk to which it refers. The importance of the business is probably the reason why it recognizes a special class, business interruption insurance. The criterion of the importance of the risk is the fact that they have special class for catastrophe insurance. II. The Separation of Life and Non-life There is a long discussion and dispute among some European Union industrial countries and others as to the necessity to separate life insurance business from non-life insurance business, and in some cases also from the pension insurance business. The reasoning for the argument in favour of separation is obvious. There is no dispute that some separation should exist in the insurance business between insurance for non-life and insurance for life. The difference between these two categories of insurances comes back to their nature. In non-life insurance the premium is the return for the assignment of risks. Whilst in life insurance, premium can be partially or totally a savings deposit managed by the insurer in an attractive way, maybe more attractively than a simple deposit in a bank. So, it is understandable that a different protection should be granted to those persons who entrust their savings to the insurer than from those persons who rely on the promises of the insurer to grant reliable coverage in the uncertain case of loss. In the second case, the premium is consumed by the expiry of the period of the insurance contract, while the premium that has the nature of saving, on the contrary, is expected in any case to be returned plus investment gain. If in one business entity there is a mixture of categories, the life business is exposed to the risks of the non-life business. Also, the non-life business cannot be compared with life from the point of view of the commercial risk that it is undertaken. The life insurance business is more stable than non-life, with its many ups and downs and dependence on factors that are difficult to predict. A third separation of risks could be non-life, life and pension insurance that is exclusively savings. Nevertheless, in order to reach consensus in the EU, the obligation for separate legal entities for life and non-life does not include pensions as a third category. On the other hand, in the EU it was permitted to the insurance companies that conducted both life and non-life (composite companies) to continue working after the enactment of the new separation regulation in Europe on condition that they create effective separation in their business and accounting practices[1]. A further issue arises when a foreign composite insurance company applies to establish a subsidiary in a EU member state. The EU had to confront the issue of whether to prohibit these composite companies from establishing by subsidiary or whether to allow them to work in both categories of insurance as in its principle place of business. The principle of equality between foreign and domestic companies demands that they should not be permitted to establish subsidiaries to conduct both life and non-life. Holders of life insurance policies will be adequately protected if foreign composite insurers are permitted to establish subsidiaries as either as life or non-life insurers, not both. The subsidiary has a separate legal entity and thus if the parent company faces financial problems, these are not transferred to the subsidiary by operation of law. Similarly, a composite insurer from an EU Member State wishing to establish a branch in another Member State can only offer life or non-life. Practice has proved that non-life insurers have a greater risk to become insolvent than life insurers, which means that composite insurers would be tempted to fund their non-life portfolios with their life insurance assets. This risk is greatly diminished, if not removed, in insurance companies that keep their life and non-life business completely separate. |
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TACIS Insurance Advisory Services II
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