The current minimum statutory Motor insurance limits in the EU were set in 1984 by the 2nd EU Motor Insurance Directive (84/5/CEE). In the meantime, claims inflation and the wide range of minimum limits adopted in EU countries, have prompted a revision of the minimum limits, as outlined in the 5th EU Motor Insurance Directive (2005/14/CE). The extent to which the 5th Directive impacts a specific insurance market will depend on the current limits offered in that market: ranging from no or little impact in countries that offer unlimited coverage for bodily injury, to potentially significant impact in countries that have remained with the former minimum limits. For example, the minimum limit for combined bodily injury and property damage per event will be multiplied ten-fold, from € 600,000 to € 6 million for countries that choose the second option of the directive.



Table 1: Minimum Motor insurance limits as per the 2nd and 5th EU Motor Insurance Directives (MID). All limits are given in euros. The choice of option 1 or option 2 is made by the government of the respective countries.

Western European countries (France, Belgium and Luxembourg) and some of the Northern European countries (the U.K., Ireland and Finland) already mandate unlimited bodily injury. These countries can expect minimal impact from the new directive for bodily injury, though there may be minor consequences for property damage. Some Central (Germany and Hungary) and Northern (Denmark and Sweden) European countries have adopted either by law and/or market practice, minimum covers that are in the same range of the future statutory minimum limits required by the 5th Directive. The impact in these countries will therefore be relatively low.

The most heavily impacted EU region is Southern Europe (excluding Spain) where minimum statutory limits are equal to or slightly above the current European minimums in force. Italy and Portugal provide good case examples of the potential impact to and approach of markets set to experience a large revision of limits.



As shown in figure 1, without any other legal modifications, Motor third party liability insurance and reinsurance pricing in Italy will need to increase in line with the large loss burden following implementation of the new directive.

The losses displayed in figure 1 before the 5th Directive are developed but capped at the policy limit levels (60% of policies are limited at € 1.55 million). These thresholds will no longer exist once the minimum statutory limit for bodily injury per event is fixed at € 5 million, neither for the original large loss distribution nor forthe trended large loss distribution. The loss burden and particularly the large loss burden of excess of loss reinsurers will therefore increase as shown.

The 5th Directive has prompted legislators in Portugal to bring additional rules for claims management and evaluation, which if implemented at the same time as the directive would limit the impact. A first law was passed in November 2006 defining the way that insurance companies should handle property damage claims, and a law pertaining to bodily injury claims was published in August 2007. The latter includes a timetable for policy limits and a strict agenda for claim settlements. It is also expected that the Portuguese Regulator will help develop official award tables in order to stabilize the compensation system and to improve early claim estimates. The use of such tables may at first increase the level of indemnity and bring a higher large claim frequency, but would then avoid an important dispersion of claims, limiting the effect of increased policy limits, reducing uncertainty around loss development and improving early claims evaluation.

Without the effect of limit capping, loss burdens and thus insurance and reinsurance pricing will increase in impacted markets, but within the boundaries of all other relevant legal adjustments in that market. PartnerRe takes a technical and consistent approach to pricing and capacity placement, based on the respective trended loss distribution. We are ready to quote and to discuss with our clients as to how these changes will affect their portfolio.