The European Commission has formally asked Ireland to abolish certain rules which it says gives VHI an unfair advantage over other insurance companies in the Irish market.
The action against the Department of Health is being taken by Irish commissioner Charlie McCreevy. If Ireland fails to comply with the request within two months, the Government may be taken to the European Court of Justice and could face financial penalties.
This is the latest escalation by the European Commission in a dispute over VHI's position in the insurance market and it follows a complaint by Vivas, a new entrant into the market.
When Ireland joined the EEC, VHI was given an exemption over rules governing the insurance market in Europe. VHI did not have to prove it had capital reserves of 40% to cover its insurance business. But that was on the condition that it did not branch out into other business activities.
Last year Vivas complained that VHI had moved into other activities such as offering holiday insurance and setting up online retail business.
Charlie McCreevy has accepted this complaint and earlier this year took action against the Department of Health.
The Department has argued that new legislation is in the pipeline, but the Commission appears to feel the Department is dragging its feet and has pressed ahead with a formal request to abolish the exemption.
If the Government's response is not satisfactory, then the Commission will take Ireland to the European Court of Justice in Luxembourg.
Vivas has accused VHI of running down its cash reserves in order to keep a competitive advantage, but VHI denies this.
VHI has responded to the EC's request by saying that the matter has already been dealt with by the Irish Government.
In a statement released this evening, the company said: 'Both VHI Healthcare and the Government are committed to the removal of derogation by the end of 2008.
'The derogation could not have been removed until risk equalisation was activated.
The statement concluded that: 'VHI Healthcare has always advocated the removal of derogation when the proper regulatory/legislative environment was in place.'
Vivas welcomed the neww from Brussels, with its CEO Oliver Tattan saying: 'We very much welcome this latest development from Brussels.
'Vivas Health issued a complaint to the European Commission as it was clear that the rules under which VHI was operating was placing us - and all other competitors - at a significant disadvantage.'
