25 September 2007

EC's business insurance enquiry ends quietly

The European Commission has buried the final part of its enquiry into business insurance, flagging up a handful of already-known problems with long-term contracts and intermediaries, but holding back from intervening with competition law instruments. 

The final report to the investigation, originally launched in 2005, will be published later today without the fanfare of political support which the enquiry into energy or the tub-thumping against banks' “excessive profits” received.

Rather, the final report – a draft of which has been obtained by MLex – revisits the main themes of intermediary remuneration, the sector's block exemption and long-term contracts without providing too many worries for the industry, according to some sources. 

The commission notes the fragmentation of national markets and the high discrepancy of profitability between member states and product lines, but accepts that much of this may be down to liability issues and differing contract law at the national level. 

"While it is acknowledged that the risk covered by underwriting is different in the different lines, and therefore the return on capital demanded may also be different, the magnitude of these discrepancies is very striking," warns the commission nevertheless.

But the general picture painted by the interim report from last January remains the same, despite the commission accepting criticism for some aspects of its methodology. 

The report concludes that three areas need to be looked at: firstly, "premium alignment when co-insurance and reinsurance is purchased through a two-step procedure involving a lead and following (re-)insurers".

Secondly, "instances where a pervasive market practice of long-term contracts may lead to cumulative foreclosure", and thirdly, potential market failure in insurance brokerage.

Nevertheless, while the commission reserves the right to use competition law to intervene, it is looking to companies to assess their own compliance. And in respect of insurance brokerage, it seems to be eyeing the review of the Insurance Mediation Directive as the appropriate time to rectify this issue.

Fighting the Block Exemption Regulation

One of the main thrusts of the enquiry has always been to prepare the ground for the end of the sector's block exemption which dates back to February 2003 and allows certain collaborative practices to go unchecked by competition authorities. 

The formal review of the exemption comes in 2010 but Competition Commissioner Neelie Kroes and her team have encountered strong resistance in responses to the enquiry, with companies stating that they dare not imagine a future for the sector without it. 

The commission responds, however, that "almost all replies failed to make a distinction between the desirability of the forms of cooperation covered by the BER, and the desirability of the BER itself." It remains non-committal in face of strong opposition from the industry and seems to be settling in for a long battle to abolish the BER. The commission will issue a report by 31 March 2009 on its future.

Best terms and conditions

In April, the commission refined its enquiry, sending out further questionnaires to re-insurance companies probing "best terms and conditions" contract clauses with direct insurers. The commission said at the time that “these clauses lead to a harmonisation of terms and conditions at the most favourable level for the re-insurers concerned, to the detriment of the direct insurer and, ultimately, of the final business insurance customer.” The commission also probed the same phenomenon in the co-insurance sector.

In the final report, the commission raises the prospect that some such aspects may fall within the scope of Article 81, and its deeper probing revealed that such conditions "almost always" resulted in a "de facto alignment of premiums". 

The commission's provisional view is that "individual instances of them [...] may fall within the scope of Article 81(1)," and it is not convinced of "their indispensability as required by Article 81(3)".

But while DG Competition does not exclude possible enforcement proceedings, it states clearly that it is up to the industry to "engage in a critical reappraisal of the said practices". It also admits that these concerns are specific. In other sectors, the commission "is not raising any concerns [...] about other ways of awarding co- and reinsurance business, which include vertical marketing, ad hoc syndication between insurers and standing arrangements such as pools."

Remuneration of intermediaries

The remuneration of intermediaries as well as their 'conflicts of interest' in providing advice and services to their clients has also attracted DG Comp's scrutiny throughout the enquiry.

The commission raises the “suggestion” that “when brokers have market power, insurers may bid up broker commissions in order to capture business." The regulators, however, are careful to tread a tightrope between acknowledging that this occurs on a case-by-case basis, but insisting that “disclosure” may not be sufficient to “mitigate conflicts of interest."

Long-term contracts: Italy in the clear; Austria not 

As regards long-term contracts, the commission also appears to soften its position, stating that while it "is able to intervene under competition rules in certain circumstances, this is not always the preferred route". 

"The commission believes it would be appropriate to consider the situation in Austria further," while in Italy "recent regulatory intervention appears to have changed the environment such that long-term contracts should no longer be susceptible of generating foreclosure".

The enquiry is not over yet, however, since the commission "for methodological reasons" has been unable to complete its investigation into profitability among reinsurers. This will be published in an addendum at a later date.

By Lewis Crofts

© MLex