Commission enquiry brings threat of intervention in insurance market

The European Commission’s final report on Business Insurance brings a step closer possible enforcement proceedings against perceived anti-competitive practices within the London market, said Reynolds Porter Chamberlain LLP (RPC).

Andrew Hobson, a competition expert at RPC, commented: “The EC is clearly marking the insurance industry’s cards. Whilst the EC’s processes may, at times, seem glacial I don’t think this report allows us too much room for complacency.”

RPC issued the following briefing on areas of risk for the insurance industry in London presented by the EC’s report:

Broker’s commissions

The EC report highlights the lack of transparency regarding commissions and other remuneration paid to insurance brokers and other intermediaries and the conflicts of interest created by intermediaries acting for both insurers and insureds.

The issue of brokers being influenced by commissions they received from insurers to act against their clients’ interest was the subject of a highly publicised investigation by Elliot Spitzer.

“Whilst the EC's processes may, at times, seem glacial I don't think this report allows us too much room for complacency.

Andrew Hobson, a competition expert at RPC

The EC’s report says that it is committed to following up its findings on broker remuneration in its review of the Insurance Mediation Directive that is currently underway.

Kenneth Underhill of RPC said: “Reading between the lines I think the EC wants to go for compulsory disclosure of commission.”

“The problem of the types and the amount of commissions being sought by brokers has begun to creep back into the market place and it looks like the EC has got the bit between its teeth on this one.”

“If the problem of illegitimate commissions charged by brokers is not resolved we do run the risk of the EC either banning commissions altogether, requiring their disclosure or trying to force the polarisation of brokers – either they work for insurers or for the insured but not for both. That nuclear option would cause problems for everyone.”

The EC’s report refers to “growing awareness” of the conflicts of interest and clearly hints that national authorities such as the FSA are to be encouraged to take up the issue.

Best terms and conditions

“Reading between the lines I think the EC wants to go for compulsory disclosure of commission.

Kenneth Underhill, RPC

EC has also decided that the widespread practice in the London market of “best terms and conditions” clause may not comply with competition law. “Best terms and conditions” means that all underwriters of a risk underwrite their portion of that risk at the highest price agreed by any of the other underwriters. The EC has also considered the horizontal marketing of risks - where the lead underwriter sets the price and all other underwriters simply follow that price. The EC believes these practises may put an upward pressure on insurance premiums for customers.

Kenneth Underhill added: “The EC is basically telling the market to get its act into order on this. If not it may well launch enforcement proceedings. The good news is the London Market has a breathing space. The bad news is that if this threat is to be taken at face value changes will be required to the way underwriters bid for risks. That will be a logistical and administrative nightmare.”

Threat to allow insurance block exemption to elapse needs to be opposed by the industry

RPC also said that the EC’s proposals to allow the insurance industry’s block “exemption” to lapse in 2010 are likely to create huge legal uncertainties.

Under European law the insurance industry has a block exemption from some competition rules to allow a measure of cooperation across the industry. This cooperation between competitors allows insurers to break up big risks and spread them around the market in insurance pools. Cooperation is also permitted to provide other benefits to those purchasers of insurance such as standardised contract wordings, risk premium calculations and security devices.

Hobson said: “If this block exemption is not replaced after 2010 then the insurance industry will have to try and find ways to ensure that the cooperation needed to run a dynamic insurance market is protected under other exemptions from EU competition law. In my view the other exemptions that exist in EU law are very imperfect and would lead to a huge level of legal uncertainty for insurers.”

“I think this is one issue the insurance industry will need to continue to lobby the EU on.”