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No knee-jerk reactions please


The European Commission held a public hearing on Friday in Brussels to discuss the findings of its recently published interim report on its sector inquiry into competition in the business insurance market.

The event was oversubscribed and the E.C. wisely invited a number of speakers from all corners of the sector to give their initial thoughts on the inquiry and what the Commission needs to focus upon next as it prepares the final report.

It is clear that the role of intermediaries will be a major topic of debate over coming months as the E.C. unsurprisingly identified apparent 'conflicts of interest' in the sector and is not happy with the lack of transparency and use of so-called contingent commissions in many states.

It is equally clear that the insurance-buying community in Europe will quite rightly use this opportunity to lobby for improved transparency from their intermediaries and particularly for smaller buyers that do not have the expertise or clout that is often required to force the brokers to open up their books.

It is less clear, however, how the Commission's concerns over levels of profitability in the sector will be and should be handled from the buyers' perspective.

The inquiry concluded that pre-tax profitability in business insurance was high across larger member states in 2005.

The Commission said it found that profitability has also been sustained over time in most member states, but that it is significantly higher in the newer member states.

It suggested that insurers may have enjoyed unnatural profits in some markets through the exercise of market power and that there could therefore be room for price cuts.

But has the Commission really uncovered anything other than the underwriting cycle at work and will any action taken at E.C. level really be in the buyers' interests?

Yes, the leading commercial and industrial insurers did make a tidy profit in 2005 and also in 2004 and 2003 in many cases, but, how did they fare before that? Not very well as we all know.

Yes, they did dramatically and collectively raise prices in 2002 and to an 'outsider', this may, understandably, look like collusion and possibly even price fixing.

But to 'insiders' this looks more like the timeless operation of the underwriting cycle which, over the longer term, has surely favored the buyer much more than the seller of corporate insurance.

Moreover, someone ought to point out to the Commission that prices for commercial and industrial insurance have actually fallen steadily over the past two to three years and that the carriers have only really managed to report such healthy numbers because of the relative lack of large losses, not necessarily inflated prices.

The insurance-buying community would, of course, be crazy not to use this E.C. inquiry to gain some advantage and fix some of the real problems outlined by the report, such as commissions and transparency.

But buyers should not to allow themselves to be carried away and cajole the Commission into some over-zealous reaction over primary pricing that could ultimately deliver an even smaller number of carriers willing and able to offer serious levels of cross-border capacity and service.