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Buyers debate insurer competition

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Buyers debate insurer competition

Risk managers are divided on whether the insurance industry's block exemption from certain European rules hinders competition in the sector.

The European Commission is set to release conclusions of its inquiry into the business insurance sector next month. That inquiry examined, among other issues, whether the exemption stifles competition and restricts choice for buyers.

Since 1992, the exemption has effectively allowed insurers to cooperate in certain areas of business. For example, it allows the use of standard policy wordings. It is set to expire in 2010 and may not be renewed.

While the insurance industry vigorously argues the merits of keeping its exemption, some corporate risk managers favor eliminating it on grounds that they would benefit from a more competitive insurance environment.

Others, however, contend that the exemption does not hinder competition and in some cases enables insurers to come up with wordings and policies that otherwise they would not.

In Finland, for example, large corporate buyers generally feel competition in business insurance is "inadequate," said Lassi Väisänen, chairman of the Finnish Risk Management Assn., and chief risk officer at TeliaSonera Corp., a Helsinki-based telecommunications company.

"By abolishing the block exemption, competition might be increased in a positive way, and therefore it would be helpful to insurance buyers," said Mr. Väisänen, recounting views from a member's meeting earlier this year. "It might result in more variety on terms and conditions and ultimately help buyers to get better terms and premiums."

From another standpoint, Ralf Oelssner, chairman of the Deutscher Versicherungs-Schutzverband e.V. in Bonn, Germany, and director of corporate insurance at Cologne-based airline Lufthansa A.G., said he is skeptical that removing the block exemption will increase competition.

"It was no jeopardy to us so far, so what do we gain by them getting rid of it?" Mr. Oelssner asked. "Unfortunately, insurers will just have to make sure that they supply some decent reasoning to Brussels why they should keep it is," he said.

Such diversity of views is the reason that the Federation of European Risk Management Assns. in Brussels, Belgium, has decided not to take an official stance on the topic, according to Thierry Van Santen, FERMA's manager for European affairs.

"Indeed, we had different opinions between our members, and both points of view are valid," said Mr. Van Santen, group risk manager of Paris-based Group Danone.

"Some may consider that this elimination would make life quite difficult for small and medium-sized insurance companies, reducing again the number of players. It may also bring confusion with every company having very specific conditions making coinsurance and reinsurance difficult," he said.

"Others consider that this would eliminate market consensus on terms and tariff and would bring new innovations and competitive products," Mr. Van Santen said. "In any case, this termination would be a major market change for all the insurance buyers with new rules and new practices."

The Commission, which began its inquiry into competition in the business insurance sector in June 2005, is still on target to publish its final conclusions in September, according to a spokeswoman. If it finds instances of anti-competitive behavior, the Commission may take steps to change European insurance law.

Speaking at a conference in July hosted by the Brussels, Belgium-based arm of Washington-based law firm Steptoe & Johnson L.L.P., Irmfried Schwimann, head of the Commission's Directorate-General for Competition's financial services unit, said the block exemption may soon be history.

In her remarks, Ms. Schwimann noted that "mainstream thinking is clearly heading in the direction that the exemption will be reduced or abolished."

Most likely, the block exemption will not be scrapped altogether but will be modified, said Martin Bechtold, a partner in the International Antitrust Group at law firm Allen & Overy L.L.P. in Brussels, Belgium.

Meanwhile, asked to respond to Ms. Schwimann's recent remarks, insurance associations reiterated that the forms of cooperation between insurers allowed under the block exemption regulation do not impede competition, but rather have fostered greater competition.

"The block exemption regulation...has proven beneficial to competition, led to the opening up of markets to new players and small- and medium-sized insurance undertakings, enhancing thus the variety of products to the advantage of the consumer," said William Vidonja, head of single market for the Brussels-based CEA, which represents European insurers and reinsurers.

Berlin-based Gesamtverband der Deutschen Versicherungswirtschaft, Germany's insurance association, expanded on the necessity for the exemption in a position paper in April. In that paper, the GDV cited its development of a nonbinding standard wording for liabilities created under the European Union's Environmental Liability Directive (2004/35/EC).

"The significant effort that was required for the drafting of these sample terms shows that probably only a small number of companies would have been able to develop corresponding insurance cover," the GDV said at the time.

Opinions among risk managers from some of the newer European Union members are also divided.

Rafal Rudnicki, board president of PolRisk, the Polish risk management association in Warsaw, Poland, said forcing insurers to always come up with their own wordings "will naturally produce plenty of confusion and misunderstanding, as well as result in a much worse quality wordings."

Stoian Lilov, head of risk management for the Bulgarian Telecommu-nications Co. and chief executive officer of the Bulgarian Risk Management Assn., both in Sofia, said he supports eliminating the exemption.

He believes it would allow more flexibility in designing customized wordings, among other benefits.