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Issue March 30, 2009 |
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BRUSSELS, Belgium—European authorities signalled last week that they may provide guidance on the extent that insurers can cooperate on policy conditions if an insurer exemption to E.U. competition law is lifted or modified next year.
The move was welcomed by insurer and risk manager representatives who had lobbied against lifting the exemption.
While changes to the exemption are not expected to end common practices, such as subscription placements in Europe, they could add to insurers' legal compliance burdens and weaken consumer protections, some observers say, and formal guidance from the European Commission may ease the transition.
The commission said last week that two forms of insurance market cooperation should continue to be exempted from European Union competition rules, but that standard policy conditions do not necessarily need an exemption.
The commission made its recommendations in a report on the insurance industry Block Exemption Regulation, which was last renewed in 2003 and applies to all insurers operating in the European Union.
The block exemption is due to expire in March 2010, and the commission must decide this year whether to renew it or to let it lapse.
After a public hearing to be held in Brussels, Belgium, on June 2, the commission will decide whether to renew all, part or none of the exemption.
The regulation enables insurers to cooperate in certain areas, including standard policy conditions and model policies, without having to justify that cooperation under the European Union Treaty Article 81(3), which covers competition issues.
While removal of the exemption would not necessarily mean insurer cooperation on policy wordings and other matters would violate E.U. competition law, it would mean companies would have to seek legal clarification that their practices were not in breach of competition rules.
The commission said two forms of cooperation--joint calculations, tables and studies and insurance and reinsurance pools for hard-to-place risks--appear specific to the insurance sector and should continue to be protected under the block exemption.
But the commission said that while it agreed with insurers' and buyers' arguments that cooperation on standard policy conditions has helped encourage competition, there does not appear "to be a significant risk of less or noncooperation" if the block exemption is not renewed.
The commission noted that standard document wordings are used in other industries, such as banking, without the need for a block exemption.
Rob Gillies, head of market processes at the Lloyd's Market Assn., which represents underwriters at Lloyd's of London, said the association was disappointed but not surprised that the commission's report did not recommend the renewal of the block exemption for standard policy conditions, which are widely used in London's subscription-based markets.
But he said the LMA welcomed the fact that the commission appears open to providing some form of guidance that would give market participants some clarity on how to cooperate on standard or model policy conditions.
Such guidance would "give firms the confidence that they are acting properly," he said.
The Comite Europeen des Assurances, which represents insurers and reinsurers in Europe, said the removal of the block exemption for standard policy conditions could mean such model policies are less widely used.
"Without the legal certainty that the (block exemption) provides, there would likely be a significant drop in such cooperation, to the detriment of insurance buyers," said Michaela Koller, director general of the Brussels-based CEA.
She said the use of standard policy conditions enables comparability of products, which is to the buyers' benefit.
Paul Hopkin, technical director of the London-based Assn. of Insurance and Risk Managers, said AIRMIC found it encouraging that the commission may consider issuing guidance on the use of standard policy conditions.
Risk manager groups had favored an extension of the exemption arguing that it helped ensure coverage for hard-to-insure risks and expand market capacity by helping smaller insurers participate in placements.
Mr. Hopkin said AIRMIC gave a "cautious welcome" to the fact that the commission had indicated the block exemption might be maintained for co-insurance and reinsurance pools and the use of joint calculations tables and studies.
The insurance industry likely will be able to continue to cooperate on standard policy conditions, as the practice is not expressly banned under European law, said Lesley Ainsworth, a competition and E.U. law partner at law firm Lovells L.L.P. in London. However, removal of the exemption may eliminate some of the consumer protections the exemption guaranteed, she said.
For example, she said, the current exemption prohibits insurers from forcing buyers to accept multiyear policies.
The commission said cooperation on joint calculations, tables and studies--such as marketwide statistics--appeared to benefit competition.
In addition, the commission said risk-sharing among certain types of risks--such as nuclear, terrorism and environmental--is crucial because individual insurers may be reluctant to underwrite those risks alone and in their entirety. Such pooling arrangements are specific to the insurance industry and the pools may not survive if block exemption is not renewed, according to the commission's report.
But if the block exemption is renewed, the commission said it likely will redraft the chapter on pools "to ensure consistency with other general and sector-specific legislation."
For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com
