Competition law and the insurance industry: a round-up of recent developments

Insurance markets are subject to competition law, just like any other business sector. Particular issues arise in insurance because of various areas of cooperation within the industry. These include market and trade body initiatives. Competition compliance is a serious issue – fines for infringements are much larger than, for example, those imposed by FSA and, in the UK, criminal prosecution is now possible. This article looks at recent UK and EC competition law developments specifically relating to the insurance industry.

UK developments

Most recently, the OFT has given its views on terrorism reinsurance arrangements and an agreement between motor insurers and replacement vehicle providers.

• Pool Re – the OFT proposes to grant an individual exemption under the Competition Act 1998 (CA 98) to Pool Re's terrorism reinsurance arrangements. Pool Re acts as a reinsurer for liabilities arising from acts of terrorism for direct insurers providing commercial property insurance. The OFT found that most elements of the arrangements do not fall within the scope of the CA98. As regards those elements found to prevent, restrict or distort UK competition, the OFT's view is that the benefits of these arrangements outweigh their anti-competitive effect, so are permissible, unless third parties disagree strongly. These benefits include ensuring all commercial properties have access to terrorism cover and enabling businesses to meet the requirements of their loans and tenancy agreements. The OFT has put this proposal out to public consultation until 10 March 2004.
• ABI replacement vehicle arrangements – the OFT proposes to grant an individual exemption under the CA98 to the Association of British Insurers' General Terms of Agreement relating to replacement vehicles, provided the ABI makes certain changes. The ABI drew up the General Terms of Agreement to regulate the process of loaning vehicles to drivers involved in road accidents. The process was previously dogged by high levels of dispute and litigation. The General Terms provide for collective approval of prices that insurers will pay to credit hire organizations (CHOs) and ensure bills are paid promptly by insurers. The OFT regards the General Terms' system of collective approval of prices as price-fixing. However, the OFT believes that in this case, there are benefits which outweigh the negative effects of price-fixing. These benefits include lessening the amount of litigation between insurers and providing greater certainty and security for drivers. Currently an ABI sub-committee reviews the CHOs, but the OFT will grant the exemption only if this sub-committee is replaced by an independent assessor and the current fixed administration fee is incorporated into the credit hire rates. Again, the OFT's proposals were put out for public consultation and any significant adverse third party comment will have been taken into account.

Liability insurance premiums and extended warranties have also come under the OFT spotlight of late:

• Recent large increases in premiums for employers' liability, public liability and professional indemnity insurance led the OFT to carry out a fact finding study. The main message of the report, published in June 2003, was that there was no evidence of collusion amongst insurers or brokers in the liability insurance market. The OFT, however, sounded a note of warning about the potential for collusive behaviour when trade bodies are involved with brokers and insurers in setting health and safety standards. The report did not result in any significant measures being adopted, but the Financial Services Authority has dealt with one of the questions raised by OFT. There will be minimum notice periods for renewals of retail customers' policies from January next year. The OFT has said it will look at the broader issues again in late 2004.
• In September 2003, the Competition Commissions' (CC) report on "The Supply of Extended Warranties on Domestic Electrical Goods" was published which concluded that the extended warranty market was unfair on consumers. This time the focus is on sales of extended warranties in stores, including so called "service backed" warranties which are not underwritten by an insurer. The Government adopted the recommendations of the CC in December 2003 and legislation is due later this year. Meanwhile, FSA will shortly re-issue its guidance. The CC endorsed FSA's draft text which regarded many of these extended warranties as illegal contracts of insurance.

EC developments

A major recent development is the introduction of a new block exemption for agreements in the insurance sector (Commission Regulation (EC) 358/2003), which came into force on 1 April 2003, replacing Commission Regulation (EEC) 3392/92. The new block exemption is in many respects similar to its predecessor, and continues to cover the same four types of agreement, i.e. (1) joint calculation and studies of risks; (2) the drawing up of standard policy conditions for direct insurance; (3) pooling arrangements (co-insurance groups and co-reinsurance groups); and (4) common rules for approving security devices. In all cases, there are strict conditions to be met. Various changes were made vis-a-vis the old block exemption.

The exemption for insurance pools was broadened with higher market share thresholds; other exemptions are similar to the old block exemption but were narrowed in various respects. The most contentious issue surrounded the use of standard policy wordings where the Commission eventually retreated from its initial very restrictive proposals, to the relief of the UK industry, particularly the London market because of the wide range of standard wordings in use.

Future developments

1 May 2004 heralds major changes in the competition law field. From that date, it will no longer be possible to notify agreements to the European Commission for a decision on whether or not they infringe competition law or qualify for an exemption. Instead, insurers and all other parties to agreements must "self-assess" their agreements' compatibility with competition law. In addition, the UK is proposing to abolish its CA 98 notification system, which mirrors that the European Commission's Article 81 system. Pool Re and the ABI's General Terms of Agreement look likely to be among the last cases to receive a formal decision on competition law exemptability.

For further information please contact Nick Paul at nick.paul@cms-cmck.com