EC Report Questions European Business Insurance Practices

September 26, 2007

The European Commission has issued its long awaited final report on business insurance practices within the 25 member countries of the European Union. It raises questions of unfair competition in two areas: 1) premium “alignment” in reinsurance and “coinsurance;” and 2) the lack of transparency in broker carrier remuneration.

Specifically the report said that “long-standing and widespread industry practices in the reinsurance and coinsurance markets involving the alignment of premiums” could lead to “higher prices for large risk commercial insurance.” The report left open the question of whether charging similar premiums might “constitute infringements of the prohibition on restrictive business practices (Article 81).”

However, in blunt terms it told the industry that it would have to either “justify the business practices concerned under the competition rules, or to reform them.” The industry has had an exemption from otherwise applicable regulatory requirements since 2003, which have permitted, among other things, that rates set by a lead insurer cannot be lowered in the follow on market. The exemption is scheduled to expire in 2010, and probably will, unless the industry can justify that an extension is necessary.

On the question of broker remuneration, the EC affirmed that it has concerns as to “transparency of remuneration and conflicts of interest in insurance brokerage, which may inflate prices and reduce choice, in particular for SMEs.” The EU’s regulatory body added that it “will further explore this issue during the review of the Insurance Mediation Directive (2002/92/EC).”

Competition Commissioner Neelie Kroes commented: “Today’s report shows that the Commission is serious about making markets work better, even where that means we need to question some established market practices when these may be harmful to consumers and competition. I invite the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices.”

In its bulletin announcing the report, the EC stressed the “vital importance for big and small businesses throughout the EU,” which the insurance industry plays. “Many industries, from aviation and shipping to major real estate developments, could not function without insurance. EU insurers collect €375 billion [$530 billion] in non-life premiums every year. European insurers and reinsurers are also very active in international markets, and they are major investors in capital markets.”

In a further comment on the “follow” market, the EC indicated that its report “does not conclude that the law is actually being infringed, as this would only be possible in the context of a specific enforcement decision. Nonetheless, premium alignment is not, in the Commission’s view, intrinsic to the operation of the subscription markets, and the Commission invites the industry either to justify the business practices concerned from a competition law standpoint, or to reform them.”

However the EC also indicated that it would not “apply its findings retroactively and will give industry every opportunity to make the representations on this matter which it considers appropriate.”

The EC also stressed that the relationship(s) between brokers and insurers “raises a number of issues for the functioning of the market and may in some cases lead to less competition and higher prices, especially for SMEs.” The EC indicated that “there is a growing awareness in the market that such conflicts of interest may need to be better supervised or regulated.”

The full report and additional information and comments may be obtained on the EC’s web site at:

Source: European Commission

Latest Comments

  • September 28, 2007 at 10:31 am
    EU citizen says:
    The industry should take on board the suggestion to do away with the subscription market. Then we could all price our accounts the way we see the risk and not have to follow ... read more
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