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To usher in a new era

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The European Commission block exemption on certain competition rules that the insurance industry has enjoyed since 1992 is under threat.

Buyers, intermediaries and providers of risk transfer coverage need to rapidly take note and a position, or else risk seeing further loss of badly needed capacity in the more difficult-to-insure pockets of the market.

This issue seems to have crept up on the market.

Much of the debate about the Commission's inquiry into the workings of the European business insurance sector has so far focused on the role of intermediaries, how they are paid, whether the system is transparent enough and whether buyers receive a fair deal.

Many would like to see compulsory disclosure of who is being paid for doing what and how.

Some would also like to see the Commission outlaw the receipt of payments by intermediaries, by both buyers and providers of coverage to prevent so-called "steering" of business towards the highest bidder, not necessarily the best products and services.

Both of these positions are valid and laudable. And one can easily imagine that the Commission competition czar Neelie Kroes will take a bullish stance on these issues, given what she and her directorate have recently done and continue to do, in other sectors such as energy and telecommunications.

But there is more to the inquiry than the nature of the distribution system.

At a recent conference in Brussels, Irmfried Schwimman, head of the Commission's Directorate-General for Competition's financial services unit, warned that within the industry's current "mainstream thinking," the exemption will be "reduced" at best and may even be outlawed altogether.

This could be a big deal for the market because the exemption allows insurers and reinsurers to use standard wordings. And this allows brokers to gather capacity in a syndicated way through coinsurance and the slip system, famously used in the London market.

Were it removed, then brokers would presumably be forced to individually tout each risk to all potential carriers and negotiate individual terms and conditions.

This would, presumably, not present much of a problem for the bulk of commercial risks placed 100% with local and national carriers.

But for larger, more complex and cross-border individual risks and wider programs, this could potentially radically alter the way the market operates.

As our front page story reveals, opinion on this issue is starkly divided within the European insurance buying community.

Those who support the removal of the exemption say that it would force insurers to compete more aggressively for market share in terms of price and the nature of the coverage, and thus inevitably benefit buyers.

Supporters of the block exemption say, however, that it is essential for the smooth and efficient operation of the so-called wholesale market, and enables brokers to amass sufficient capacity for more difficult risks.

They say that its removal could actually make the market less competitive because it would be more costly and cumbersome. This would persuade some supporting markets to exit and focus on simpler and cheaper business lines.

BIE is, of course, an ardent supporter of the constant search for improved terms and conditions for our readers—the European insurance buying community.

But we urge caution in this debate.

This is because it is not clear that there is sufficient quality capacity for buyers of serious insurance and reinsurance coverage to merit the dismantlement of a risk diversification system that has basically worked—despite the vagaries of the cycle-for so long.

Given what our readers have told us since our launch last September about the worrying lack of choice already for large industrial risks, it is likely that the loss of the exemption would actually further reduce, not enhance competition.

It could also usher in a whole new era of rampant contract uncertainty and renewed debate over the role of the intermediary and how it is paid, just as it seemed that it was about to be sorted out.