Ferma comments on planned changes to BER

The Federation of European Risk Management Associations (Ferma) released a statement that welcomed certain elements of the proposed draft insurance Block Exemption Regulation (BER).

The association, which represents insurance buyers and risk managers, said the draft regulation “confirms some important improvements” to the BER.

On the other hand, Ferma also noted some “shortcomings” and “too narrow improvements which could affect legal certainty”.

“Those limitations could jeopardize some forms of highly valued and beneficial cooperation between insurers and the risk management community,” commented Ferma in the policy statement.

The BER grants an exemption to the application of competition rules to certain types of agreements in the insurance sector. The current BER will expire on March 31, 2010.

The European Commission has already indicated that it intends to renew the BER but to reduce its scope to cover only joint calculations and common coverage of certain types of risks (pools), with some significant changes to the existing provisions.

The new regulation would no longer cover the other two classes of agreement currently exempted by the BER, namely: standard policy conditions and agreements on technical specifications, rules and codes of practice concerning security devices.

Ferma made the following recommendations, in brief.

Pools

The association welcomed the extension of the BER for pools, where (re)insurers come together to provide capacity for very large and complex risks.

But Ferma also noted that the necessity for the pool’s exemption should be tested more frequently than solely at the formation of the pool.

“Absence of insurance capacity in the commercial insurance market today can change rather rapidly over time. Being created in a period of capacity shortfall, pools may not restrain the commercial insurance market from growing into that risk. The insurance market has to remain dynamic and competitive,” read the statement.

Ferma is in favour of an increase of the market share thresholds set out in the BER (above 20% for co-insurance groups and above 25% for co-reinsurance groups) in order to provide exemption to co-insurance or co-reinsurance pools comprising large and medium sized companies.

Without an increase in the thresholds, FERMA believes that a number of large and medium sized companies would be reluctant to either participate in pools or remain within existing pools. “These large and medium sized companies often contribute most to the building of financial capacity and risk experience,” said Ferma.

The association also supports other amendments which benefit competition, namely more flexibility for insurers to get out of the pool on short notice and allowances for them to insure or re-insure outside the pool.

A clearer definition of the “relevant market” for the purposes of the BER was also requested. “The absence of guidance on market definition in the insurance sector creates uncertainty. Such uncertainty would result in a significant risk of non-cooperation and thus a decrease in insurance capacity,” commented Ferma.

Scope and definition of new risks

The coverage of new risks currently falls under the BER for a period of three years. Ferma, however, proposed that this exemption period be extended from three to five years in order to “enable insurance and reinsurance undertakings to acquire sufficient experience of risks with which they are unfamiliar”.

“Five years constitutes an adequate period for the constitution of sufficient historical information on claims and to ascertain the potential damages in a new risk environment,” read the statement.

According to Ferma, new risks should include:

Risks with increasing frequency and severity (e.g. terrorism, climate change, etc.)

Risks that have not previously been covered: e.g. new scheme required by the Environmental Liability Directive.

Risks no longer insurable due to more (and new) exclusions appearing in general conditions: e.g. EMF (electromagnetic fields), nanotechnology, toxic mould.

Such risks equally need adequate insurance coverage, said the association of buyers. It is seeking confirmation from the European Commission that the new definition encompasses the above new risks.

Subscription market

Ferma is also concerned that the removal of the BER can restrict the operation of the subscription market and thereby reduce market capacity to the disadvantage of insurance buyers. These concerns are also shared by the insurance market itself.

Currently ad hoc co-insurance and co-reinsurance arrangements fall outside the scope of the BER. “This is understandable as these structures are not pools,” said Ferma. “The absence of an exemption nevertheless leaves open the continuation and justification of this practice. This practice is part of the basic functioning of the insurance market in Europe (both the London and the Continental European markets). As this practice has been working properly so far and proved its benefits, it should not be hindered. Rather, it should be permitted and allowed to continue.”

Following the insurance sector inquiry, Ferma has noted a lot of initiatives of associations (insurers, brokers and risk managers) to address the limited concerns of the Commission. "Those initiatives are not only intended to further promote competition in this area but also to introduce more transparency toward corporate insureds," said the statement.

Joint calculations

Ferma welcomed the exemption on joint calculations, tables and studies. It said there is a “continued need for a BER in this area”.

Joint calculations and statistics on the actual cost of risk are crucial to market access by new entrants and they enable large insurance buyers to benchmark their risk management, said Ferma.

“However, granting access to joint calculations and statistics may not be effective in all situations,” noted Ferma. “This is because actuarial data generated for certain insurance products are very complex and difficult to exploit without actuarial expertise.”

Standard policy wordings

Ferma said it is concerned by the non-renewal of the standard policy conditions (SPCs).

It said it considers cooperation on SPCs “very valuable as it helps to create transparency in the insurance market”.

For large commercial buyers, SPCs reduce transaction costs, facilitate the comparison between policy conditions and provide better contract certainty, noted the association.

“Non-renewal will increase significantly the risk of non-cooperation and legal uncertainty,” said the association.

Security devices

On the issue of security devices, Ferma acknowledged the non-renewal of the BER. “Insurers have the tendency to adopt security requirements going beyond what is strictly necessary and, hence, could operate without this extension,” commented the association.

Read The European Commission's view