Linklaters

The European Commission (the “Commission”) yesterday released its final report into the provision of insurance products and services to businesses in the EU (the “Report”). The Business Insurance Sector Inquiry (the “Inquiry”) was launched in June 2005 in parallel with the Retail Banking Sector Inquiry. The aim of the Inquiry was to identify restrictive practices or distortions of competition that might fall within the scope of Articles 81 or 82 of the Treaty.

The Report confirms the importance of the insurance sector, and in particular emphasises that “the functioning of this industry in a pro-competitive way is not only crucial for the insurance industry as such, but for the economy as a whole.” Competition Commissioner Neelie Kroes also confirmed that “Today’s report shows that the Commission is serious about making markets work better, even where that means we need to question some established market practices when these may be harmful to consumer and competition. I invite the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices.”

The Report sets out the Commission’s conclusions and is a follow-up to its preliminary findings which were published in an interim report in January of this year.

The Commission’s key findings relate to (i) concerns relating to insurers and (ii) concerns relating to intermediaries.

• Concerns relating to insurers

  Four principal concerns are expressed in the report in relation to insurers:

  • Variation in profitability: the Commission’s examination of data relating to insurers’ financial performance has revealed that there are significant variations in profitability, both in terms of business lines and by member state. There are a number of explanations for these variations (e.g. degree of risk varies by line), but the magnitude of the discrepancies is nonetheless striking. The Commission also comments on market fragmentation and the scope for savings from further integration. The Commission may examine this issue further and propose measures to encourage greater market efficiency.
  • Harmonisation of terms and conditions in coinsurance and reinsurance: the Report notes that established practices in the reinsurance and coinsurance markets appear to have led to higher prices for large risk commercial insurance. The Commission expresses concern that established practices often leads to alignment of the price offered by insurers participating in an insurance contract. The Report does not express a definitive view as to whether these practices amount to a breach of Article 81 of the EC Treaty. However, the Commission has called for the industry to undertake “a critical reappraisal” of these practices.
  • Horizontal co-operation amongst insurers: the Report considers the scope of the Block Exemption Regulation (“BER”), which exempts certain agreements between insurers from the ambit of Article 81. The Inquiry failed to find compelling reasons to extend the BER beyond its current expiry date of March 2010 but the Commission has promised to address this issue in more detail in a report on the functioning and future of the BER to be published on or before 31 March 2009.
  • Duration of business insurance contracts: the Commission expressed concern regarding certain networks of long term insurance contracts, in particular in Austria. The cumulative effect of such long term contracts could be to cause market foreclosure.
• Concerns relating to intermediaries
  • The Commission is concerned by indications of potential market failure in respect of insurance brokerage. In particular, the Inquiry pointed to a lack of transparency of intermediaries’ remuneration, reducing the potential for competition in relation to insurance mediation services. Further, the Inquiry identified insufficient regulation in respect of certain conflicts of interest which frequently arise in the context of services provided by intermediaries. The Commission has resolved to take account of these findings in its review of the Insurance Mediation Directive.

The Report is accompanied by a working document which sets out the detailed findings of the inquiry. The Report and working document, plus non-confidential versions of all the submissions made during the public consultation, have been published on the Commission's website at: http://ec.europa.eu/comm/competition/antitrust/others/sector_inquiries/financial_services/business.html

Eamonn Doran, competition partner at Linklaters, commented:

“After a lengthy inquiry, the Commission has produced a thorough and informative report, indicating various issues for the industry to consider. It inevitably means that the insurers will continue in close dialogue with the Commission on these and on the renewal of the BER, which will, itself, lead to a further Commission report in Spring 2009. This approach has advantages for both sides: allowing the business insurance industry to address the Commission’s concerns by justifying or, where required, reforming current market practices, without the need for potentially time consuming and damaging enforcement action by the Commission.

“Nonetheless, the Commission, on the basis of the Report, is going to take some persuading that the practices it has identified and/or BER renewal are necessary for, or conducive to, a competitive insurance or reinsurance market.”

For further information on this hot topic or to arrange an interview with Linklaters, please contact:
Sarah Peters on +44 (0)20 7456 2153 / sarah.peters@linklaters.com or Rupert Winlaw on +44 (0)20 7456 3219 / rupert.winlaw@linklaters.com