The regulation allows insurers and reinsurers to benefit from an exemption to the prohibition of anti-competitive agreements under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). The exemption covers two types of agreement:
- agreements with respect to joint compilations, joint tables and studies; and
- common coverage of certain types of risk (co-insurance and co-reinsurance pools).
The regulation consultation was preceded by a study on co(re)insurance and ad hoc co(re)insurance agreements by Ernst & Young (E&Y).(3)
The E&Y report examined the prevalence of common coverage agreements (pools) (for further details please see "Co(re)insurance pools and ad hoc co(re)insurance agreements report published"). It reported that a wide range of pools exist. The principal rationale of pools is to provide access to cheaper or more efficient cover for pool members. Individual pool members often do not have the capacity to cover risks that are insured in pools, but there is limited compliance awareness among them.
Commentators have observed that E&Y's focus was institutional pools rather than shorter-term arrangements created (typically) by brokers to assemble capacity for particular lines of business from preferred carriers. The latter are the primary beneficiaries of the pool exemption. Institutional pools, by contrast, often have a statutory or quasi-public law status and were established precisely to cover otherwise uninsurable risks, such that they are highly unlikely to present competition law concerns.
A previous EU report into the business insurance sector(4) expressed concern that subscription market practices – where, for major risks, a customer or broker selects a lead insurer with the most attractive terms and invites other 'following' insurers to subscribe on the same terms – result in alignment of premiums among co(re)insurers. However, the E&Y report found no cause for concern.
Respondents described any alignment to be the result of intense competition with regard to the selection of the lead insurer in any consortium. The tenor of the E&Y report and follow-up roundtable discussion was that the European Union should revise its thinking on subscription markets as they are an essentially pro-competitive process.
Currently, the regulation exempts agreements with respect to joint compilations, joint tables and studies for certain purposes, including for the calculation of the average cost of covering a specified risk. Collection and dissemination of this information improves the knowledge of risks and facilitates the efficient rating of risks for individual companies. This enables swifter market entry and creates customer benefits. The same applies to joint studies concerning the probable impact of extraneous circumstances that may influence the frequency or scale of claims, or the yield of different types of investments.
The regulation also exempts co-insurance and co-reinsurance pools if they cover a new risk or if the joint market share of the pool members does not exceed 20% for co-insurance pools and 25% for co-reinsurance pools on the relevant market. New risks are risks that did not previously exist or risks that have changed so materially that it is impossible to know in advance what subscription capacity is necessary in order to cover such risk. As regards the calculation of market shares, all premiums must to be taken into account (ie, premiums that have been generated outside the pool). According to the regulation, insurance pools help the respective undertakings to:
- gain the necessary experience of the insurance sector involved; and
- generate cost savings or the reduction of commercial premiums through joint reinsurance on advantageous terms.
On a narrow reading of the E&Y report, the commission may be tempted to conclude that extending the regulation is unnecessary for pools, given their lack of competition law awareness. However, this would be a premature conclusion. The real beneficiaries of this exemption – not identified by E&Y – are the many broker/client-sponsored insurer panels. Creating a high degree of legal uncertainty for these arrangements is undesirable.
Similarly if joint studies cease to be protected by the regulation, this is likely to significantly increase compliance costs for the industry. In some cases companies may conclude that abandonment of statistical programmes is the only way to de-risk these projects. Perversely, this would be to the detriment of competition, since it would favour larger carriers with a substantial data set to inform their underwriting stategy. Smaller carriers and new entrants have the most to lose from being denied access to joint studies, as they have insufficient in-house data to be as efficient at rating risk if denied access to the joint data set.
If not renewed, companies will have to apply general competition law principles. This will engender unnecessary legal uncertainty. Unlike in other industries, cooperation in the insurance industry is endemic and essential for the industry to function – particularly co-insurance on large risks.
If the regulation were not extended, all insurers involved in a pool or that intend to be involved would have to assess whether the pool might be considered anti-competitive. Thus, even without the regulation, not all pools are anti-competitive. Rather, in all cases in which individual pool members do not have the capacity to cover their risks alone, the forming of a pool cannot constitute an anti-competitive agreement under Article 101(1) of the TFEU. However, this self-assessment carries a high risk of legal uncertainty. At present, insurers are spared such complicated assessment due to the safe harbour provided by the regulation.
Further, even if the respective pool is considered anti-competitive, there may be arguments in favour of an individual exemption of the respective pool under Article 101(3). However, insurers would be burdened with the development of those arguments. Insurers would have to self-assess whether there were any competitive merits of their agreements striking for an individual exemption under Article 101(3). This can be an expensive and onerous exercise.
Thus, if the regulation were not extended, the insurance industry would have to do business in a more legally insecure environment. In every downturn of the business cycle counterparties might look to use competition law for legal leverage to get out of agreements or refuse claims. Additional guidelines from the commission (eg, the Guidelines on Horizontal Agreements) cannot compensate for the absence of the regulation, since – unlike a block exemption – EU guidelines can bind neither courts nor national authorities. However, legal uncertainty increases the cost and risk of doing business.
The industry is invited to respond to the consultation. There will be an industry roundtable discussion and proposal on the chosen policy options in 2015.The sector is likely to lobby forcefully for renewal and to argue that other EU instruments would be insufficient.
For further information on this topic please contact Bill Batchelor or Jan Kresken at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email (firstname.lastname@example.org or email@example.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
(4) For further information (reports and hearing documents) on the Business Insurance Sector Inquiry see http://ec.europa.eu/competition/sectors/financial_services/inquiries/business.html.