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					EC competition law in the insurance sector

Andrzej Kmiecik Istanbul 16 May 2006


1. Overview of EC competition rules
• Article 81(1) – prohibits agreements which appreciably restrict competition (provided they affect trade between EC Member States)
– horizontal agreements (between competitors, e.g. price fixing) – vertical agreements (e.g. a distribution agreement)

• Article 81(3) – exempts an agreement which infringes Article 81(1) provided there are efficiencies resulting from the agreement outweigh the restrictive effect of the agreement
– Commission block exemptions

• Article 82 - prohibits abuse of dominant position • The above is also the model for national competition laws within the EU and Turkish competition law


2. Consequences of breach of EC competition rules
• Invalidity of agreement • Fines of up to 10% of worldwide group turnover • Claims for damages by injured parties


3. The application of the EC competition rules to the insurance sector
• The EC competition rules apply in full to the insurance sector • The industry argued unsuccessfully that the rules should not apply as (i) collaboration among competitors is necessary given the special characteristics of the industry and (ii) the industry is heavily regulated • The insurance industry has not generally been in the spotlight of enforcement action and there is little recent case law • There is a Block Exemption Regulation (No 358/2003) that exempts very specific forms of cooperation among insurance companies • Insurance mergers have not attracted major competition concerns • However, the industry is now subject to a sector inquiry by the Commission - the “quiet life” may be about to change

4. The sector inquiry
• The European Commission has formed a provisional view that competition is not working in the insurance markets • The Commission cites: - limited cross border supply by insurance companies within the EU - obstacles to market access (inadequate access to data and to distribution channels) - high level of cooperation among competing insurance companies in various areas (pooling, standard clauses, role of associations etc) - price rigidity • The Commission is looking for evidence of competition law infringements • It has requested large amounts of data from insurers, associations, intermediaries, consumers associations etc


5. Block Exemption Regulation (No. 358/2003)
The block exemption exempts under Art. 81.3 four distinct categories of cooperation agreements between insurance companies : - the making of joint calculations, tables and studies concerning common risks - the drawing up of standard form insurance contracts - the setting up and operation of groups of insurance or reinsurance undertakings - collaboration on technical standards for security devices


5a. Joint calculations, tables and studies concerning common risks
• Insurance companies may jointly establish (& distribute): - calculations of the average cost of covering a specific risk in the past; and - mortality, illness, accident and invalidity tables Limits are imposed on the exchange of competitively sensitive information, e.g., no individual companies or insured party can be identified Insurance companies may also carry out joint studies on general external circumstances affecting (i) risks or (ii) profitability of investments Reason for exemption: to promote competitiveness and market entry by improving knowledge of risks and facilitating individual rating of risks





5a. Joint calculations, tables and studies concerning common risks (contd.)
• To ensure these forms of cooperation do not distort competition: - all insurance companies must have access to the data and studies on reasonable and non-discriminatory terms - no exclusive use obligation can be imposed with respect to the results Participation in these forms of cooperation is not subject to a market share limit Calculations etc must be expressly stated to be non binding




5b. Standard terms and models
• Insurance companies can jointly establish (and distribute):
– – Non-binding models illustrating profits to be realised in life assurance contracts (to be provided by way of non-exclusive guidance only) Non-binding, standard policy conditions in model insurance contracts

• There must be no direct or indirect agreement on terms : standard terms must state that they are neither binding nor recommended, and that participants remain free to apply other terms.


5b. Standard terms and models (contd.)
• The block exemption lists specific terms which cannot appear among standard terms • Terms excluded for competition law concerns include:
– – the level of commercial premiums, the amount of the excess, administrative costs and interest rates (Reason: concern over price fixing) the obligation on the insured party to take cover for different risks (Reason: concern over tying).

• Terms excluded for consumer protection reasons include:
– – – – – exclusion of coverage of risk owing to characteristics of policyholder; contract duration over 3 years (non-life); unilateral right of insurer to modify contract term; right of insurer to maintain policy following, e.g., "unjustified" increase in premium; obligation to transfer policy to new owner on disposal of insured object etc.


5c. Common coverage (pooling)
• This is the most extensive form of cooperation among competing insurers exempted by the block exemption as it covers the joint provision of insurance (common policies and premiums). • Both co-insurance and co-reinsurance are exempted • Joint coverage of (completely) new risks - exempted for 3 years regardless of market share • For other risks, and after 3 years for new risks, joint coverage is exempted provided the market shares of the participating insurers do not exceed:
– – 20% in the case of co-insurance 25% in the case of co-reinsurance


5c. Common coverage (contd.)
Conditions of exemption: • Each member must have a right to withdraw on one year’s notice • There can be no obligation on members to use the group (to promote independent competition to the group) • There can be no geographical limitations on the activities of the group or members (to promote market integration) • There can be no restrictions on the output of the group or on the customers it may serve • In reassurance groups there can be agreement on commercial premiums to be charged by participants for direct insurance (to prevent spill-over) • The exemption only covers membership of one group per market per insurer

5d. Security devices
• Insurers can draw up technical specifications, rules and codes of conduct (as well as procedures to establish compliance with them) concerning: – – security devices (in the absence of harmonised EC regulatory rules); and the installation and maintenance of security devices

• This collaboration is permitted as it may serve as a useful benchmark to insurers when evaluating risk • Insurers must be free to accept the use of any devices which do not comply with the jointly developed specifications and rules • Conditions are laid down by the block exemption to ensure that suppliers of security devices are treated in an objective and non-discriminatory manner (to prevent risk of foreclosure)


6. At Risk Conduct
Types of conduct by insurers that risk infringing the competition rules: • Agreeing, or exchanging information, on intermediaries’ commissions • Restricting the right of an intermediary to discount (unless the intermediary is an agent who bears no risk) • Agreeing, or exchanging information, on the level of premiums • Exchanging information on other competitively sensitive information, e.g. individual market strategies, current sales, customers, individual costs, etc • The sharing markets or customers among insurers


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