QUESTIONNAIREINTEGRATION OF FINANCIAL SERVICES

Prepared for the AIDA XI World CongressOctober 20-24, 2002New York, NY USA

Jonathan R. Macey, General Reporter

BELGIAN ANSWERprepared by

Prof. Herman A. COUSYandProf. Caroline VAN SCHOUBROECK

Centre for Risk and Insurance StudiesLaw School,Catholic University of Leuven (K.U.Leuven)

1. What is the current level of integration among commercial banking, investment banking and insurance in your country?

(a) fully integrated(b) partially integrated but moving towards full integration(c) partially integrated and in a state of equilibrium(d) not integrated at all(e) other (please explain)

1. In Belgium the rapprochement of commercial banking, insurance and other financial services and the integration of the various providers of such services has been the object of a long-lasting and rather slow process, that has taken momentum only during the very last decade of the nineteen-nineties.It is true that in the middle of the 19 th century a central and public savings and loans institution, the “Caisse Générale d’Epargne et de Retraite” (ASLK - CGER) had been installed, combining in its lap a savings bank and a life insurance company. The CGER remained however an unique exception in a financial landscape which was otherwise characterised by a far-reaching fragmentation of financial services, offered by specialised categories of providers under a regulatory scheme that imposed such obligatory “specialisation”.

Prof. H. Cousy is currently President (since 1986) and Prof. C. Van Schoubroeck a Member, of the “Commission des Assurances”, official advisory body to the Belgian government in insurance matters.

2. The very first and timid signs of the current move toward “despecialisation” would appear in the nineteen-sixties. A first and timid rapprochement of the legal status (more precisely of the list of authorised investments) of so-called deposit banks and savings banks came in 1967. The Royal Decree n° 11 of 18 April 1967 extended the list of assets in which savings banks were allowed to invest, thereby narrowing the difference with the more liberal rules governing deposit banks.

A next step came with the so-called “Loi-Mammouth” (Act of Parliament of 30 June 1975 on the legal status of deposit banks, savings banks and other financial undertakings) which made the integration of the legal status of deposit banks and savings banks official 1.

3. A next step would be the integration between the banking and the insurance industry, which came slowly and rather late in Belgium. The trend started indeed slowly but then suddenly expanded into impressive proportions. The very early signs of rapprochement between banking and insurance could already be observed around 19862, but the effective despecialisation would take off only later on, i.e. in the late nineteen-eighties and through the nineteen-nineties.

With respect to this process of rapprochement between banks and insurance, it is important to distinguish between the following three concepts (and methods): bancassurance, assurfinance and all finance. As a recent commentary by L. VAN DEN BERGHE and K. VERWEIRE, (a book that will be our companion and guide through several of the answers that follows hereafter3), puts it: “bancassurance” designates the strategy where a bank wants to cross-sell insurance products through its own distribution channels, usually branches. In such case, the bank can either become the risk bearer herself by creating or acquiring her own insurance company or the bank can look for the help of a creative joint venture, or she can limit herself to being a pure agent or broker.

“Assurfinance” is the opposite modus of diversification in which an insurance company or an insurance intermediary practices cross selling of “financial products” (such as credit or investment or savings operations) to its clients.

1 About this legislations, see BRUYNEEL, A., “La loi du 30 juin 1975: Mammouth, souris ou pot-pourri”, Journal des Tribunaux 1975, p. 645; COUSY, H., “De wet van 30 juni 1975 betreffende het statuut van de banken, de private spaarkassen en bepaalde andere financiële instellingen”, Rechtskundig Weekblad, 1975-1976, 1387-1406.2 Compare COUSY, H., “Vers la déspécialisation entre secteur bancaire, assurance et sécurité sociale”, Bulletin de l'Association Royale des Actuaires Belges, 1986, n° 80, p. 15-31.3 VAN DEN BERGHE, L.A.A. and VERWEIRE, K., Creating the Future with All Finance and Financial Conglomerates, Kluwer Academic Publishers, 1998 (hereafter cited as Creating the Future), p. 5; see also ROMAIN, J.F., “La “Bancassurfinance” et le statut des intermédiaires financiers primaires et secondaires”, in Bancassurfinance, Cahiers EVBFR-Belgium, Brussels, Bruylant, 2000, p. 185-194;

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A third form is called “all-finance”: here the products of banks and insurance companies are unbundled and rebounded in a different manner in view of adapting them to the specific needs of the customer4.

Bancassurance has now been fully realised in the sense that most banks have close relationships or established co-operations with insurance companies whose products they sell as intermediaries.

Assurfinance is much less practised because of regulatory constraints: insurance undertakings are only within very limited conditions allowed to offer certain other financial services because of the specialisation principle that governs insurance undertakings (see answer to question n° 6).

All-finance is practised, but at the level of the conglomerate groups that have been formed: the various subsidiaries of the group offer different financial services, but it is in such co-operation with other members of the group that tailor-made solutions can be proposed to the client.

4. For a good understanding of the history and present situation on the Belgian market, particular attention must be given to two special characteristics of it: first, the absence of a significant tradition in investment banking and second the traditional, be it now largely historic, existence of a variety of so-called public (in the sense of state-owned) credit institutions.

5. With respect to the activity of investment banking one must bear in mind that from an historical point of view the Belgian legislation and scenery have been profoundly influenced by the crash and the ensuing economic crisis in the early nineteen-thirties. As a result of and in an effort to avoid similar future crises, the Belgian financial legislation of the mid thirties had introduced an absolute ban on “mixed banking”. The well-known regulation of the Royal Decree n° 185 of 9 July 1935 (now largely replaced by the Act of 22 March 1993 on the organisation and supervision of Credit Institutions (Credit Institutions Act) prohibited banks to invest the proceeds of the deposits in shares. The activity of providing undertakings with equity and the function of investment banking were not the object of any specifically regulated type of institution. In 1967 a specific legislation was issued concerning the organisation and supervision of so-called “sociétés de portefeuille”, i.e. of “holding companies” (Royal Decree n° 64 of 10 November 1967). Also in 1962 a public (state-owned) investment company (“société nationale d’investissement”) was established. But a tradition of investment banking did not come off the ground. Most analysts would agree that the absence of such institution has exercised a profound influence upon the general investment climate in Belgium. However, the situation has changed.

In due time the absolute ban on the possession by banks of risk sharing capital was gradually softened. A major change occurred however when the Act of 22 March 1993 on Credit Institutions (implementing several European directives, and especially the so-called European Banking Directives (First Banking

4 VERWILST, H., “Huidige praktijk en ontwikkeling in Bancassurance”, Bancassurfinance, Cahiers EVBFR-Belgium, Brussels, Brylant, 2000, p. 24-29; see also Creating the future.

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Directive of 12 December 1977 and the Second Banking Directive of 15 December 1989)5 came along.

Giving a broad definition of credit institutions as undertakings that receive deposits or other repayable funds from the public and invest them in giving credits; the Act of 22 March 1993 on Credit Institutions entirely reverses the previously prevailing rule against mixed banking. Whereas under the old rule the possession of shares in commercial undertakings was in principle prohibited, except in these cases where the law explicitly permitted so, the new rule is that such possession is in principle allowed, be it within the limits laid down by the Act6.

One other recent development must be signalled. Implementing several European directives in that field, the Belgian Act of 6 April 1995 on Secondary Markets in Financial Instruments has introduced into Belgian law a regulatory framework for “investment firms” (“entreprises d’investissement”).

As defined in the Investment Services Directive (Directive (93/22/EEC) of 4 May 1993 on Investment Services in the Securities Field), an investment firm is any legal person the regular occupation or business of which is the provision of investment services for third persons on a professional basis7.

To qualify as an investment firm, an undertaking must obtain an authorisation (from the financial authority, i.e. the “Commission Bancaire et Financière –CBF) as either a securities brokers firm (“société de bourse”), a “société de gestion de patrimoine”, a “société de courtage en instruments financiers” or as a “société de placement d’ordres en instruments financiers”. Besides the services that they are authorised to provide by virtue of their specific license, investment firms may not perform other tasks. Credit institutions are allowed to call themselves investment firms and can perform investment services.

6. Typical for the Belgian situation was also the existence at one time of a large number of highly specialised so-called “public” (in the sense of state-owned) credit institutions. In a spirit of counterbalancing the power of privately owned financial undertakings the Belgian legislator had, ever since the middle of the nineteen-thirties, created a vast number of highly specialised public credit institutions. In fact, almost for every separate branch of credit activity one or more public institutions had been established; several for home acquisition credit, one for agricultural credit, one for export credit, one for credit to industry, one for credit to public entities like “provinces” or “towns”, etc. Under the influence of the E.C. Commission, actively encouraging a policy of

5 The first and second banking directives have now been replaced by a coordinated and codified version of one single Directive (2000/12/EC) of 20 March 2000 on credit institutions.6 See answer tot question n° 6.7 Investment services include: (a) reception and transmission, on behalf of investors, of orders in relation to financial instruments; (b) execution of such orders other than for own account; (c) managing portfolios of investments in accordance with mandates given by investors on a client by client basis; (d) underwriting in respect of financial instruments and placing of such issues (Annex A to the European directive on Investment Services).

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demonopolisation, nearly all of these public credit institutions have now been “privatised” or otherwise changed.

As a result of and in view of the European integration, such public credit institutions have sought to strengthen their position first by trying to merge with similar public or semi-public institutions. Later on all of them were privatised, i.e. sold to and integrated into private institutions. All public institutions, even the hereabove already mentioned “Caisse Générale d’Epargne et de Retraite” (CGER-ASLK) have thus been sold to a private financial conglomerate (in casu Fortis) and indeed disappeared from the Belgian financial scenery.

7. By way of summary, it may be stated that the current level of integration among commercial banking, investment banking and insurance, is situated at the level of full integration, as far as some of the very large groups (see examples under question nr. 2) are concerned, and at the level of partial integration in a number of other cases. The situation is developing rapidly, and from the very outlook of the publicized activities of some major financial groups, the diversification of financial services, and the terminology used, are still very much in rapid evolution.

There is the activity of “Network banking”, which includes retailbanking, full service to industrial clients, trade and commodity finance.

There is the activity of “merchant banking”, which refers to such activities as investment banking, financial markets, information banking and private equity.

And there is the activity of “private banking” and asset management.

2. Compare the level of integration in the insurance industry in your country with the level of integration in developed countries generally. Specifically, is your country’s insurance industry more heavily integrated, less heavily integrated or integrated at about the same level as the average level in countries that are members of G7 group of industrialised nations (Australia, Canada, France, Germany, Japan, Italy and the U.K.)? Feel free to discuss this question in some detail, explaining which aspects of the insurance industry are more or less well integrated than others.

The integration of the insurance undertakings into larger financial groups has started off at about the same time as it happened in some other E.U.-Member States. It has indeed lasted until the late nineteen-eighties and early nineteen-nineties when the first major conglomerate entities (banks and insurance undertakings) were formed. Since then however the integration has proceeded rapidly and rather intensively.

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Our perception is that, certainly in this last phase, the integration occurred almost synchronically in the various Western European countries, bordering Belgium.

In an effort to give an idea of what has been going on in the Belgian scenery, we allow ourselves to report on two of the major cases of integration between bank and insurance, that have occurred in Belgium, in the course of the nineties: the Fortis case, and the KBC case8

A. THE FORTIS CASE1. (Source: Creating the Future , footnote n°3, p. 114.)Fortis is a somewhat special and interesting case.Originally “Fortis” was the name for the operating subsidiaries of the two mother insurance companies: the Belgian AG Group and the Dutch AMEV Group. These parent companies had retained their own independence and identity in full for several reasons: differences in legal structures tax positions and differences in power exercised by the main shareholders. This structure was also used by other financial institutions aiming at cross-border alliances such as Crédit Local de France and Gemeentekrediet (1996) and recently by Zurich and the insurance companies of the British BAT (1997).In 1993 Fortis acquired the CGER-Group (see about this originally public bank and insurance institution, under question nr. 1) and thus strengthened its position in the Belgian home market. In 1992 Fortis created a joint venture, Caifor, with the largest Spanish savings bank La Caixa. This joint venture was very successful and this insurance group became one of the largest insurers in Spain. At the end of 1996 Fortis took over MeesPierson, the investment subsidiary of the Dutch bank ABN-AMRO and thus significantly strengthened its banking position in the Netherlands.Fortis’s strategy can be summarised in the following words: multi-domestic, multi-channel and multi-product.Since then the complex organisational structure has often been changed. In 1996 the structure presented in the figure hereafter was adopted.Although this structure seems very decentralised, the central idea was one of controlled freedom, achieved by a linking pin principle.

Organisation structure of Fortis after 1996

8 Of direct importance to Belgium has been the setting up in the Netherlands, of the ING-Group: see Creating the Future, footnote n° 3, p.138.

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50% 50% 50% 50% 50% 50% 50% 50%

operating operating operating operating companies companies companies companies

2. (Source: Fortis, Information Memorandum with respect to the unification of the shares of Fortis and Prospectus with respect to the application for listing of the Fortis Share, 15 November 2001, p. 16-25; www.fortis.com).

“In 1998 the shareholders of Fortis (B) and Fortis (Nl) approved an Equalisation Agreement pursuant to which all shareholders share identical economic rights per share with respect to earnings, dividents and net asset value. Until 1998 the voting rights and other legal rights of Fortis Shareholders pertained only to the company of the share held, i.e. Fortis (B) and Fortis (Nl). With the creation of the Fortis Share, all shareholders will have the same economic and legal (including voting) rights” (p. 16).

Fortis structure after the Unfication (p.18)

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FORTIS AG FORTIS AMEV

Fortis Nederland

FortisInternationaal

FortisVS Inc.

ForisBelgië

Fortis Shareholders

100% 100%

50% 50%50% 50%

B. THE KBC CASE(Source: KBC website www.kbc.com)

Formed in 1998 after the merger of Kredietbank (a retail and corporate bank), CERA Bank a co-operative bank), and ABB (an insurance company), KBC has 43.000 employees world wide, and is especially active in Belgium and Central Europe.The organisational structure is based on a vertical structure with a holding company, harbouring a banking and an insurance leg.KBC Bank and Insurance Holding Company is the holding company of the KBC Group. It is the direct parent company of KBC Bank NV, KBC Insurance NV and KBC Asset Management NV. All other companies of the KBC Group are direct or indirect subsidiaries of these three companies.KBC Bank (wholly-owned by the KBC Bank and Insurance Holding Company) is the banking arm of the KBC Group. It is the parent company of all the KBC Group Companies that are involved in banking and other financial activities in Belgium and abroad.KBC Insurance (wholly-owned by the KBC Bank and Insurance Holding Company) is the insurance arm of the KBC Group. It is the parent company of all the KBC Group companies that are involved in insurance activities in Belgium and abroad.

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Fortis SA/NV Fortis NV

Fortis Brussels Fortis Utrecht

Fortis Bank Fortis Insurance

KBC Asset Management (55%-owned by the KBC Bank and Insurance Holding Company and 45%-owned by KBC Bank) is the asset management arm of the KBC Group. It is the parent company of KBC Asset Management Ltd.

3. What are the principal similarities between investment banking, commercial banking, and insurance? Be sure to discuss both sides of the balance sheet: i.e. investments by banks and insurance companies, as well as capitalisation and funding.

A “Belgian” answer will, in view of what was said with respect to investment banking supra question n° 1 (in fine), remain limited to the comparison of the activities of credit institutions (legal term for deposit and savings banks since the Act of 1993 (see question n° 1) and insurance undertakings. However, the results will probably not be very different in Belgium as compared to other countries.

1. At a very general level, one can state that both sorts of financial institutions attract their clients money (through deposits c.q. payment of premium) in return for a promise of a later payment. Such payment will take place when, in the case of a bank, the client withdraws his money from his account or makes otherwise use of his deposit, or when, in the case of an insurance company, the insured recovers a claim against the insurer.

At the time when a distinction was made between deposit banks and savings banks (see under question, n° 1), the first one’s attracted short-term deposits, the second one’s attracted so-called savings deposits and other long term money. Since the merger of the two types of banks by the Act of 22 March 1993 on Credit Institutions, the distinction has faded. Nearly all credit institutions have diversified the structure of their liabilities, by attracting short-, medium- and long term money. The widening of the range of their deposits and other sources would allow them to also diversify the range of their investments.

At present, life insurance companies and some credit institutions (commercial banks) (oriented toward attracting savings) attract to a certain degree the same money, more precisely the long-term savings of private households. Whereas insurers traditionally attracted principally pension-oriented savings, other institutions like savings banks would principally attract savings oriented toward the acquisition of real property. The situation has since undergone significant changes, precisely in the sense of more despecialisation. Credit institutions (commercial banks) have attracted pension oriented savings and investments, while on the other hand insurers offer their new life insurance products like e.g. Unit linked Life Insurance or other flexible insurance products, that come closer to traditional bank and especially investment products.

2. On the asset side of the balance sheet, there is a remarkable difference between credit institutions (commercial banks) and insurance undertakings.

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Whereas under Belgian law, the rule has traditionally been that credit institutions (commercial banks) are free to invest in the assets and activities of their choice, (given some legally imposed restrictions ruled in Article 32 of the Credit Institutions Act of 1993), the opposite principle applies to insurance companies. Here the authorised investments of technical provisions are limited to those assets that are listed. Largely following in that respect the detailed prescriptions of the European Insurance Directives (see Articles 21 and 22 of the Third Life and of the Third Non-life Insurance Directives of 1992), the Belgian insurance supervisory regulation holds a detailed list of categories of investments, with specifications of the maximum allowed percentages that can be invested in any given category (see especially Articles 17- 17bis of the Insurance Supervision Act of 9 July 1975 and Article 10 of the Royal Decree of 22 February 1991 holding the so-called “Réglement Général de Contrôle”). One of the important rules that were introduced by the European Insurance Directives is the prohibition addressed to the Member States to require investment in particular categories of assets (Articles 22, 5 Third Non-Life Insurance Directive (92/49/EEC) of 18 June 1992 and Third Life Insurance Directives (92/96/EEC) of 10 November 1992).

4. To what extent to you agree or disagree with the following statement: Investment banking, commercial banking, and insurance are similar because they each involve: (a) risk-management; (b) evaluating investments and managing financial assets on a large-scale basis; (c) large-scale investing on behalf of small clients (depositors, investors, and insured individuals)?

The statement especially in its subparts (b) and (c) can be largely subscribed, at least while one looks at the comparison between the life insurance business and the savings formulas offered by banks.

5. What are the principal reasons for integration among commercial banking, investment banking and insurance in your country (circle all that apply):

(a) achieving significant economies of scale in operations, i.e. cost savings;

(b) achieving economics of scope in operations, i.e. achieving more efficient delivery of some services or products because of information or skills acquired in delivering other services;

(c) increasing overall market share;(d) reducing the risks associated with future trends in consumer

demand by diversifying product lines;(e) cross-marketing opportunities(f) matching competitors’ strategic moves;

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(g) reducing the risk associated with the insurance business through diversification into other areas;

(h) the need to meet international competition;(i) other, please explain

1. This enumeration of possibilities gives a fine oversight of the many motives and reasons involved. In Belgium the specific reasons and motives for moving toward integration, and specifically toward bancassurance (and other further reaching) integration of financial services are generally considered to be the following: (1) a general move toward rationalisation and integration within the financial

services (e.g. in Belgium, since the legislation of 1975, the move toward “despecialisation” between savings banks and deposit banks and between public and private credit institutions) in view of a growing demand for integrated and even “holistic” services;

(2) the decrease of the “marge d’intermédiation” (difference between ‘debit’ and ‘credit’ interest rates) and ensuing decrease of profits of traditional banks, obliging them to look for new profitable activities;

(3) the need of commercial banks to make a renewed effective use of their highly refined net of local banking agencies (almost one per street) and of their highly trained personnel (deprived by lot of their tasks by fast growing electronic finance and threatened with redundancy because of merger between banks) ;

(4) the desire of insurance companies to gain access to the vast amounts of savings in the hands of private households and to offer and sell their own expertise and counselling services in the field of investment.

2. Compare the analysis by VAN DEN BERGHE and VERWEIRE, in Creating the Future, footnote n°3, p. 7 where they write: “The formation of financial conglomerates does not coincide completely with the growing market interface between insurance companies, banks and investment firms. Belgium for instance has been a country of financial holdings, which did not operate in the market as financial conglomerates for quite a long time. The diversification of the banking sector was driven by different forces. One of the most significant forces has been the desintermediation in commercial banking. (...) During the former decade, some structural trends have evolved, both on the assets and the liabilities side of the bank balance sheet. On the asset side, credit institutions are confronted with the replacement of straight bank loans by market-determined sources of financing (...). On the liabilities side, there is a substantial outflow of deposits to a wide range of financial products offered by companies of different sectors. In addition banks faced new capital adequacy rules which put further pressure on the bank’s profitability (...). Therefore banks have looked for new sources of profit, preferably without increasing their necessary solvency level. All fee income was therefore a welcome source of diversification”.

3. Another important factor, which has played a decisive role, has been the opening of the European internal market for credit institutions, insurance undertakings and investment firms. The perspective of the coming into existence of huge and liberalised Community wide markets for financial

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services has convinced many smaller financial institutions that they necessarily had to adapt their size to the size of the markets. Numerous take-overs and mergers have taken place. In a way both the objectives of acquiring larger scale (acquiring more market share) and of acquiring large scope (diversification and despecialisation) have been achieved more or less simultaneously in the course of this process.

6. Are there significant regulatory obstacles to integration among investment banking, commercial banking, and insurance businesses in your jurisdiction?If your answer is yes, please explain.

Under this heading we will first examine what are the regulatory restrictions that limit the acquisition by a credit institution (commercial bank) of shares in or of a holding in an insurance company, and second what are the limitations to the participation of an insurance company in the capital of a credit institution.

1. As to the first point, the basic idea has already been expressed. Whereas Belgian law had traditionally adhered to the principle prohibiting banks to invest their depositor’s money into risk bearing equity (see question n°1), this rule has been overturned since the so-called Second European Banking Directive (89/646/EEC) of 15 December 1989 on credit institutions. Henceforward investing in equity is allowed in principle be it that a number of limitations of a prudential nature are imposed.

The basic rule is laid down in Article 12 of this Second Banking Directive. This provision was implemented in the Belgian Act of 22 March 1993 on the organisation and supervision of Credit Institutions (Credit Institutions Act). Roughly speaking credit institutions are allowed to directly or indirectly possess shares within the following limits and conditions. A first category of shares is those that a credit institution can have without limitations in time or in amounts. These are the shares in other credit institutions, securities brokerage firms, insurance undertakings and other financial institutions that offer non-core services like leasing, factoring and the like.

The second category are the shares that the bank may keep in her commercial portfolio for a limited time: the shares that are envisaged here are those that the bank is holding in the normal course of underwriting, in her own name or on behalf of others, and the shares that the bank is holding to cover dubious or unpaid claims.

The third category contains the shares other than those referred to in the previous categories. Those (shares in commercial undertakings generally) can be held insofar as each item does not exceed 10 % and the total amount of the various items does not exceed 35 % of the bank’s own funds. These percentages can be drawn up by the banking supervisory authority (that is in Belgium the “Commission Bancaire et Financière – CBF”), with this limitation

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that the amount of a credit institution’s qualifying holdings in any undertaking (other than those mentioned hereabove) does not exceed 15 % of the bank’s own funds and that the total amount of the bank’s qualified holdings does not exceed 60 % of the own funds of the credit institution).

Apart from the European Banking Directives, many other European rules and the national legislation that have implemented them, have an impact or impose limitations (and indeed obstacles) to the acquisition by a bank of the entirety or part of an insurance undertaking. In this respect one can mention the European Banking Solvency Directive (89/64/EEC) of 18 December 1989 or the European Directive (92/121/EEC) of 21 December 1992 on the monitoring and control of large exposures of credit institutions. The European Insurance Directives from their side also put up obstacles to the easy acquisition of insurance undertakings by obliging Member-States or their competent authorities to check the identity of the persons who possess or acquire a qualified holding in an insurance undertaking and to check the fitness of the shareholders. Also changes in an existing shareholders structure must be signalled through all means to the competent authorities (Article 8 Third Non-Life Insurance Directive (92/49/EEC) of 18 June 1992 and Article 14 Third Life Insurance Directives (92/96/EEC) of 10 November 1992 and implemented by Article 23bis Belgian Insurance Supervision Act of 9 July 1975).

Neither credit insurance institutions, nor insurance companies are excluded from the field of application of the so-called European transparency directive (88/627/EEC) of 12 December 1988 on the information to be published when a major holding in a listed company is acquired or disposed off, imposing (again) an information duty on those acquiring a significant holding in a target public company9.

2. Many more obstacles are refraining an insurance company from wholly or partially “buying” a bank. There are especially the limitations on the authorised investments that must be taken into account. Both in the European Life and Non-Life Insurance Directives there are explicit prescriptions limiting the categories of assets with which insurance undertakings may cover their technical provisions (Articles 20 and 21 of both the Third Non-Life and the Third Life Directive, see also question n° 3). In addition, these European Directives contain percentagewise limitations of the authorised investments (Articles 22). According to the Belgian insurance legislation and regulation (Article 17 of the Insurance Supervision Act of 9 July 1975 and Article 10 of the Royal Decree of 22 February 1991) investments in shares and other negotiable securities treated as shares and bonds from the same undertaking may not exceed 5 % of its total gross technical provision. The limit is raised to 10 % if the investments is in shares of a European undertaking that is controlled like an insurance undertaking (say a bank) and if the insurance undertaking does not invest more than 40 % of its gross technical provisions in the shares of bodies in each of which it invests more than 5 % of its assets.

9 Those who enjoy the pleasure of reading (and understanding) the Dutch language will find a thoroughly detailed account of these and other obstacles, in DEVROE, W. “Bank en verzekering: deelname in elkaars kapitaal (Europa en U.S.A.)”, in Bank, Financiewezen en Verzekering, (H. Cousy & H. Claassens, ed.), Maklu, 1994, p. 93-142.

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3. Among the legal obstacles to integration among banks and insurance, certain private law rules, more specifically rules relating to unfair trade practices, should be mentioned. In view of protecting the consumer and his freedom of choice, the Belgian legislator had traditionally been firmly opposed against the practices of so-called “joint-offers” (“conditional sale”) whereby the acquisition of products or services is linked to the acquisition of the other (even identical) products or services (Article 54 of the Act of 14 July 1991 on Unfair Trade Practices and the Protection of the Consumer, repealing the Act of 14 July 1971). Products or services can be offered jointly if they form “one whole”. Although the legal provision authorises the minister to further define what constitutes “a whole” in the field of financial services, such governmental regulation was never issued. Recent case law has given a rather liberal interpretation to the rule by not considering as a forbidden joint offer the situation where a bank is offering a reduced interest rate on a loan if the client buys the required insurance coverage from an insurance undertaking indicated by the bank10.

7. Are there significant cultural, economic or other non-regulatory obstacles to integration among commercial banking and insurance businesses in your jurisdiction?If your answer is yes, please explain.

The rapprochement of banks and insurance undertakings in the context of bancassurance has shown that different business cultures do exist between banks and insurance undertakings. Insurance products, so it is said, are sold (the client has to be pushed to buy), whereas banking products are bought (the client is pulled to the bank).

Other differences exist at several levels: at the level of the highest executive officers, in the internal relationships inside the companies, at the level of the relationships with clients. It may very well be that bankers have a light tendency to look down upon insurers. Unlike, or less than bankers, insurance undertakings have a tendency to hide away and to refrain from entering into direct contact with clients: the whole network of distribution through intermediaries works as a shield. Bankers are their clients creditors (claiming the payment of credits and loans), insurers are their clients debtors. This casts quite a different light on the relationship between the operators and their clients. It is a very much asked question what the effect of integration and bancassurance will be. From the standpoint of the consumer the perception and appreciation of the one and other financial service provider may change. From the standpoint of the operator however, the new role of bancassureur may give rise to advantages (better information about the client) and to

10 Case law Court of Cassation (High Court) of 30 March 2001, www.cass.be; Revue Banque et Finance 2001, 256, note G. Straetmans.

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disadvantages (interrelation between different services and possible conflicts of interests, possibility of "cannibalism" whereby a competitive relationship develops between the bank product and the insurance product that are emanating from the same bancassurance group.

Most people do not think that these (and other) differences should constitute an obstacle. However at least one very well known captain of industry has spoken out against bancassurance. Mr. Kees Storm, CEO of Aegon insurance company (Netherlands), has said that leading both an insurance company and a bank is like simultaneously driving two cars at the same time.

Other business leaders have spoken and do speak rather enthusiastically in favour of the opportunities offered by bancassurance, like Mr. H. Verwilst, Deputy CEO of Fortis (Belgium)11.

8. In your view, what are the principal obstacles to integration among investment banking, commercial banking, and insurance businesses? Please rank the following in order of importance with the number 1 (one) indicating the most significant obstacle to integration and higher numbers indicating less significant obstacles to Integration:

(a) regulatory obstacles unrelated to anti-trust concerns (please specify the precise source of these regulatory obstacles);

(b) anti-trust concerns (please specify whether these anti-trust concerns emanate from country-specific anti-trust rules, or derive from international sources);

(c) local cultural norms;(d) legal uncertainty concerns (please specify the precise source of

the legal uncertainty);(e) business risks associated with taking on new lines of business;(f) costs;(g) lack of compelling business justification;(h) other, please explain.

Reference can here be made to a paper on the performance consequences of financial conglomerates in Belgium and the Netherlands. In this paper existing theoretical models to investigate the performance consequences of diversification within the financial services industry are applied, thereby taking into account the multidimensionality of diversification by considering aspects of strategic and organisational fit simultaneously: VERWEIRE, K. and VAN DEN BERGHE, L., "The performance consequences of diversification in the financial services industry: the case of financial conglomeration in Belgium and the Netherlands", Vlerick Working Papers 2001/1, www.vlerick.be/research/WP.

11 H. VERWILST, "Huidige praktijk en ontwikkelingen in Bancassurance", in Bancassurfinance, Cahiers EVBFR-Belgium, Brussels, Bruylant, 2000, p. 13-30.

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9. As a general matter, which industry is more heavily regulated in your country at the present time, Investment banking, commercial banking, or insurance?

1. Both the insurance undertakings and the credit institutions are regulated by virtue of national supervisory legislation which find its basis in European directives, issued on the basis of the E.C Treaty Provisions concerning free establishment and free (cross border) provision of services (Articles 49-55 (ex 59-66) E.C. Treaty).

The insurance industry has been a little bit more resistant toward the European harmonization than the banking sector. This appears inter alia from the fact that to set up the legal framework for an "internal market of banking" only two generations of co-ordination directives were needed (First Banking Directive (77/780) of 12 December 1977 and the Second Banking Directive (89/646) of 15 December 1989). In the sector of insurance however, things went a little less smoothly: three generations of co-ordination directives were needed (First Insurance Directives of 1973 (Non-Life) and 1979 (Life), Second Insurance Directives of 1988 (Non-Life) and 1990 (Life) and Third Insurance Directives of 1992). At least in the continental European Member States (with the exception of the Netherlands) insurance markets were, much more than the markets of banking and other financial services, very much more split up along national borderlines and frontiers.

2. Both in the banking and in the insurance area the European directives were issued in the context of the creation of a European internal market. The basic concepts and techniques were laid down in a 1985 White Paper of the European Commission. According to this White Paper, the creation of an internal market was to rest on three legal-technical principles: (1) the principle of minimal harmonisation; (2) equivalency of national legislation (after minimal harmonisation) and mutual recognition of national legislation; (3) home country control (applicability of the national supervisory legislation of the Member-State where the head office of the undertaking is established, and where the undertaking obtained authorisation to take-up the activities in that Member-State and establish an agency or offer cross border services in another Member-State).

Some fear that the combination of the three principles might have as a consequence that Member-States will be encouraged to scale down the severity of their legislation. In other words the principles, laid down in the Internal Market White Paper might lead to the (in-) famous "regulatory competition" between Member-States.

We have no hard data about the exact "deregulatory" effect of European directives. And such effect must most probably not be exaggerated. In fact, European directives are generally considered to increase rather than to

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decrease the amount and the density and severity of legislation. And such is probably right.

3. It is unclear whether the deregulatory/regulatory effect of the European directives is more explicit in the one or the other sector of the financial services.

What is for sure is that the European directives have given rise to an impressive increase of national regulation, in the insurance sector even more than in the other ones. This is clearly the case with respect to the generalisation of a supervisory legislation and with respect tot the regulation of insurance distribution. As far as the banking sector is concerned, there already existed a fairly elaborated legislation.

4. A remarkable difference between banks and insurance undertakings relates to the applicability of the regulation and the supervision to the contractual relationships between respectively the bank and her client and between the insurance company and the insured and other third parties concerned.

The basic idea of the European legislation, as it was laid down in the banking directives as well as in the insurance directives, is that the legal framework must serve to optimalize free competition among banks and among insurance undertakings. If such competition is optimal, than the consumer must be able to find the most suitable product among the many banks or insurers who have their headquarters in an E.U. Member-State and who offer cross border services to potential clients in other Member States. In this legal framework, the consumer is mainly protected through the guaranteed access of the operators to the different insurance markets on the one hand and through the supervision of the financial stability of the financial institution (bank or insurance undertaking) on the other hand. Article 1 of the Belgian Insurance Supervision Act of 9 July 1975, as well as article 1 of the Belgian Credit Institutions Act of 22 March 1993 acknowledge the same basic idea that the consumers protection runs through the smooth operation of a free market and an effective prudential supervision. But the Belgian legislator goes further, be it only in the field of insurance.

Unlike the banking regulation, the Belgian insurance legislation also contains clear and specific rules concerning the contractual relationship between the parties to the insurance contract. First there is a fairly elaborated and compulsory legislation concerning the insurance contract in general and concerning certain specific insurance contracts (e.g. motor vehicle liability insurance) and for specific consumer risks (e.g. fire Insurance and household insurance). Secondly there is the power of the supervisory authority (Office de Contrôle des Assurances-OCA) to not only control the financial stability of the insurance undertaking but also to have a look at the contents of the insurance contract and to sanction infringements. Such “contrôle matériel” (substantive control) of insurance conditions and premium tariffs used to be a cornerstone in the task of the Office de Contrôle des Assurances. Since the implementation of the third generation of insurance directives of 1992 however, no such ex ante control of tariff conditions and tariffs nor any systematic control (even ex post) can be exercised.

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During more recent years also the European legislator appears to have given more attention to the aspect of the protection of contractual relationships (micro level). In this respect the legislator used mainly the approach of so-called vertical legislation and focused on consumer contracts. Such was the case in the European directive on unlawful clauses to various categories of consumer contracts, in a proposal for a European directive on distance selling of financial services, as well as in the Communication of the E.U. Commission concerning the harmonisation of general contract law.

10. In your country? what are the specific regulations that impose the highest costs on: (a) the commercial banking Industry; (b) the investment banking industry, and (c) the insurance industry?

Without going into any detail, it might be argued that a very important factor is that the new regulations applying to the banking, insurance, and investment industry, hold high requirements of solvency (insurance) and "own funds" ratio's (banking and investment banking industry). The gradual reinforcement of such solvency requirements has given rise to a major restructuring of the landscape of financial institutions. Many of the smaller ones have been obliged to join bigger ones, inter alia because of insufficient degree of solvency and insufficient own funds. Such requirements are however not specific to Belgium since they directly originated in European and international regulations aiming at financial stability and solvency of financial intermediaries.

11.Describe the general structure of the regulations that govern the insurance industry in your country.

A. 1. Before 1975 only three insurance branches were subject to state supervision and regulation (industrial accidents compensation, life insurance and motor vehicle liability insurance). Generalisation of state supervision and control of the taking-up and pursuit of insurance activities came about under the influence of the European insurance directives, in particular the First Non-Life Insurance Directive of 1973 and the First Life Insurance Directive of 1979). The gist of the Belgian regulatory apparatus is found in the Belgian Insurance Supervision Act of 9 July 1975, the Royal Decree of 22 February 1991 (repealing the Royal Decree of 1976), the Royal decree of 17 December 1992 (repealing Royal Decree of 1985) concerning Life Insurance and the Royal Decrees of 14 May 1985 and 7 May 2000 concerning (company) Pension Funds. Over the years the Belgian regulation has been modified numerous times, mainly pursuant to a change in the subsequent European Insurance Directives (in particular the Second and Third Life and Non-Life Insurance Directives; the European Directive (95/26/EEC) of 29 June 1995 on reinforcing prudential supervision and the European Directive (98/78/EEC) of 27 October

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1998 on supplementary supervision of insurance undertakings in an insurance group (see hereafter, under B.2.)12.

2. As was already mentioned, the Belgian insurance supervisory legislation declares to have consumer protection as its primary goal (see question n°9). Article 1 of the Act of 9 July 1975 indeed declares that "this Act aims to protect the insured and all parties to the contract concerned".

3. Access to insurance activities is subject to the requirement of obtaining prior (governmental) official authorisation from the competent authority by every undertaking which establishes its head office within the territory of Belgium or by any undertaking which, having received this authorisation, extends its business to an entire class or to other classes of insurance. Insurance undertakings must adopt the form of a company with limited liability ("société anonyme" or "société coopérative") or of a "mutual insurance association". As already mentioned, the objet of an authorised insurance undertaking is limited to insurance and some operations flowing directly therefrom (like loans), capital redemption and the management of pension funds.

4. Essential substantive rules of the supervisory legislation are those that relate to the financial supervision13: adequate solvency margins, the technical provisions, the presence of adequate matching assets, the prudential investment rules concerning of the matching assets, the transfer of all or part of portfolios of contracts, the measures to be taken in case of insolvency of the company, the acquisition of a qualifying holding in an insurance undertaking and rules concerning fitness and properness of shareholders and directors. Specific rules are enacted regarding the supervision of insurance undertakings being part of an insurance group (see hereafter, B).

As was already mentioned (sub question 9, 4) Belgium used to impose a notification and ex ante approval of general and special policy conditions, premium tariffs, or forms and other printed documents of the insurance undertaking, as a prior condition for this insurance undertaking's carrying on its business. By virtue of the European Insurance Directives this requirement has been changed in an ex post non-systematic notification (with the exception of compulsory insurance for which systematic notification is still allowed) of those policy conditions and other documents and for the sole the purpose of verifying compliance with national provisions concerning insurance contracts.

5. Insurance undertakings with head office established in a Member States of the European Union are exempt from obtaining an official authorisation in Belgium and remain entirely subject to the financial supervision of the authorities of their home State, being the Member State in which the head office of the insurance undertaking covering a risk is situated. This regulation is based upon the principle of the single license and the "home country control"

12 For an unofficial co-ordination of the Eurpean Insurance Directives see VAN SCHOUBROECK, C., “Codex European Insurance Laws”, in BLANPAIN, R. (ed.), International Encyclopaedia of Laws, Kluwer Law International, Den Haag, 1998, 450 p.13 See COUSY, H. and CLAASSENS, H., “Ex post control of insurance in Belgium”, The Geneva Papers on Risk and Insurance, 1994, 46-59.

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principle. These insurance undertakings are allowed to provide insurance activities in Belgium under the right of establishment (establishing a branch or agency) or by means of free provision of services upon notification to the Belgian competent control authority and under the financial supervision of the control authority of their so-called home Member State. Nonetheless, the OCA remains in charge of an observatory task and can perform investigatory acts on account of a foreign supervisory authority and, in certain circumstances, even impose sanctions. The OCA has controlling authority over all Belgian insurance undertakings, irrespective of the country in which they provide their insurance activities.

6. The supervision of insurance is entrusted to a separate autonomous public authority the "Office de Contrôle des Assurances - OCA" (which has also jurisdiction for capital redemption operations, pension funds, mortgage loans, even when these are carried out by other financial institutions and insurance intermediaries).

In addition the OCA obtains information from the "commissaires agréés", appointed by each insurance undertaking among a list of certified accountants who are specifically accredited by the OCA. Their task consists of reporting to the OCA. all illegalities and irregularities in the management of the insurance undertaking.

Since about ten years Belgian legislation has also adhered to the Anglo-Saxon tradition of appointing obligatory one (or more) "certified actuary" in each insurance undertaking charged with advising the company's directors, prior to every decision on tariffs, reinsurance and the evaluation of technical provisions.

The flow of information between the insurance supervisory authority (OCA), the banking supervisory authority (CBF) and the fiscal administration as well as the professional secrecy obligations are carefully regulated.

7. The Belgian supervision authority and the Minister in charge of insurance matters can, and often are legally obliged to, consult the official advisory body, the "Commission des Assurances". This board is composed of representatives of the insurance undertakings, the insurance intermediaries, the consumers, and experts. The tasks of this Commission is very similar to the one held by similar bodies that exist in other E.U. Member States (like e.g. the “Conseil National de l'Assurance" in France). The Commission gives advice at the request of the Minister or on its own initiative concerning all (draft) regulations relating to insurance. Its role is double: representation of the interests of the parties involved (insurers, banks, intermediaries, consumers and experts) and also expert advise.

8. In accordance with the European accountancy directives, there exists in Belgium, like in the other Member States, a specific regulation concerning the annual accounts and accountancy of insurance undertaking (Royal Decrees of 17 November 1994 and 8 October 1996). Comparable specific regulations were issued for credit institutions and pension funds.

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9. Typical for insurance is the fact that the OCA has not only the authority to control the financial situation of insurance undertakings. In addition the OCA has a specific authority regarding the contractual relation between the insurer and the insured and other parties concerned. Besides the already mentioned ex post non systematic control of insurance conditions and forms (see hereabove point 4), the OCA can controle and sanction unclear or unlawfull policy conditions. Moreover, the OCA organises a consumer complaints board to reach out of court settlement. This authority of the OCA is not limited to Belgian insurance undertakings.

B. 1. A word must be said about the general outlook of the E.U.-legal structure for financial undertakings. The European legal structure for financial undertakings shows the adherence of the European authorities to the specialisation principle. The specialisation principle is entrenched in different European Directives on financial services: (1) the Second Banking Directive of 15 December 1989 explicitly rules that: "the Member States shall prohibit persons or undertakings that are not credit institutions from carrying on the business of taking deposits or other repayable funds from the public" and (2) the first Non-Life and Life Insurance Directives (respectively 1973 and 1979 - as amended by the Third Directives of 1992) state that: "Member States shall require every insurance undertaking for which authorisation is sought to (...) limit its business activities to the business of insurance and operations arising directly therefrom, to the exclusion of all other commercial business". Moreover, life insurance undertakings must limit their business to life insurance (and ancillary non-life insurance business) as defined in Articles 1-3 of the First Life Insurance Directive of 5 March 1979. This specialisation principle is also implemented in the Belgian regulation (Article 9 Insurance Supervision Act of 9 July 1975).

Pursuant to the principle laid down in article 13, 3 and 14 of the First Life Insurance Directive of 5 March 1979, the Belgian Insurance Supervision Act prohibits Insurance companies to practise both life and non-life insurance, except if they were already doing so in 1992 (vested rights).

2. The European legislative authorities could not stay blind for the important consequences, from the point of view of adequate prudential regulation and supervision of the phenomenon of the formation of groups and concerns of insurance undertakings and other financial institutions.

The regulatory approach to the phenomenon takes place in two phases. In a first move the European legislator tackled the homogeneous groups by introducing supplementary supervision of (individual) insurance undertakings that are part of an insurance group (i.e. any insurance company which is a participating undertaking in at least one insurance undertaking, reinsurance undertaking or non-member-country insurance undertaking, and any insurance company whose parent undertaking is an insurance holding company or a reinsurance undertaking or a non-member-country or a mixed activity insurance holding company) (European Directive (98/78/EC) of 27 October 1998 on the supplementary supervision of an insurance undertaking in an insurance group). The objective of the directive's regime is to enable the supervisory authorities to

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form a more soundly based judgement of the financial situation of the company under control, through a better access to information, through extending general supervision to intra-group transactions and especially through calculation of an adjusted solvency situation for an insurance undertaking forming part of an insurance group. A similar legislation was issued for banking groups (European Directive (2000/12/EC) of 20 March 2000 on the taking up and pursuit of the business of credit institutions and Directive (93/6/EC) of 15 March 1993 on the capital adequacy of investments firms and credit institutions).

3. Quite recently, the second phase (heterogeneous group) was entered into when the E.U. Commission has submitted a proposal for a directive on the supplementary supervision of credit institutions, insurance undertakings and investment forms in a financial conglomerate (Proposal (213), Brussels 24 April 2001). The Commission observes that the importance of financial conglomerates is significant in the Benelux and Scandinavian countries and that some of the bigger actors in the market are financial conglomerates. The proposed directive seeks to introduce specific prudential legislation for financial conglomerates, and also to align the regimes for homogeneous and for heterogeneous financial groups. A central issue is to ensure that the capital adequacy of the entities should not be impaired by such dangers as "multiple gearing" (the same capital is used simultaneously as a buffer in two or more entities) as "excessive leveraging" (parent issues debt and down streams the proceeds as equity to its regulated subsidiaries). The proposed directive also addresses supervisory concerns about intra-group transactions and risk exposures in a financial conglomerate (by insisting on an internal management policy with effective internal control; reporting requirements to supervisors, effective supervisory enforcement powers). Co-ordination arrangements between supervisors is organised through the appointing of a co-ordinator authority for a financial conglomerate and through co-operation and information sharing.

12. Is the insurance industry in your country regulated by the same regulatory agency that regulate commercial banking and/or investment banking?

1. Whereas the insurance industry is supervised by the Office de Contrôle des Assurances - OCA (see question n° 11), credit institutions and other financial undertakings are controlled by the "Commission Bancaire et Financière - CBF" (successor to the earlier "Commission Bancaire", which was originally set up by the Royal Decree n° 185 of 9 July 1935).

The insurance supervisory authority was described under question n° 11. We add here some data about the CBF.

The task that is presently exercised by the Commission Bancaire et Financière is double. The CBF exercises the prudential control on credit institutions (as

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well as on a number of other financial institutions14) in accordance with the prescriptions of the banking directives and the Belgian 1993 Credit Institutions Act. In the exercise of its control the CBS traditionally (partially) relies on the system of the "contrôle revisoral" which in every bank is exercised by a "commissaire-réviseurs agréé". An important and traditional instrument in the field of bank supervision are the so-called "coefficients règlementaires" (regulatory ratio's). and specifically the ratio's concerning the "own funds" of the bank. Here again European directives have forced Member-States to repeated changes of legislation.

The second major assignment given to the CBF consists in controlling the public offering for sale of shares, stocks. This task is still governed by what remains of the old (but recently updated) Royal Decree n° 185 of 9 July 1935 (see also the Royal Decree of 7 July 1999 on the definition of the "public" character of financial operations). One of the important aspects of the CBF's control consists in controlling the contents of the "emission prospectus".

2. At present, the government is working thoroughly on a quite fundamental reform of the structure of the supervisory bodies in the financial area, precisely in view of the ongoing integration of financial services.

The basic idea of the reform appears to be not one of total integration or unification of existing supervisory authorities, but one of co-ordination of the supervision of the financial sector. Such co-ordination implies a close co-operation between the central bank (the "Banque Nationale de Belgique", NBB), the Office de Contrôle des Assurances (OCA) and the Commission Bancaire et Financière (CBF). According to the proposed legislation (of which only unofficial and not up-to-date copies were available to the authors), such co-operation would be embodied in the operation of the "Comité de Stabilité Financière". This new body will be composed of the members of the "comités de direction" of three authorities and charged with examining issues of common interest to the three authorities, like the stability of the financial system, the interactions of the prudential control, the "oversight" of the payment and clearing systems, crisis management, deposit guarantees and protection of investors, etc. A second new organ to be created is the "Conseil de Surveillance de l'Autorité des Services Financières", composed of the members of the boards of the three authorities, and acting as an advisory body to the Minister of Finance. The relative weight of the three authorities inside the newly envisaged co-operation or bodies is at present the object of intensive debate and speculation.

13. If the insurance industry In your country is not regulated by the same regulatory agency that regulates commercial Banking and/or investment banking, which regulatory agency is:

14 The prudential control of the CBF extends also to a Member of financial institutions such as collective investments funds and “sicav” type investment institutions, holding companies (sociétés de portefeuille), etc.

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(a) more efficient;(b) more technically competent;(c) more sophisticated;(d) more transparent;(e) more free of corruption, special interest group pressures, and/or

political pressures?

14.Which Industry do you believe has been more profitable globally during the last decade? investment Banking, commercial banking? or insurance?

15.Which industry do you believe has been more profitable in your jurisdiction during the last decade, vestment banking, commercial banking, or insurance?

16.Which Industry is likely to be more profitable over the coming decade? investment banking, commercial banking, or Insurance?

17.Which industry has been more risky during the last decade, investment banking, commercial banking, or insurance:

(a) In your country?(b) globally?

18.Which industry is likely to be more risky over the coming decade (2000-2010), investment banking, commercial banking, or insurance:

(a) in your country?(b) globally?

19.What sort of firm would be riskier: an integrated financial services firm that offers investment banking, commercial banking, and insurance services or an insurance company:

(a) in your country?

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(b) globally?

20.What sort of firm would be riskier: an integrated financial services firm that offers investment banking, commercial Banking, and insurance services or a commercial bank:

(a) In your country?(b) globally?

21.What sort of firm would be riskier: an integrated financial services firm that offers investment banking, commercial banking, and insurance services or an investment bank:

(a) in your country?(b) globally?

Question 17 to 21 dealing with the risks run by the different financial institutions and by their integrated counterparts.

In their book Creating the Future with All Finance and Financial Conglomerates (footnote 3, p. 161 et seq. ) VAN DEN BERGHE, L. and VERWEIRE, K. list the following risk and policy considerations, related to concentration: - risk of contamination: problems of one part of the organisation can infect another healthy part; important psychological effects on the image, reputation and credibility; - risk of double gearing: capital may be counted several times in determining the adequate capital coverage for the group as well as for the different parts of the conglomerate (cfr. proposal for a European directive on supplementary supervision of credit institutions, insurance undertakings and investment forms in a financial conglomerate (Proposal (213), Brussels 24 April 2001)); - creation of opaque structures: supervisory problems (cfr. the post BCCI-European Directive (95/26/EEC) of 29 June 1995 on reinforcing prudential supervision);- external conflicts of interests: what happens if a bank has a credit exposure in a firm, in which the insurance undertaking has an equity stake; need for Chinese walls, codes of ethics;- internal conflicts of interests: danger of cannibalisation, cross-subsidisation and marginal tarification; struggle between different distribution outlets; cultural conflicts (different selling techniques, different attitudes toward risk, etc.);- quality downgrading because of insufficient control on all elements of the service chain;- abuse of power.

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22.The following question deals with the issue of national identity. For many years people involved an international finance have observed that countries’ national identities are closely intertwined with certain industries. Such industries sometimes are called “flags up Industries”. The banking and airlines industries commonly are regarded as flagship Industries. For example, we still retain the idea of a national “flag carrier” in the airline industry. Italy’s Alitalia, and Britain’s British Airways, are thought of as flag carriers, despite financial problems at Alitalia, and despite the fact that British Airways has long been a private company. Many people think that the recent wave of mergers and merger-related consolidations within the Netherlands, France and Italy are attributable, at least in part, to a desire to avert future cross-border acquisitions in these countries, particularly by British, German and U.S. banks. Please respond to the flowing questions, which are related to the ways in which issues of national identity are intertwined with the issue of financial integration:

(a) As a general matter, do you agree or disagree with the assertion that countries’ national identities are closely intertwined with certain industries?

(b) If your answer to the above question is “yes”, please list the industries that you think are closely associated with national identity.

(c) Do you think that national identities are closely intertwined with certain industries in your country?

(d) Do you think that national identities are closely intertwined with certain industries in your country, which particular Industries are closely associated with national identity?

(e) If you think that national identities are closely intertwined with certain industries in your country, do you think that regulators should have the Power to block a cross-border merger on the grounds that such a merger would result in the elimination of a major firm in a “flagship Industry”?

(f) Do you think that the insurance industry is a “flagship industry” in any country?

(g) Do you think that the insurance industry is a “flagship industry” In your country?

In a small country like Belgium (10 million inhabitants) situated on the border line of (Germanic and Romanic) cultures and languages and with a traditionally very open economy, national identities may have a somewhat lower weight and impact than may be the case elsewhere.Nevertheless, Belgium did use to be proud of its own major industries, like the airline company, Sabena (which however went bankrupt in 2001) and like its major financial undertakings.

One cannot but observe (and deplore, according to some) that in the course of the rather stormy integration movement which has taken place, many of these - even most venerable - flagbearers were almost all absorbed by groups or holdings which were most often of foreign origin. The insurance company "Royale Belge" has now been integrated in the French Axa group, the "Banque

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de Bruxelles" and the Insurance company "La Patriotique" are owned by the Dutch ING-Group, etc.

23.Commercial Banks, insurance companies and investments banks all play an important role in the financial security of the citizenry. It is generally thought that the government has a strong role in assuring the soundness of these institutions and in preventing the kinds of systemic failures observed in the period following the collapse of the securities markets in 1929. The following questions relate to the integration of insolvency regulation by banks:

(a) Describe the way that Insurance company insolvency is regulated in your country. If there are guaranty funds, describe the way that these work. Be sure to identify who many initiate an Insurance company insolvency proceeding: creditors, regulators, or Both;

(b) To the extent that you are familiar with insolvency regulation for commercial banks and investment Banks, describe those regulations;

(c) Regulators in general, and guaranty fund administrators in particular, have an Interest in the solvency and stability of Out-of-state (foreign) insurance companies operating within their jurisdiction. Describe the extent to which regulators at the state level are able to enforce safety-and-soundness regulations, capital requirements and related solvency regulations on foreign, i.e. out-of-state insurance providers.

(d) To what extent does solvency regulation or concern over issues related to solvency affect cross-border mergers of firms in the insurance industry?

(e) To what extent does solvency regulation, or related concerns about solvency issues, affect mergers between firms in the insurance industry and firms in other industries, such as manufacturing, investment banking, and commercial Banking?

1. Preliminary remark: since the end of 1920, no single Belgian insurance company has been declared insolvent, with the sole exception of the Belgian subsidiary of a British insurance undertaking whose entire debts in Belgium were eventually paid.

2. The Insurance Supervision Act of 9 July 1975 entrusts the supervisory authority (OCA) with specific tasks in each case of withdrawal (as in the case of bankruptcy) or renunciation of the licence or authorization of an insurance company. In case of winding up (liquidation) of an insurance company, the appointment of the liquidator is subject to the OCA's approval.

The Insurance Supervision Act holds the rule that the joint matching assets representing technical provisions shall constitute, per separate portfolio (life,

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non-life) an estate on which insurance claims shall take precedence (Articles 18 and 48 Act of 9 July 1975).

Every insurance undertaking offering industrial accident insurance or motor vehicle liability insurance must participate in the Guarantee fund on Industrial Accidents and Motor Vehicle Guarantee Fund. This is a condition prior to obtain the official authorization to take up the insurance activity and to obtain notification to set up a branch in an other member State or provide services by way of free provision of services. The tasks of this Motor Vehicle Guarantee fund will be extended in the near future, in order to implement the Fourth European Motor Vehicle Insurance Directive(2000/26/EC) of 16 May 2000 on visiting motorists. The Fund will be in charge of guaranteeing the payment of insurance claims to insured and injured third parties having claims against an insolvent insurer covering those risks.

3. Just recently the European Community has issued directive (2001/17/EC) of 19 maart 2001 on the reorganisation and winding up of insurance undertakings. Under the Directive, where an insurance undertaking with branches in other Member States fails, the winding up process will be subject to a single bankruptcy proceeding initiated in the Member State where it has its registered office.

An important substantive rule in this directive is the one laid down in its article 10 giving the Member States the choice between two alternative methods of protecting insurance claims (method 1: insurance claims take absolute priority over all other claims over the assets representing the technical provisions; method 2: insurance claims take priority - subject to certain preferred creditors - over all the company's assets). A parallel Directive on the winding up of Credit Institutions was equally promulgated.

4. A remarkable difference between the regulatory regimes of banks and insurance undertakings is that with respect to credit institutions deposit guarantee schemes (Directive 94/19/EC of 30 May 1994) and with respect to investment firms investor compensation schemes (Directive 97/9/EC of 3 March 1997) have been set up. So far such no comparable regulation exists at the European level in the field of insurance. In the United Kingdom a scheme was introduced under the Policyholder Protection Act (now: Financial Services Compensation Scheme). In Europe there is fierce discussion going on as to the question whether such scheme should be generalized.

5. In view of enhancing the overall solvency situation of financial undertakings, the European authorities have engaged in an ambitious two-phased program (Solvency I and Solvency II). Solvency I laid to the promulgation of the two Directives (2002/13/EC and 2002/12) of 5 March 2002 aiming at improving the existing rules for calculating the solvency margin requirement and giving the supervisory authorities extra powers for early intervention. Solvency II involves a long-term effort to introduce more sophisticated approaches to solvency (better matching the solvency requirements to the true risk encountered by an insurance undertaking). Similar developments take place in the banking field.

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Leuven, 1 June 2002

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