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European Commission outlines concerns on contingent payments

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European Commission outlines concerns on contingent payments

BRUSSELS, Belgium—Potential conflicts of interest among insurance brokerages, a lack of transparency of broker compensation and market fragmentation are among the problem areas the European Commission has identified in its examination of the commercial insurance sector.

The Commission last week published a 164-page interim report detailing initial findings of its broad, ongoing study into whether the structure of the business of insurance in Europe is distorting competition.

The Commission said it will hold a public hearing in Brussels, Belgium, on Feb. 9 to present and discuss the findings. Following a consultation period, the Commission will publish its final conclusions in September.

A key concern outlined in the report is the potential for conflicts of interest among insurance brokers, in part because of the dual role that such intermediaries play.

"Brokers act both as an adviser to their clients and as a distribution channel for the underwriter, often with underwriting powers and binding authorities. This dual role could be a source of conflict of interest between the objectivity of the advice they provide to their clients and their own commercial considerations," states the report.

The report also notes that the Commission will continue to examine the use of contingent commissions--those tied to the volume or profitability of business--and concerns that they can create conflicts of interest. Many of the world's largest brokers have ceased accepting such commissions in the wake of former New York Attorney General Eliot Spitzer's probe into broker compensation practices.

"The results of the sector inquiry confirm that contingent commission agreements were widespread in many member states in the past.... Some intermediaries have derived considerable revenues from contingent commissions, highlighting the potential for conflicts of interest.

"It appears that the investigation in the U.S. and the increased public attention have led some market participants to change their policy concerning contingent commissions. Other market participants have made no changes to their practices. The Commission intends to further examine this issue," states the report.

The survey said insurers indicated a "high prevalence of contingent commission agreements in Belgium, Germany, Denmark, Spain, France, Hungary, the Netherlands and the United Kingdom, where at least 50% and in some cases up to 100% of respondents" indicated they used the arrangements for the period surveyed.

In addition, the Commission pointed to a lack of transparency over remuneration among most brokers and said that it will look for advice on how to address this, particularly from the European insurance buying community.

"Insurance clients are critical of the lack of transparency of intermediaries' remuneration. The survey shows that intermediaries across the E.U. tend not to declare to their clients spontaneously how they are remunerated for the placement of insurance through commissions.... The overall lack of transparency of intermediaries remuneration reduces the potential for price competition in relation to mediation services," the report states.

Other concerns

The report "identified factors on all levels of the supply chain that may prevent the markets from working as well as they should," said Neelie Kroes, the E.C.'s competition commissioner.

The Commission asserted that buyers in European Union member states operate in a market that is fragmented by sustained and not easily explained differences in insurer profitability, making the market ripe for price cuts.

It also said that long-term insurance contracts and distribution structures in some member states--notably Austria, Italy, the Netherlands and Slovenia--may limit the scope for competition.

And the Commission said it is troubled by, among other things, the degree and nature of information sharing in the business insurance market across the continent.

David Strang, competition partner at Barlow Lyde & Gilbert, said that the role of the broker was clearly the highlight of the report.

"While the first phase of the inquiry has looked at a wide range of issues, the role of the brokers seems to feature most prominently. The Commission is concerned not only about the continuing use of the contingent commissions, but also about the significant lack of transparency in broker remuneration, particularly in the U.K.," said Mr. Strang.

The only major broker to have issued a formal response to the E.C. report by the end of last week was Marsh Ltd., a London-based unit of Marsh & McLennan Cos. Inc.

"What this report makes plain is that insurance intermediaries should be putting clients at the core of everything they do," Toby Foster, a director of Marsh, said in a statement.

"However, like the Commission, we share considerable reservations about the continued accepting of contingent commissions by some brokers. We will continue to make the case strongly that, in the interest of clients, this practice should end," said Mr. Foster.

Marsh stopped collecting contingent commissions in 2004 after Mr. Spitzer sued the brokerage, charging it with bid-rigging and client-steering schemes designed to maximize such commissions. Many smaller brokerages, though, continue to collect such compensation.

For more information on the report, visit http://ec.europa.eu/comm/competition/antitrust/others/sector_inquiries/financial_services/