The price is right

In a special inquiry into business insurance, European competition authorities looked into areas of the co-insurance market they felt were uncompetitive and poorly served clients. The clear message of the final report, published in 2007, was that the Commission expects a reappraisal of some key aspects of business insurance.

The Commission singled out long-standing industry practices in the co-insurance market involving the alignment of premiums, which the Commission believes may lead to higher prices for large risk commercial insurance. The focus is the widespread practice of alignment between the price charged by a policy leader and by following insurers which sign on afterwards. The Commission says the effect of this process is to align the price charged by the following insurer with the price charged by the leader.

By and large the insurance market is frustrated with the Commission’s intrusion into its affairs. Most participants are happy with the way things are. ‘If it isn’t broken don’t fix it,’ is the overwhelming feeling. Any changes to the system could have big implications for Lloyd’s of London, which runs the biggest subscription market. They say the co-insurance system has developed over hundreds of years to meet the needs of a sophisticated client base in a fiercely competitive global industry. Many large commercial buyers, the consumers, think the co-insurance system is an efficient way of getting access to coverage on large exposures; they benefit from consistent coverage across multiple insurers and from speedy decision making.

For the time being the Commission is happy for the market to come up with its own solution. And that is what the market has started to do, in the form of principles for the placement of business with multiple insurers. The Commission has accepted these as a useful first step.

“Just because something has been done for hundreds of years does not mean it is the right way of doing things.

Eithne McCarthy

But if the insurance Block Exemption Regulation (BER), which exempts the insurance market from certain competition rules, elapses next year, as it is widely expected to do, the Commission might turn its attention to other parts of the market which it thinks are uncompetitive. As it stands, the subscription market falls outside the BER, so it will not directly be affected if it is terminated. But the Commission has indicated that it is not scared of weighing in on these issues.

‘Just because something has been done for hundreds of years, does not mean it is the right way of doing things,’ said Eithne McCarthy, a project leader at the Commission’s competition directorate, at a conference in London recently.

Alternatives

There are some alternatives to the traditional co-insurance placement system, which still allow multiple insurers to sign on to a single policy. Some buyers say that putting a tender together and getting insurers to bid against each other for parts of the risk can reduce costs because the insurers do not all follow the price set by the lead insurer.

“The price reflects the pricing of the market and not of one leader.

Yvon Colleu

Yvon Colleu, manager of EDF Assurances, the insurance buying arm of EDF Energy, organised insurance for a large property exposure through a process called vertical marketing. Colleu looked for a lead insurer for the programme with whom he agreed a policy wording and price. After that he approached other insurers, who each gave their own price in exchange for a share of the risk. ‘It was a way to get a price that reflects the pricing of the market and not the pricing of one leader,’ he says.

Proponents of the subscription system argue it is the best way of accessing coverage. But Colleu says that vertical marketing opened up new areas of the market because insurers could set their own price for the risk rather than having it set for them. That meant the insurers that he approached were not priced out of the risk because they thought it was too much or not enough. ‘In the end we had various participants and various prices and we understood the contract,’ he says.

Many smaller insurers find the subscription system easiest, because they would rather follow a lead insurer than provide their own quotation. Colleu simplified the process by providing the quotation of the leader as a reference for the market. ‘Followers can use the same price, or discount it because they have less to do than the leader,’ he says. The leader has to provide services like discussing policy amendments and new risk inclusions as well as settling claims.

Policyholders will have to decide for themselves whether the cost savings of an independently priced placement outweigh the ease of arranging a traditional subscription placement. Either way, if the Commission sees that buyers are considering a range of alternatives it is more likely to be convinced that they are not being ripped off and to think that overhauling the traditional co-insurance marketplace is a step too far.