Out-Law News 4 min. read

Europe's insurers face reduced exemptions from competition rules


Insurers look set to lose at least part of their block exemption from European competition rules, according to a preliminary report published by the European Commission this week.

The Insurance Block Exemption Regulation currently allows European insurers to agree to work together in certain specified circumstances that may otherwise breach the prohibition on anti-competitive agreements.

Article 81 of the EC Treaty bans agreements which may affect trade between member states and which prevent, restrict or distort competition.

Individual agreements may be exempt from the prohibition, however, if insurers can demonstrate that the benefits they bring outweigh the restriction on competition. In addition, the Commission has the power to grant a block exemption, which automatically exempts certain types of agreement if specified conditions are met.

The current insurance block exemption, which came into force on 1st April 2003, automatically exempts four categories of insurance-related agreements.

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.

But the regulation expires in March 2010 and the European Commission has to decide whether or not it should be renewed in full, in part, or at all.

Purpose

One of the Commission's main concerns is whether the insurance block exemption still has a purpose to serve under the new European competition regime.

In 2003, when the current block exemption came into force, agreements that restricted competition had to be notified individually to the Commission to obtain the exemption. The block exemption, therefore, helped cut down the number of notifications.

But since May 2004, companies have no longer been required (or able) to notify agreements. Instead they must self-assess whether the benefits brought about by an agreement outweigh any restriction of competition. According to the Commission, this means that the insurance block exemption's "primary original objective" has been removed.

Consequently, the Commission has been focusing on whether the insurance sector is special – as compared to other sectors – to the extent that there is an "enhanced need" for insurers to be able to cooperate with each other and whether that need should be protected by legal instrument.

Provisional findings

Last year, the Commission consulted the industry and other interested parties, asking for information on how the insurance block exemption is currently being used and its impact on insurance markets in the EU.

After analysing the 60 responses received, the Commission has come to the preliminary conclusion that there are good reasons to renew the exemptions for joint calculations, tables and studies and for insurance pools, but not for standard policy terms or security devices.

Calculation of risk is key to the pricing of all insurance products and is a factor that differentiates insurance from other sectors. The block exemption currently requires that when insurers agree to share statistical data, they give access to that information on a non-discriminatory basis.

The Commission believes that if the block exemption for joint calculations, tables and studies is not renewed, access to this sort of information could become more limited, particularly for smaller insurers.

Insurance pools increase the number of insurers potentially able to cover a particular risk and so generally increase market access, availability of cover and competition. The Commission's view at this stage is that there are several arguments in favour of an exemption to protect or facilitate such agreements.

But the report comments that some insurers are applying the current exemption too broadly. Many co-insurance and co-reinsurance pools in practice fall outside its scope. So, although the Commission is proposing to renew the exemption in some form, the report warns that it is likely to be significantly redrafted.

Agreements concerning non-binding standard policy conditions, however, are not unique to insurance and the Commission sees no need for a sector-specific block exemption. Nor does it believe there is a significant risk that cooperation between insurers in this area will diminish if the block exemption is not renewed. It may, however, issue further guidance if it decides on non-renewal.

As for cooperation on technical and other specifications for security devices, these are, again, not specific to insurance and, in the Commission's view, could be adequately covered by guidance on standardisation.

Legal uncertainty?

Many respondents to the consultation argued that loss of the block exemption would result in legal uncertainty and increase costs because insurers would have to self-assess more individual agreements.

The Commission, however, takes the view that the legal assessment insurers currently undertake to check that an agreement falls within the block exemption is not that different from the one they would carry out to check the agreement qualifies for exemption under Article 81. The Commission has found no evidence that it would cost more

Michaela Koller, director general of the CEA, the European insurance federation, is disappointed that the Commission is not minded to renew the block exemption for standard terms and security devices.

“Without the legal certainty that the BER provides, there would likely be a significant drop in such cooperation, to the detriment of insurance buyers,” she said. “While we recognise the value of the Commission’s proposed guidance, we would urge the Commission to reassess its preliminary position during the forthcoming consultation.”

Alan Davis, competition law expert at Pinsent Masons LLP, the law firm behind OUT-LAW, welcomed the news that the insurance block exemption would be maintained in some form, but warned about the consequences the promised redrafting of the insurance pools exemption could bring.

"There is a risk that limiting the scope of the exemption for co-insurance pools could prompt competition authorities to start monitoring such agreements more actively and enforcing the competition rules more rigorously," he said.

"If so, insurers will need to make doubly sure that their existing and new co-insurance arrangements are compliant," said Davis. "And where co-insurance arrangements fall outside the scope of the revised block exemption, insurers will need to take particular care when they self-assess whether an agreement can be individually exempted."

The Commission will hear further representations at a public event on 2nd June before making its final decision.

If it decides to renew all or part of the block exemption, there will be a further consultation on the draft regulation. If it decides not to renew any part of the exemption, it will confirm its decision by the end of the year.

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