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The Continental conundrum

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The Continental conundrum

FERMA's response to the European Commission Inquiry into the workings of the business insurance market underlined just how tricky this debate has become for Europe's risk management community, with gains and losses potentially canceling each other out, depending upon what action the Commission eventually decides to take.

The federation will not have won many friends in the broking community for its comments, but it could not duck the issue of broker remuneration and transparency in general.

Anything other than an outright condemnation of the obvious lack of a level playing field across mainland Europe would have been ridiculous.

Thus FERMA was right to point out that disclosure is very uneven and that while most of the major broking firms have been "pushed" by their U.S. headquarters to be more transparent, "strong" opposition to the disclosure concept remains from the majority of the rest of the market.

FERMA also reminded the Commission that none of the big brokers have yet signed up to the code of practice it proposed two years ago and was still trying to get off the ground when BIE was launched last September.

The federation was also correct to point out to the Commission that, where there is disclosure, the brokers are often "vague and unclear" about their direct remuneration, and that in the case of contingent commissions--payments from insurers based on account value--are "rarely revealed."

"Commercial insurance is not a uniform product, and the buyer has to use judgment to get the most appropriate coverage. To do that he or she needs impartial advice," said Thierry van Santen, FERMA's spokesman on competition matters.

FERMA also correctly pointed out the link between transparency and the efficient operation of the market, and noted that the industrial risk market has a lot of work to do in this regard, particularly on quality and processes.

FERMA's list of proposals to deal with the transparency problem are difficult to argue against, although its point about forcing a strict separation of reinsurance intermediation from traditional brokerage services would be a spicy debate.

It would also be helpful if FERMA was clearer on exactly what "additional incentives" should be "strictly restricted" and what it means by that.

But the bottom line is that if Europe's leading insurance buyers' body is advising the European Commission to act on broker remuneration and transparency, Neelie Kroes, the European Commissioner for Competition, is unlikely to ignore it.

The really tricky bit, however, comes when FERMA comments on the lack of competition in the market, problems with national pools and cooperation between insurers the need to try and ensure that whatever the Commission does about that will not make it worse.

Mr. Van Santen said FERMA had asked the Commission directly to avoid making any regulations that would reduce still further the number of insurers that currently write major commercial risks.

It is difficult to see how this could be achieved currently, given the Commission's propensity to respond to problems with rules and perhaps that would have been better left under the carpet.