The European Commission announced its decision to undertake an inquiry into the business insurance sector in June 2005. The inquiry was initiated in the context of action in the U.S. (precipitated by then New York Attorney General, now Governor, Eliot Spitzer) regarding "contingent commissions" paid to brokers, and in the context of wider scrutiny by the Commission of the financial services sector, such as its retail banking sector inquiry.

On January 24, 2007, the European Commission published the interim report of its business insurance sector inquiry ("the Report") and held a public hearing to discuss its preliminary findings on February 9, 2007. The Report analyses the European insurance and reinsurance markets in depth, covering market integration, distribution of insurance and horizontal cooperation. Although it lacks the fireworks that were seen in the energy sector inquiry, it flags up some signs that the market is not operating as competitively as it might – with a particular concern that separate national markets are not integrating into a pan-European market. Some specific concerns are also identified, mostly in particular member states rather than across the Community as a whole. For the moment, the Commission's goal is to collect more information in particular areas. However, Commissioner Kroes also gave a warning at the public hearing that the Commission would not flinch from taking action against anticompetitive behavior – potentially in collaboration with national authorities.

The Commission's Report examines a number of areas, discussed separately below.

Horizontal Cooperation Between Insurers

Horizontal cooperation among companies is significant in the insurance sector, with mechanisms such as pooling playing a key part in the market.

A number of forms of horizontal cooperation in the market are permitted by the insurance block exemption, originally introduced in 1993 and revised in 2003. The Report finds that in some member states there is quite a high level of cooperation within the various categories set out in the block exemption. In others the market appears to operate without any such cooperation.

In light of this the Commission will consider whether there is a case for retaining these exemptions, particularly in relation to co-insurance pools, and is now seeking further information on why the differences in practice exist and how much use market participants make of the exemptions. However, no decision will be taken on this in September and the debate will continue until 2009 when the Commission is due to present a draft proposal relating to the block exemption.

If the Commission were to decide not to renew the block exemption, this would have major consequences for those member states where horizontal pools are common (for example, Belgium, Germany, the Netherlands and the U.K.). Each pool would need to be assessed as to its compliance under article 81(1) or its exemption under article 81(3). If a pool could not satisfy the article 81(3) exemption, new methods would have to be found for insuring those risks previously insured by the pool.

Long Term Insurance Contracts

In most member states, insurance contracts are of a relatively short duration, around a year. However, in some member states – Austria, Italy, the Netherlands, Slovenia and Spain – they are longer (up to eight years on average in Austria). The Commission suggests that, in some cases, long insurance contracts, coupled with automatic renewal or extension clauses, could shut out potential new entrants from the national insurance market.


The Commission has expressed concern at the prevalence of "best terms and conditions" clauses in reinsurance contracts, particularly in brokered reinsurance markets. These clauses allow reinsurers to benefit from the most generous terms offered to any reinsurer on the contract in question and will tend to align premium levels, in an upward direction. They will also tend to increase levels of transparency in the market.

For both of these reasons, these clauses may in certain circumstances breach the Article 81 prohibition on anticompetitive agreements. The Commission is seeking further information on the effect of this type of clause and their prevalence.

Insurance Distribution

Insurance distribution has been the subject of a great deal of controversy in recent years, particularly in the light of Mr. Spitzer's investigations. The Report addresses directly one of the key Spitzer issues – contingent commissions (i.e., commissions payable by the insurer to the broker for reaching agreed targets, for example on the volume or profitability of business placed by the broker with the insurer). The use of contingent commissions varies from country to country in Europe, with a general downward trend in their use since the Spitzer investigation. However, they are far from being eliminated and the Commission is seeking further information on their use and disclosure. It also views disclosure of intermediary remuneration generally as an issue that requires further investigation, and this topic was discussed in some detail at the public hearing.

Concerns are also expressed about restrictions on the ability of intermediaries to pay part of their commission over to their client as a rebate. The Report remarks that these payments are illegal in Germany, although it also notes that the practice of making the payments is actually pro-competitive. The Commission will seek further information on any agreements or practices that may restrict the ability of intermediaries to provide these rebates to their clients.

Next Steps

The Report outlined a number of questions on which the Commission sought responses by April 10, 2007. In her speech at the public hearing, Commissioner Kroes stressed that the Commission's focus in the coming months will be on taking soundings from business insurance customers in particular SMEs (Small and Medium-size Enterprises).

The final report remains scheduled for publication in September 2007. In the meantime, stakeholders in the insurance industry will wish to consider carefully the potential impact of the Commission's concerns and any action that might be taken to remedy them.