The European Commission has recently issued a Report announcing its preliminary view that the Insurance Block Exemption Regulation (“IBER”) should not be renewed when it expires on March 31, 2017. The IBER provides an exemption from Article 101(1) of the Treaty on the Functioning of the European Union, which prohibits cartels and other forms of anticompetitive agreements, for two categories of cooperative activities among insurers: information sharing for ratemaking purposes and the establishment and functioning of pools. The Commission’s Report of this preliminary view of non-renewal reflects not a belief that these activities should be restricted but that developments in insurance markets and competition laws have rendered a block exemption unnecessary.
The IBER provides insurers with an exemption for sharing two categories of information:
- Sharing information about historical experience on the frequency and and scale of losses;
- Joint studies of the impact of external events on the frequency or scale of insured losses or of the profitability of different types of investments.
The Commission’s Report recognizes that information generated from these cooperative efforts can enable insurers to set premiums more reliably than if each insurer were required to develop the same information on its own. At the same time, sharing information of this type among competitors can create a danger that the competitors will use it to collude on prices. The IBER set certain conditions for the exemption designed to eliminate this danger of collusion, primarily that premium information is not shared, the information shared is displayed in an aggregate form that does reveal the experience of individual transactions or individual insurers, and the information is available to all insurers, including potential new competitors, on non-discriminatory terms. The expectation underlying the IBER is that that if these conditions are met, competition will be preserved and the information sharing will result in lower premiums.
The Commission’s Report concludes that the IBER is no longer necessary to achieve these competitive benefits, because Horizontal Guidelines that it issued in 2010 after the adoption of the IBER and that apply to all sectors of the economy, allow sharing of the same types of information and impose essentially the same conditions as the IBER. The Commission expects that pro-competitive information sharing among insurers would continue in the absence of the IBER and thus sees no justification for giving the insurance industry a special exemption from Article 101(1) for these activities.
The IBER provides an exemption for the formation and operation of insurance and reinsurance pools, which are combinations of multiple insurers in which a single underwriter binds and sets the premiums, terms and conditions for coverage for all participants. Pools typically are established to cover large, unconventional risks, such as nuclear facilities. A pool can enhance competition when it provides coverage that would not otherwise be available, either at all or at the same cost. A pool can harm competition if and to the extent that it merely replaces a process of individual insurers competing effectively for the same risk or if it imposes additional restrictions on competition among the pool members that are not necessary for the pool’s operation. The IBER imposes conditions on the formation and operation of pools that are intended to prevent these anticompetitive outcomes, including market shares that the pool cannot exceed.
In recommending non-renewal of the IBER, the Commission noted that only a small number of active pools, 46 in total, were in operation in all of the EU. The Commission also noted that uncertainty in calculating the market share limits imposed by the IBER raised the possibility that some pools benefiting from the exemption were actually imparing competition.
Most significant to the Commission is the continued development in the market of various types of co-insurance, such as broker-led lineslips, which offer the ability to cover large, unconventional risks with less of a threat to competition than an institutionalized pool. The Commission cited its recent study of co-insurance arrangements in the EU, which it launched in response to allegations that these arrangements led to an alignment of premiums and ultimately increased premiums but which eventually concluded that the arrangements actually enhanced competition and lowered premiums.
Elimination of the IBER will not mean that pools are illegal. It will mean that the legality of pools will be tested under the rules generally applicable under Article 101(1) to cooperation among competitors. The principal defense raised in challenges to the competitive effects of pools, that in their absence individual insurers would be less able to cover large, unconventional risks, will be more difficult to make, given the Commission’s views of the effectiveness of various co-insurance arrangements that can serve as alternatives to pools.
The Commission will receive commentary on its preliminary views over the upcoming months, including at a meeting that it will hold for stakeholders on April 26, 2016. If the Commission maintains its preliminary views, the IBER will expire at the end of March 2017, and the insurance industry no longer will enjoy any special exemptions from the EU’s competition laws.