European Union: EU Final Report On Sector Inquiry Into Business Insurance

Last Updated: 10 January 2008
Article by Lesley Ainsworth

EU Final Report On Sector Inquiry Into Business Insurance

After 27 months of information gathering and deliberation, the European Commission has issued its final report into competition conditions in the business insurance sector.

The Report identifies three issues which the Commission proposes should be followed up either by the Commission itself or by national competition authorities:

  • "Certain practices leading to premium alignment when co-insurance is purchased through a two-step process involving a lead and following (re)-insurers
  • Instances where a pervasive market practice of long-term contracts may lead to cumulative foreclosure and
  • Indications of potential market failure in respect of insurance brokerage."

Given the scale of the Commission's investigation, the narrow scope of the concerns identified in the final report and the relatively low key follow-up action proposed may come as a surprise – though no doubt a welcome one to the industry. The one area where the report is more likely to raise temperatures is its challenge to the widespread and long standing practice of insurers underwriting a risk at a common premium in the subscription market – a practice which the Commission suggests may infringe Article 81 EC Treaty.

In addition, although the insurance block exemption regulation is not due to expire until 2010, comments in the report suggest that the Commission is not inclined to renew it – preferring insurers and reinsurers to rely on self-assessment of the compatibility of their arrangements with Article 81 EC Treaty.

What Is A Sector Inquiry?

Sector inquiries are used by the Commission to investigate a sector of the economy where it considers that competition within the EU may not be working as effectively as it should. From the Commission's perspective they provide a valuable means of understanding how competition in a particular sector operates, although the cynical observer may condemn them as a fishing expedition by the Commission, carried out at considerable cost to industry.

Sector inquiries are primarily fact finding exercises. They can lead to proposals for regulatory changes or, if a sector inquiry uncovers evidence of anti-competitive arrangements or behaviour, the Commission (or a national competition authority) may launch investigations into suspected breaches of competition law by individual companies. Final reports on sector inquiries into energy and retail banking were published in January this year and have been followed by proposals for regulatory change and competition law enforcement actions.

What Are The Commission's Findings?

Premium alignment – implications for the subscription market

The Commission's initial focus on the implications of reinsurers using a "best terms and conditions" clause in their quotations has widened, in the final report, to a more general concern about other practices that result in insurers and reinsurers providing cover for a particular risk at the same premium rates. The Commission focuses, in particular, on the subscription process under which "following" insurers accept a share of the risk at the rate and on the terms set by the lead underwriter.

The Commission recognises the benefits that co-insurance and co-reinsurance arrangements bring in terms of greater capacity, risk divestment, lower prices and better terms for clients. However, it remains unconvinced that these benefits could not be achieved without the harmonisation of premiums that currently frequently occurs where business is written on a subscription basis. Whilst stressing that the assessment of whether Article 81 is infringed would have to be carried out on a case by case basis, the Commission's comments inevitably set a hare running as to the compatibility with Article 81 of practices that the Commission acknowledges have been considered normal market practices for many years.

The good news, however, is that the report states:

"The practices of revealing the price of a lead insurer in the subscription phase, guaranteeing the lead insurer's share and aligning the terms of cover other than the premium, are less likely to raise concerns from a competition law standpoint or are more likely to fulfil the conditions for exemption".

Also on the positive side, the Commission says it:

"...it is not raising any concerns in the Report about other ways of awarding co- and reinsurance business, which includes vertical marketing, ad hoc syndication between insurers and standing arrangements such as pools".

The Commission, however, does not entirely rule out the possibility of individual instances of such arrangements infringing the competition rules.

The clear message from the Commission is that the industry needs to re-appraise the basis on which premiums are established during the subscription process and should review carefully whether other options are viable rather than all underwriters contracting at the same premium level.

In its press release on the Report the Commission says that it does not intend to apply its findings retroactively: in other words it is not proposing to take enforcement action under Article 81 in respect of past conduct. It is willing to give the industry an opportunity both to make further representations on this issue and to review their practices.

In contrast to the implications of their comments on premium alignment, the other findings by the Commission are much less likely to be controversial.

Duration Of Business Insurance Contracts

The Commission has repeated its concern about the potential for long term insurance contracts (other than those which are by their nature long term) to foreclose the market. In some cases this may be the result of the cumulative effect of a number of similar long term contracts or where the practice is carried out by a company that has a dominant market position. In terms of follow-up action, however, the Commission's focus seems to be on Austria and the language of the final report suggests that the Commission's solution is more likely to be a regulatory one than a competition enforcement one.

Activities Of Insurance Intermediaries

In the final report the Commission revisits its concerns about various aspects of the role of brokers including:

  • the potential for conflicts of interest where the broker acts both as an adviser to their clients and as distribution channel for insurers
  • lack of transparency on intermediaries' remuneration
  • practices designed to incentivise brokers to place business with particular insurers
  • arrangements that prohibit intermediaries from rebating premiums to insureds.

The Commission indicates that it intends to look at these issues in its review of the Insurance Mediation Directive. However, it does not rule out enforcement action by individual Member States where appropriate.

Future Of The Insurance Block Exemption

Despite the very considerable support for the existing insurance block exemption from within the insurance industry, the Commission seems reluctant to extend the block exemption beyond its current expiry date in 2010. Although the Commission has not reached a definitive view on this, the indications are that it is likely to conclude that there is no need for a sectoral block exemption now that businesses can carry out their own self-assessment on the application of Article 81(3) as in other sectors. This does not mean that the Commission is now opposed to these sorts of horizontal co-operation arrangements permitted under the block exemption; rather that it feels that such practices no longer need the protection of a block exemption. However, the debate on this issue is likely to continue for some time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions