Across the European Union (EU) there is a growing demand for risks to be written on a Freedom of Services (FOS) basis, according to a research paper published by the International Underwriting Association (IUA).
The London-based IUA, a market organisation for non-Lloyd’s international and wholesale insurance and reinsurance companies, says that such contracts provide a flexible option for clients and have become a significant option for some multinational corporations (MNCs) looking to develop their more traditional global liability programme arrangements.
The IUA’s Liability Underwriters’ Group paper is titled ‘Freedom of Services and General Liability Insurance – an introductory guide and practical underwriting, claims and compliance considerations’.
It examines the concept of FOS whereby an insurer in one EU member state can write and issue policies in other member states, without first establishing a branch or other representation. This cross-border arrangement is a principle of the EU single market and enshrined in the Third Non-Life Insurance Directive.
“The potential advantages and economies of scale to be gained from using policies on a FOS basis have meant that there has been an increasing demand for such products from risk managers, which insurers and reinsurers have been quick to meet,” said Chris Jones, director of market services at the IUA.
“Although most clients still prefer to buy products from a locally established insurer, this type of cross-border underwriting is a useful and valued option, particularly where the local policy is too expensive to issue and reinsure as part of a multinational programme. Even for domestic risks, the FOS option can offer opportunities of extra capacity, specialist cover and greater competition.”
The report, however, also identifies several continuing challenges for companies looking to provide FOS cover. These include communication difficulties arising from language differences and alternative legal systems governing the use of insurance contracts. In some circumstances there may also be complexities in tax compliance and administering claims.
“Despite the concept of a European single market, the reality is that insurers still face significant local legal, compliance and operational challenges,” added Jones. “There are a number of issues that require careful consideration.
“In particular, the lack of legal and fiscal harmonisation within the EU means that a single insurance market is not yet a reality and this inhibits the smooth management of risks on an FOS basis.”
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