Yesterday, 24 March 2010, the European Commission (Commission) adopted a new Block Exemption Regulation (IBER) for the insurance sector. The legislation will come into force on 1 April 2010 when the current IBER expires. The IBER exempts certain agreements commonly found in the insurance sector from the application of normal EU competition law rules, on the basis that co-operation between companies in these areas will increase efficiencies in the sector and will ultimately benefit consumers. The block exemption creates a safe harbour for companies that meet the relevant criteria.
As anticipated, the IBER broadly reflects the draft legislation which was circulated last year. The scope of the IBER has been significantly reduced. Under the new rules, only two of the four categories of agreement which are currently exempted, namely joint compilations, tables and studies of risk and co and re-insurance pools will continue to enjoy the benefit of the block exemption and the conditions which must be fulfilled for the exemption to apply have been tightened, considerably narrowing the scope of the exemption.
Joint compilations, tables and studies
The IBER will continue to apply to agreements on joint compilations, tables and studies (typically agreements among companies to share access to statistical data). The Commission recognises the importance of protecting and facilitating co-operation in this area to allow the accurate calculation of risk. However, this type of agreement could potentially allow companies to exchange sensitive data and thereby align premiums.
Crucially, the IBER makes it clear that the exchange of information for the purposes of joint compilations, tables and studies is only exempted to the extent necessary to achieve a more accurate calculation of risk. The IBER thus retains the prohibition on companies exchanging information on the level of commercial premiums and requires that all results are anonymised. Companies must be free to price below the level of the average cost of a risk should they chose to do so.
The IBER also requires that calculations and studies be made available not only to all insurance companies, but also to consumer and customer organisations which request them. While this requirement extends the obligation to share information beyond the current rules, the Commission has stepped back from its earlier suggestion that individuals and academics should be able to obtain the results of joint calculations and studies. Under the new rules, insurance companies can only refuse access where non-disclosure is justified on the grounds of public security.
Co and re-insurance pools
From a competition perspective, co and re-insurance pools can be problematic as they may restrict competition on price and cover terms. The Commission has retained the block exemption for pools that cover “new risks” and for other pools, provided the pool participants do not exceed certain market share thresholds.
Agreements which cover new risk are exempted for a 3 year period, regardless of the participants’ market share. The IBER makes it clear that the risk must be genuinely new or, exceptionally, be a risk whose nature has changed so materially that it is no longer possible for individual companies to assess the risks involved.
There are changes too in respect of pools which cover existing risks. Whereas previously the market share thresholds were applied based on the turnover of the pool, from now on, the application of the exemption will be depend on the turnover of all participating companies on the relevant market (whether that turnover is achieved insider or outside the pool). This greatly narrows the scope of the exemption and introduces considerable uncertainty, particularly for larger insurers, as to how to safely calculate market shares for all participating companies, as well as on how to define the relevant market.
For the first time, ad hoc co-insurance and co-reinsurance arrangements are specifically excluded from the scope of the IBER due to competition concerns over premium alignment (through subscription procedures) and BTC clauses. This means that insurance companies which participate in ad hoc arrangements will have to ensure that these types of arrangement comply with general EU competition rules.
The IBER will no longer apply to agreements on standard non-binding policy conditions as the Commission has taken the view that these generally do not give rise to competition issues and are not particular to the insurance industry. Similarly, agreements on minimum specifications for security devices will also lose the benefit of the block exemption, due to the increasing harmonisation of standards across the EU. However, the general principles of competition law will continue to apply to both these types of agreement.
The IBER introduces significant changes in the application of competition law to the insurance sector, in particular as regards co and re-insurance pool arrangements. Although there is a short transitional period before the IBER is enforced, companies have very little time to ensure that their existing agreements are compliant with the new rules.
The Commission has warned companies against simply assuming that they will be sheltered from the normal application of competition rules, making it clear that it will closely monitor the behaviour of insurance companies, in particular the operation of insurance pools. History shows that where the Commission conducts sector-specific reviews (e.g. in the pharmaceuticals, aviation and energy sectors), enforcement action follows against companies that are found to have breached the rules. Already, in the last year, the insurance sector has been scrutinised by competition authorities across Europe, with enforcement action against a cartel in Spain and an investigation into brokers in Germany.