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.

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