The European business insurance sector inquiry
This guide was last updated on 14th February 2008.
The aim of the European Commission's business insurance sector
inquiry was to identify any concrete restrictive practices or
distortions of competition in the sector that might fall within the
prohibitions in articles 81 or 82 of the EC Treaty.
The final report published on 25th September 2007raises concerns
about two areas: the harmonisation of terms and conditions in the
subscription market and the role of the broker.
The report also comments that the Commission has yet to be
persuaded that the insurance Block Exemption Regulation (which
exempts certain types of agreement that would otherwise
be in breach of the prohibition) is still necessary, but it will
decide the issue definitively in March 2009.
The subscription market
The Commission is concerned that, in certain circumstances,
industry practices in the reinsurance and insurance subscription
markets could be in breach of the prohibition on restrictive
practices.
In a subscription market, a number of individual insurers (or in
the case of reinsurance, reinsurers) agree to accept shares of an
insurance or reinsurance risk. During
negotiations, participating insurers or reinsurers may
stipulate that they will contract on a "best terms and conditions"
(or BTC) basis.
This purports to give the particular insurer or reinsurer the
right to obtain terms no less favourable (from its own point of
view) than those obtained by any other insurer or
reinsurer participating in the contract.
The European Commission raised concerns about the use of BTC
clauses in an interim report published in January 2007. But
its final report goes further, commenting that market practices in
subscription markets could effectively be harmonising terms and
conditions in ways that are detrimental to the (re)insured and more
favourable to the (re)insurer, whether or not express BTC clauses
are actually used.
While there may be administrative benefits in having a single,
harmonised set of terms and conditions, the Commission
believes there might be circumstances where different agreements
with different (re)insurers would be more favourable to the
(re)insured.
Not indispensible
Anti-competitive practices and agreements can be exempted if
they contribute to improving the production or distribution of
goods or services while satisfying certain other criteria. One of
these is that the restrictions are indispensable to attaining these
objectives.
The Commission has not yet been persuaded that harmonisation
practices are indispensable but says it will deal with the issue on
a case-by-case basis, taking into account the widespread nature of
such practices and the fact that they may have been considered
normal in certain markets for a long time.
In the meantime, however, the report invites the industry
"either to reform its practices or to ensure that they meet the
conditions required for compatibility with EC competition
law".
These comments were strongly criticised in the London
subscription market, which pointed out that the Commission had not
consulted with the industry before publishing the report.
The CEA (the European insurance and reinsurance federation) has
offered to facilitate an exchange of views and the Lloyd's Market
Association, Lloyd's and the International Underwriting Association
are currently preparing submissions.
Brokers
The main issue regarding brokers is the potential for conflicts of
interest arising, not only from the dual role played by many
brokers in advising the insured and providing services to the
insurer, but in the way they are remunerated.
Most brokers are still paid by commission. Yet the inquiry found
a very low rate of spontaneous commission disclosure in almost all
member states. The Commission believes this lack of transparency
affects competition because it means many business insurance
clients are unable to make fully informed decisions about which
broker they use.
Even when disclosure is made, the Commission found that it is
not always in a form that is comprehensible to the client. As a
result, many small and medium sized businesses grossly
underestimate the cost of mediation services.
Larger clients are generally better informed. The main problem
for them, however, appears to be the lack of transparency in
relation to contingent commission, including profit commission,
whereby the broker earns additional commission if he brings
business to a particular insurer.
These, and any similar arrangements, are of particular concern
to the Commission because of the potential conflict between the
broker's commercial interests and the objectivity of the advice he
provides his client.
The report concludes that practices aimed at inciting brokers to
place business with a particular insurer undermine fair
competition. No firm recommendations are made, however, beyond the
suggestion that disclosure "may help mitigate conflicts of
interest".
But, the Commission warns, "it is questionable if disclosure
alone is sufficient to mitigate conflicts of interest, in
particular in relation to those types of remuneration that
specifically aim at aligning the interest of brokers with that of
insurers".
The issue will be revisited in the Commission's planned review
of the Insurance Mediation Directive in 2008-9.
Contact: Alan Davis (alan.davis@pinsentmasons.com
/ 020 7418 7026)
See:
The European Commission's final report on its business insurance
sector inquiry (9-page / 142KB PDF)
See also: The insurance Block Exemption
Regulation, an OUT-LAW Guide
