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We offer some thoughts on the EC(_quote_)s latest Report
EC issues final report on Business Insurance Sector Inquiry
The EC decided on 13 June 2005 to initiate a sector inquiry into business insurance; a sector which it considers includes coverage for property risks and business interruption; shipping; motor vehicles; general, professional and environmental liability; personal accidents and credit risks.
On 25 September the European Commission issued the findings of its sector investigation into business insurance.
The EC said it has adopted the final report of the competition inquiry on the business insurance sector and when issuing the findings said:
”Building on the interim report of January 2007, a wide public consultation and extensive further fact-finding, the final report raises concerns about the operation of two areas of business insurance. First, long-standing and widespread industry practices in the reinsurance and coinsurance markets involving the alignment of premiums, which may lead to higher prices for large risk commercial insurance. The report leaves open the question of whether these constitute infringements of the prohibition on restrictive business practices (Article 81), but invites the industry either to justify the business practices concerned under the competition rules, or to reform them. Second, the Commission also confirms its concerns as to transparency of remuneration and conflicts of interest in insurance brokerage which may inflate prices and reduce choice, in particular for SMEs. The Commission will further explore this issue during the review of the Insurance Mediation Directive (2002/92/EC).”
Competition Commissioner Neelie Kroes said that the report shows that the Commission is serious about making markets work better, even where that means it needs to question some established market practices when these may be harmful to consumers and competition. The Commissioner invited the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices. The EC acknowledged that insurance is of vital importance for businesses throughout the EU and that many industries, from aviation and shipping to major real estate developments, could not function without insurance. It estimated that EU insurers collect €375bn in non-life premiums annually.
Under the heading of “Co- and reinsurance” the EC commented that:
“The report looks inter alia at the coverage of large risks through co- and reinsurance. The Commission is concerned that the prevailing practice in the marketplace which excludes participants in the so-called "follow market" from offering lower premiums than that offered by the lead insurer, may not comply with competition law. The Report does not conclude that the law is actually being infringed, as this would only be possible in the context of a specific enforcement decision. Nonetheless, premium alignment is not, in the Commission(_quote_)s view, intrinsic to the operation of the subscription markets, and the Commission invites the industry either to justify the business practices concerned from a competition law standpoint, or to reform them.
The Commission does not intend to apply its findings retroactively and will give industry every opportunity to make the representations on this matter which it considers appropriate.”
On the subject of Insurance intermediaries the EC observed: “The Report also highlights conflicts of interest and lack of transparency in the way that insurance intermediaries are typically remunerated. This raises a number of issues for the functioning of the market and may in some cases lead to less competition and higher prices, especially for SMEs. There is a growing awareness in the market that such conflicts of interest may need to be better supervised or regulated. The Commission is committed to follow up these findings in the framework of the review of the Insurance Mediation Directive which has already started. National authorities are also expected to take an interest in the Commission(_quote_)s findings.”
In respect of the block exemption Regulation for insurance (358/2003), which lapses in 2010, the Commission “has yet to be persuaded” that the Regulation – which treats the insurance industry differently to other industry sectors – is still necessary. However, it will review the matter definitively in a report in March 2009.
AIRMIC (the U.K. Association of Insurance and Risk Managers) issued a statement on the day of the report’s release in which it strongly welcomed the EU Commission’s support for full transparency in the disclosure of broker remuneration. AIRMIC said that the report rightly recognises that there are areas of the market, especially those serving the SME sector, that are poorly served in this respect, and said that “We hope the enquiry will lead to a situation where all buyers of commercial insurance routinely and automatically receive full disclosure as to how much of their premium the broker receives.”
AIRMIC said it will study the Commission’s comments on co-insurance and differential pricing within the subscription market; adding that, as a general comment, however, “we regard the subscription market an efficient vehicle for spreading risk without reducing competition.”
While the findings may come as no surprise to insurers or brokers, neither are likely to relish the work associated with further submissions to the EC and the consequences of more regulatory-driven changes. Arguably while the findings concerning transparency of remuneration and conflicts of interest in broking could be expected and – at least in regard to the business of sophisticated major commercial buyers – may not lead to major changes, the future development of the workings of the subscription market ultimately may be far more significant for buyers, sellers and intermediaries.
If the EC finally determines that present practices in the subscription market - particularly the general absence of differential pricing - are unacceptable, it will at least give heart and enhanced purpose to a variety of interests, include these who favour a greater commoditisation of insurance products and a greater use of electronic trading in relation to major commercial risks – it could transpire in time that ebay is not the leading global online auction system!
Of course, many believe that a ‘true’ subscription market – embracing, inter alia, the concept of a real commonality of interests – has not really existed for many years and presently the subscription market is, in effect, only about risks too large for any one insurer and has little to do with anything else.
Of course the erosion of what might be called a ‘traditional’ London-style subscription market has, in part, been a consequence of anti-trust/competition legislation – a good thing in principle but not inevitably so in practice – and we, like everybody else, must recognise the reality of the present market environment and dynamics.
Ultimately the EC’s intervention is all about equitable competition and trading practices, and if the market participants disagree with the initial conclusions of the EC then they need to make their cases with force and careful argument.
Brokers will clearly be concerned that their - often ‘creative’ - ways of boosting income will be further restricted, particularly at a time when their margins are under pressure. However, surely the general position on broker earnings - as agent - from their client’s business is clear? Transparent (and adequate) earnings in exchange for the efficient delivery of defined services within a mutually acceptable contractual framework can ultimately only benefit all parties. However, we would be the first to agree that such a statement is somewhat easier to make than achieve, and past practices – including some buyers inability to recognise the concept of intellectual capital (not that such a quality is always evident) – means that there is still work to be done on both sides of the bargin.
Whatever transpires we will continue to do our best to ensure that our clients – whether buyers or sellers – enjoy the benefits of our independence of structure, thought and practice.
Posted on 27-Sep-2007.
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