Introduction

The European Commission has published its interim report on its sector inquiry into business insurance. The report focuses on a number of issues which may be preventing effective competition in the insurance market and echoes the inquiry carried out in the US by Eliot Spitzer.

The issues include:

  • fragmentation of markets along national lines;
  • wide variations in the profitability of underwriters;
  • the existence of long term insurance contracts in certain countries;
  • standardisation of certain terms and conditions used by re-insurance companies (to the benefit of the supplier);
  • the existence of conflicts of interest for some insurance intermediaries, and a lack of transparency in intermediaries’ remuneration;
  • and differences in the extent of co-operation among insurers in different member states raising doubts about the need for and content of the existing insurance block exemption regulation.

Duration of contracts in the business insurance sector

The Commission considers that there may be a risk of market foreclosure resulting from the length of some contracts. While in most member states, contracts are generally concluded annually or bi-annually, longer term contracts (of between six to eight years) are common in Austria, Italy, the Netherlands and Slovenia. In addition, the use of automatic renewal or extension provisions are common (in particular in Austria, Belgium, Germany, Denmark, Spain, Finland, Luxembourg, the Netherlands and Sweden).

Reinsurance

The Commission is concerned by the terms and conditions used by reinsurers in their contracts with direct insurers. Particularly, “best terms and conditions” clauses, which give the reinsurer the benefit of any more favourable terms that could have been agreed between the insurer and another reinsurer. The Commission considers that these clauses may:

  • Have the effect of harmonising terms and conditions at the most favourable level for the reinsurers. This acts to the detriment of the direct insurer and, ultimately, the final customer.
  • Increase price transparency.
  • Under certain circumstances, give rise to a restriction of competition by reducing the impact of differences on the final premium paid by the reinsured; this type of clause could contribute to maintaining higher premiums in the market than under fully competitive conditions.

Brokers

The Commission believes there is a potential conflict of interest for brokers acting as advisers to clients and as a distribution channel for insurance companies. Brokers’ objectivity may be affected by commercial incentives and this could weaken competition in the insurance market place.

The use of contingent commissions (payments from insurance companies based on achievement of agreed referral targets) could reduce the brokers’ objectivity in choosing insurance companies and so weaken competition. (a key feature of Eliot Spitzer’s investigation in the USA).

There is little scope for price competition in relation to the services of brokers as in general brokers do not disclose their commission charges for negotiating contracts.

Cooperation between Insurers

The Commission found that there are substantial differences in the cooperation arrangements between insurers in different Member States and considered this brought into question the justification for the insurance block exemption which exempts joint selling and joint covering of risk and safety devices from Article 81(1) (Regulation 358/2003 which expires on 31 March 2010).

The Commission’s key findings were that:

  • Co-insurance pools covering the territory of a single member state are numerous for certain insurance lines. These are particularly common in Germany, the Netherlands, Belgium, Finland and the UK. Insurers’ associations are generally only involved in the management and co-ordination of pools, management of data exchanges and clearing and settlement of premiums and claims.
  • Co-operation on risk calculations and studies is substantial, in particular in Germany and Belgium for certain lines of insurance.
  • Agreements on the joint establishment and distribution of standard policy conditions are common in most countries across most insurance lines.
  • A significant number of insurers use premium indexing clauses that have been developed by trade associations.
  • Co-operation on technical specifications, rules or codes of practice concerning safety equipment are common in several member states, but not in others.
  • Claim settlement agreements are common in Germany, the Netherlands, Austria and Portugal for several insurance lines, but are not used to any significant extent in a number of other countries.