Competition block exemption for insurers may be 'abolished': E.C.

By Rick Mitchell

[BRUSSELS] European Commission and industry representatives traded clashing assessments on the need for increased competition in the European business insurance sector at a conference earlier this month.

Irmfried Schwimann, head of the Commission's Directorate-General for Competition's financial services unit, said the so-called block exemption to certain E.U. competition regulations currently enjoyed by the insurance industry may soon be history. Since 1992, it has effectively allowed insurers to cooperate in certain areas of business. For example, it allows the use of standard policy wordings, but it is set to expire in 2010 and may not be renewed.

She noted that "other financial services sectors are learning to live with competition rules; they are not collapsing completely," and warned delegates that "mainstream thinking is clearly heading in the direction that the exemption will be reduced or abolished."

Ms. Schwimann told attendees at a conference hosted by the Brussels, Belgium-based arm of Washington-based law firm Steptoe & Johnson L.L.P. that the unit's current inquiry into the sector is not an enforcement. "It is a snapshot to understand the market better," she said. "Perhaps during the inquiry we will detect competition distortion that could then lead to enforcement," she continued.

Michaela Koller, director general of the Brussels-based Comité Européen des Assurances, which represents insurers and reinsurers in Europe, argued that the exemption "integrates the market and fosters competition, [as well as] allowing positive cooperation between big and small players. Standard policy terms are one hurdle less for new market entrants. This can promote consumer interests, improving mobility and comparability of products."

Integration

Ms. Koller said loss of the exemption could lead to "national authorities making divergent interpretations of competition law. We will have market disintegration instead of integration."

"There will be legal risks to sharing data. Insurers need to have the ability to collect data on climate change, for example," she said.

Ms. Koller added that the exemption also contributes to "making additional legal advice available to insurers, reducing legal and compliance costs."

Angus Rodger, a lawyer for the London-based arm of Steptoe & Johnson, said the exemption contributes to insurability.

In the London market, "property and casualty coverage for the global market can sometimes run into the billions of pounds. It is rare an insurer would have the capacity for that alone, so the broker goes around with a subscription slip to 10 to 20 carriers, providing a tower of coverage benefiting everyone. Someone coming in from a purely competitive point of view might consider that objectionable," he said.

Ms. Schwimann replied that the case described by Mr. Rodger would cause the Commission concern, because there is a tendency with such arrangements for coverage prices to rise to the highest of those offered by the carriers involved.

"We would be worried if all the contracts are the same, because it always goes up to the higher price," she said. "Why do they all have the same prices? That is not in the clients' interest. It cannot be so difficult to offer different prices."

The official said that "2008 will be a very good opportunity to debate how we will continue" when the exemption expires in 2010.

She summarized industry feedback on the inquiry's interim results presented early this year (See BIE, Jan. 29, page 1) and said the unit will issue its final report in September.

Broker commission

On the subject of broker remuneration, Ms. Schwimann said that clients and intermediaries had responded to the interim results. "Big companies and risk managers insist on knowing what their brokers earn, but small and medium-size enterprises are not as interested. Not surprisingly, their broker fees are as much as 70% higher, and there is a higher degree of competition for big contracts," Ms. Schwimann said.

Contract duration varies substantially across Europe, with an average duration of one year. Longer contracts might raise competition concerns, because they risk shutting out competition, the official said.

Despite widely publicized investigations into abuses, the practice of contingent commissions does not seem to have been totally abandoned, she noted. These were indications of a double relationship that is an incentive to steer high-volume business to certain insurers, Ms. Schwimann said.