It warned insurers that they will face stricter scrutiny to make sure they comply with the new regime.
Article 81 of the EC Treaty prohibits agreements which may affect trade between member states and which prevent, restrict or distort competition. Individual agreements may be exempt, however, if it can be shown that the benefits they bring outweigh the restriction on competition.
In addition, the Commission has the power to grant sector-specific block exemptions which automatically exempt certain types of agreement, provided specified conditions are met.
One such block exemption currently applies to four categories of insurance-related agreement. These are: agreements for the exchange of statistical information for the calculation of risk; agreements establishing non-binding standard policy conditions for direct insurance; the setting up of insurance pools for the joint coverage of certain risks; and agreements relating to specifications for security devices.
The existing Insurance Block Exemption Regulation, however, expires on 31st March 2010.
The Commission has been carrying out a detailed review of how the current exemption is used in order to understand whether it is still necessary and justified. It has now decided to renew the regulation for another seven years, but only as regards two of the four categories of agreement, subject to certain changes.
Announcing the proposals on 5th October, Competition Commissioner Neelie Kroes said the Commission had conducted a thorough investigation into how the current insurance block exemption is working in practice.
"We now consider that there are sufficient grounds to renew the exemptions for information exchange and insurance pools," she said. "However we intend to be tougher on monitoring and enforcement to ensure compliance with the rules."
Interested parties have until 30th November to comment on the revised regulation, which is due to come into force on 1st April 2010.
Under the proposals, the exemption for the exchange of information will only apply where information sharing is necessary to achieve the objectives of improving the knowledge of risks, making it easier for new insurers to enter the market, and ultimately benefiting consumers.
Access to the data should be made available on reasonable and non-discriminatory terms, not just to insurers and new entrants to the market, but also to interested third parties, such as consumer groups and academics.
More significant changes are proposed for the exemption covering co-insurance and co-reinsurance pools.
The Commission acknowledges that insurance pools increase the number of insurers potentially able to cover a particular risk and so generally increase market entry, availability of cover and competition. But it is also concerned that pools can encourage the standardisation of policy conditions and even the amount of cover and premiums.
The current pools exemption covers the joint coverage of new risks for three years and other risks subject to certain conditions, such as market share thresholds.
Under the proposals, the three-year period for new risks would remain, subject to a new definition of new risks which includes risks which did not exist before or, in exceptional cases, "risks whose nature has, on the basis of an objective analysis, changed so materially that it is not possible to know in advance what subscription capacity is necessary in order to cover such a risk".
For risks which are not new, the exemption will apply to pools on condition that the aggregate market share held by the participating insurers inside and outside the pool does not exceed 25% of any relevant market in the case of co-reinsurance and 20% in the case of co-insurance.
This is a significant change from the previous exemption, which only considered market shares within the pool. The amendment will bring the insurance block exemption into line with the approach taken to market shares in other general and sector-specific competition rules.
The other two categories of agreements in the current block exemption (non-binding standard policy conditions and specifications for security devices) were not considered by the Commission to be sufficiently specific to the insurance sector to warrant automatic exemption.
For these and any other agreements that fall outside the new block exemption, insurers will need to carry out a self-assessment to decide whether the benefits brought about by the agreement outweigh any restriction of competition.
Alan Davis, competition law expert at Pinsent Masons LLP, the law firm behind OUT-LAW, urged underwriters to review their agreements as soon as possible.
"Insurers need to understand the potential implications of the changes now if they are to be ready to comply with the new block exemption when it comes into force on 1st April 2010," he said.
"The Commission's comments about monitoring and enforcement raise the prospect of greater scrutiny of the insurance sector under the competition rules," said Davis. "Recent experience in other sectors, such as energy and pharmaceuticals, has shown that when the Commission carries out an EU sector-wide enquiry followed by a tightening up of the rules, enforcement action against non-compliant arrangements – including dawn raids on individual companies – tends to follow."
