Tuesday, 1 April 2003 marked the entry into force of the European Commission’s new exemption for agreements and practices in the insurance sector.
The previous block exemption regulation was adopted in 1992 after the Commission had been swamped by over 300 notifications from the insurance sector following the European Court’s confirmation in 1987 that the EC competition rules applied in full to the insurance sector. The new block exemption (published in the official journal on 28 February 2003) (OJ (2003) L 53/8) takes account of the responses to the consultation on a draft text published by the European Commission last year.
The Commission's new regulation is in many respects similar to the previous regulation. Made under the enabling Council Regulation of 1991 (the same regulation which enabled the adoption of the 1992 regulation), it covers the following types of agreement: joint calculations of risks, and joint studies on future risks; the establishment of non-binding standard policy conditions; the establishment and management of insurance pools; and the testing and acceptance of security equipment.
The Commission has responded to concerns about its draft proposal, which had proposed removing much of the protection for standard policy conditions. The adopted text is closer to the previous block exemption. This is particularly important for the London market.
The exemption for insurance pools has been broadened with higher market share thresholds; the other exemptions are similar to the previous block exemption but have been narrowed in various respects.
Joint calculations and studies of risks.
The Commission stresses the importance for insurers to have accurate information about the risks which they insure, including future risks. Apart from the larger insurance providers, information generated internally in insurance undertakings does not provide a complete assessment of the risks they insure. The new regulation exempts certain types of exchange of statistical information and joint calculation of risks. The Commission believes that this promotes competition by helping smaller insurers, and facilitates market entry. However, the new regulation adds two new conditions for exemption of joint activity in this area. Firstly, the calculations and tables must include as detailed a breakdown of the available statistics as is actuarially adequate and secondly, the calculation, table and study results must be available on reasonable and non-discriminatory terms to any insurance undertaking which requires access to them.
The exemption does not apply if there is any element of price fixing, i.e. agreeing the premium to be charged by insurers. The exchange of information cannot extend to elements for contingencies, income deriving from reserves, administrative or commercial costs, fiscal or para fiscal contributions or revenues from investments or anticipated profits.
Comment: This remains largely unchanged from the previous block exemption. The Commission justifies the first condition on the grounds that it will provide insurance undertakings with more detail on the cost of covering specified risk and thus greater leeway as regards calculating premiums.
To be exempt calculations, tables and studies must be available to all insurance undertakings (including those considering entering the market) on reasonable and non-discriminatory terms.
The results of a study by a trade association would have to be made available to non-members. The commission indicates that fees charged for access to studies to insurance firms which have not contributed to the studies cannot be so high as to constitute a barrier to entry onto the market.
Standard policy conditions
The regulation has not changed the previous conditions for exemption of standard insurance policy wordings (for direct insurance) e.g. those produced by associations of insurance undertakings. Standard policy conditions will only be exempted if they are not binding and expressly state "that their use is not in any way recommended" and the undertakings are free to offer different policy conditions to their customers and the conditions are accessible to any interested party and can be easily provided on request. There is a long list of "black" clauses which cannot be included. Comment: The Commission has been persuaded to drop its intended plan to restrict the exemption to standard policy conditions developed in conjunction with the joint calculation of risks (see above). This will be a relief to the UK insurance industry, particularly the London Market, where there are a wide range of standard wordings in use.
Common coverage of certain types of risks (pools).
The Commission's changes to the exemption of pools has broadened the scope of the exemption. The previous regulation subjected the exemption of pools to thresholds based on the parties' market shares. The new regulation increases these market shares: pools will be authorised on condition that the combined market shares of their members do not exceed 20% for co-insurance pools and 25% for co-reinsurance pools. These have been increased from 10% and 15% respectively. In addition, the new regulation introduces a new exemption, with no market share threshold, for insurance pools which are newly created in order to cover a new risk, for the first three years of their existence. New risks are defined as risks that did not previously exist. This does not include risks that previously existed but were not insured against. Terrorism would not be a new risk, even where there has been a considerable increase in terrorism activity.
Comment: These appear to be helpful changes. The Commission indicates the areas for which pools are most often created as being aviation, nuclear and environmental. It confirms that pools will generally not infringe Article 81(1) if, in the absence of the group / pool in question, none or only one of the members of the group would be able to offer the category of insurance concerned (even if other companies or pools do supply that category of insurance). However, where the subscription capacity of the group is such that it could be replaced by at least two competing groups, the group may restrict competition with the meaning of Article 81(1) depending on the level of its market power; hence the need for market share thresholds.
In addition, the Commission explicitly recognises that pools may otherwise benefit from an individual exemption, stating that as many insurance markets are constantly evolving, an individual analysis would be necessary to determine whether or not the conditions for exemption laid down in Article 81(3) are met. The Commission is currently studying a number of pools which have recently been established to provide terrorism cover.
Joint determination of approved safety equipment.
The new regulation introduces a new condition for exemption of agreements between insurers on approved security equipment. Agreements between insurers in areas where there is already Community level specifications, classification systems, rules, procedures or codes of practice will not be exempted.
The block exemption provides automatic exemption for those agreements that come within its scope. If an agreement falls outside of the block exemption’s scope this does not necessarily mean that the agreement will infringe the EC rules on competition. The agreement may not infringe competition rules or it may qualify for individual exemption.
For existing agreements which are exempt under the previous block exemption, there is a transitional period to bring existing agreements into line by 31 March 2004.
These changes will also be important in the context of the Competition Act 1998 as compliance with an EC block exemption provides a "parallel" exemption under the 1998 Act. Agreements or practices falling outside the scope of the new block exemption may therefore infringe the prohibition in Chapter I of the 1998 Act irrespective of any effect on inter-state trade which is necessary for an infringement of EC competition law. Breaches of the Competition Act are already subject to fines imposed by the Office of Fair Trading.
In 2001, the European Commission imposed fines of over £1billion on companies which infringed competition law; individual companies have been fined hundreds of millions of Euro (making FSA's disciplinary fines seem insignificant by comparison). Later this year, new penalties will be introduced – a criminal offence carrying a five-year prison term and the disqualification of directors and there will be a new right for injured third parties to be awarded damages by the Competition Appeal Tribunal.
If you would like further information on:
- Competition compliance arrangements for brokers, insurers, underwriters, life offices and other companies involved in the insurance sector, or
- The new insurance block exemption
please contact Nick Paul on +44 20 7367 2806 or by email at nick.paul@cms-cmck.com In addition, the Commission has published its new regulation in the Official Journal which is available on the europa website
