EU says justify business insurance practices or reform them

The European Commission has adopted the final report of the competition inquiry on the business insurance sector.

The Commission invites the industry either to justify its business practices under competition rules, or to reform them. It also confirms its concerns as to transparency of remuneration and conflicts of interest in insurance brokerage which may inflate prices and reduce choice, in particular for SMEs.

Co- and reinsurance

The report looks at the coverage of large risks through co- and reinsurance. The Commission is concerned that the prevailing practice in the marketplace which excludes participants in the so-called "follow market" from offering lower premiums than that offered by the lead insurer, may not comply with competition law.

Nonetheless, premium alignment is not, in the Commission's view, intrinsic to the operation of the subscription markets, and the Commission invites the industry either to justify the business practices concerned from a competition law standpoint, or to reform them.

The Commission does not intend to apply its findings retroactively and will give industry every opportunity to make the representations on this matter which it considers appropriate.

Insurance intermediaries

The Report also highlights conflicts of interest and lack of transparency in the way that insurance intermediaries are typically remunerated. This raises a number of issues for the functioning of the market and may in some cases lead to less competition and higher prices, especially for SMEs. There is a growing awareness in the market that such conflicts of interest may need to be better supervised or regulated. The Commission is committed to follow up these findings in the framework of the review of the Insurance Mediation Directive which has already started. National authorities are also expected to take an interest in the Commission's findings.

Block Exemption

“Today's report shows that the Commission is serious about making markets work better, even where that means we need to question some established market practices when these may be harmful to consumers and competition. I invite the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices.

Competition Commissioner Neelie Kroes

In respect of the block exemption Regulation for insurance, which lapses in 2010, the Commission has yet to be persuaded that the Regulation– which treats the insurance industry differently to other industry sectors – is still necessary. However, it will review the matter definitively in a report in March 2009.

Long-term Contracts

Finally, the Commission expresses concerns in the Report with the situation as regards networks of long-term contracts in Austria which may restrict competition. This is not a definite conclusion but it needs to be examined more closely. In the other cases examined – The Netherlands, Slovenia and Italy – the concerns raised in the interim report have been resolved.

Responding to the publication of the Commission’s sector inquiry Stephen Riley, chairman of the International Underwriting Association, commented: “The IUA welcomes the European Commission’s comments on the need for complete transparency and accountability on broker remuneration.”

“The association also notes comments on the operation of differentiated co and reinsurance pricing in the subscription market. Such vertical pricing already exists for a number of classes of business and will continue to be adopted by IUA members where appropriate.”

“The London insurance market is probably the most competitive in the world and presents customers with a very efficient mechanism for covering risks.”

Competition Commissioner Neelie Kroes said "Today's report shows that the Commission is serious about making markets work better, even where that means we need to question some established market practices when these may be harmful to consumers and competition. I invite the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices."

EU insurers collect €375bn in non-life premiums every year.