UK insurers would be affected by likely lapse of Insurance Block Exemption Regulation, experts say

Out-Law Analysis | 16 Aug 2016 | 10:05 am | 5 min. read

FOCUS: The likely lapse of the Insurance Block Exemption Regulation (IBER), as anticipated by a recent European Commission report, would take place well before any agreement on the UK's exit from the EU comes into force. 

EU competition law also continues to apply to UK businesses after the UK exits from the EU if their activities have an effect on trade between EU member states.

The lapse of IBER could potentially have quite a big impact on insurers throughout the EU, including those in the UK. Firms should therefore review the agreements and practices that they have in place with other businesses in their market to ensure their compliance with EU competition rules.

In its March 2016 report, the Commission reached the provisional conclusion not to renew the IBER once the current regulation expires on 31 March 2017. It is expected to announce its final decision on the point early next year.

What has the Commission said?

The IBER exempts certain types of information exchanges and 'pooling' agreements between insurers from the general EU competition law prohibition on anti-competitive agreements.

However, the Commission no longer believes that "the strict conditions for the creation of a sector-specific BER" continue to be met. Based on its preliminary findings, the Commission considers that of the two areas covered by the current exemption:

  • for joint compilations, tables and studies: appropriate guidance already exists in the Commission's horizontal guidelines on the benefits of information exchange, meaning that the need for the continued existence of a block exemption is questionable; and
  • for common coverage of certain types of risk (pools): there is a market trend away from institutionalised pools formed on insurers' own initiatives and towards more pro-competitive forms of cooperation between insurers and reinsurers, often set up by intermediaries or brokers. As these are arguably more likely to produce shared efficiencies, it seems doubtful that the current block exemption sufficiently protects effective competition in this field while providing benefits to consumers. Information from the review also indicated that little use was made of the second category of exemption, since many potential beneficiaries considered their agreements to fall outside the scope of IBER as they would not be anti-competitive in the first place.

The preliminary conclusions are subject to ongoing assessment by the Commission and industry discussions. These will culminate in the issuing of an impact assessment report in early 2017. The Commission has said that if the exemptions are not renewed, it may decide to adopt additional guidance on the principles for self-assessing agreements that will no longer benefit from the block exemption.

The Commission has commissioned two studies on issues raised during the consultation process:

  • supply-side substitutability in insurance – that is, asset switching between different insurance products of relevance for pools; and
  • different forms of co-insurance and reinsurance available on the market and their impact on competition.

Feedback on the report and these studies will contribute to the Commission's final proposals in early 2017.

In its reviews, the Commission noted a mixed awareness and understanding of IBER. For example, one EU member state's competition authority thought that its national insurance industry's understanding of 'pools' differed from what was regarded as being a 'pool' under IBER. This underlines the importance of firms reviewing existing agreements and practices in good time in the event that IBER ceases to apply from April 2017.

What will happen to industry agreements once IBER lapses?

Assuming the Commission decides against renewing IBER, this will not mean that the agreements that benefitted from it now automatically infringe competition laws without any possibility of exemption.  One possibility is that a particular agreement would benefit from an individual exemption, applying similar principles to those set out in IBER and its guidance. However, this would be unlikely if:

  • the agreement is based on an incorrect interpretation of IBER and its guidance;
  • the Commission was correct when suggesting there is a market trend towards more pro-competitive forms of cooperation, often set up by intermediaries or brokers. This was one of the reasons it removed the block exemption for pools. Continuing with a pool when there are less anti-competitive alternative ways to collaborate could mean that the competition restriction in question would not be justified.

If no individual exemption is available, compliance would be based on the Commission's horizontal guidelines and general case law. The Commission has said that it would consider issuing new sector-specific guidelines if IBER lapses. This would be welcome, as information on the likes of information sharing in the horizontal guidelines is not industry-specific, and therefore potentially less useful.

The need for sector-specific guidelines is perhaps amplified by the fact that the Commission itself noted that the IBER definition of ‘pools’ was seen as ambiguous and that stakeholders reportedly have experienced difficulties in defining relevant markets in the insurance sector.

If an agreement might infringe EU competition law and does not benefit from an individual exemption, what can be done?

Infringements of the competition rules can lead to fines imposed by competition authorities for serious infringements, such as price fixing or market sharing; and potential damages claims from third parties. The agreements themselves would also be unenforceable.

The action that the firm would need to take would vary depending on different factors. It could range from a need to amend the agreement and improve compliance protocols, to having notify national regulators. In the UK, regulated firms may have to notify the Financial Conduct Authority (FCA) under Principle 11 of its Principles for Business if the potential infringement was believed to be "significant"; having regard to its actual or potential effect on competition, any customer detriment, the duration of the infringement and implications for the firm's systems and controls.

At the most extreme, if an infringement appears to amount to serious cartel-type conduct such as price fixing or market sharing, it may be possible to apply to national competition regulators for leniency.

Additional issues for UK firms to consider

Insurance companies in the UK also need to be aware that the FCA's new competition division now enforces competition law in addition to the Competition and Markets Authority (CMA) and the European Commission. The FCA may take a particular interest in looking at potential infringements in insurance markets, as these are mostly national in scope and therefore less likely to be 'lost' to the Commission, which would generally take jurisdiction over cross-border infringements.

The FCA could also investigate competition law infringements under its own general powers, such as those included in the Financial Services and Markets Act (FSMA), as well as under its new concurrent competition law powers. It could do so either in parallel or sequentially.

Should the UK exit the EU without negotiating a free trade deal similar to the terms of the European Economic Area (EEA) Agreement, the FCA and CMA would also be able to open their own proceedings in parallel with the Commission in cross-border cases.

There would be scope for the UK to introduce its own block exemptions, and therefore an opportunity for businesses and trade associations to lobby for this. It is, however, unlikely that the CMA or FCA would take enforcement action in relation to any agreements which continued to meet the criteria of an EU block exemption unless and until there was a UK equivalent.

If the Commission issues sector-specific guidance after IBER lapses, the CMA and FCA would be able to depart from it even while the UK was still a member of the EU as such guidance is not legally binding. However, if the UK opts for a non-EEA type of exit from the EU, the UK authorities would be more likely to produce their own guidance on the application of UK competition law rules to insurance. That application could divert from how the Commission applies EU competition law.

Angelique Bret and Robert Eriksson are competition law experts at Pinsent Masons, the law firm behind