Out-Law Guide 3 min. read

The European business insurance sector inquiry

This guide was last updated on 14th February 2008.  The aim of the European Commission's business insurance sector inquiry was to identify any concrete restrictive practices or distortions of...

This guide was last updated on 14th February 2008. 

The aim of the European Commission's business insurance sector inquiry was to identify any concrete restrictive practices or distortions of competition in the sector that might fall within the prohibitions in articles 81 or 82 of the EC Treaty.

The final report published on 25th September 2007raises concerns about two areas: the harmonisation of terms and conditions in the subscription market and the role of the broker.

The report also comments that the Commission has yet to be persuaded that the insurance Block Exemption Regulation (which exempts certain types of agreement that would otherwise be in breach of the prohibition) is still necessary, but it will decide the issue definitively in March 2009.

The subscription market

The Commission is concerned that, in certain circumstances, industry practices in the reinsurance and insurance subscription markets could be in breach of the prohibition on restrictive practices.

In a subscription market, a number of individual insurers (or in the case of reinsurance, reinsurers) agree to accept shares of an insurance or reinsurance risk. During negotiations, participating insurers or reinsurers may stipulate that they will contract on a "best terms and conditions" (or BTC) basis.

This purports to give the particular insurer or reinsurer the right to obtain terms no less favourable (from its own point of view) than those obtained by any other insurer or reinsurer participating in the contract.

The European Commission raised concerns about the use of BTC clauses in an interim report published in January 2007. But its final report goes further, commenting that market practices in subscription markets could effectively be harmonising terms and conditions in ways that are detrimental to the (re)insured and more favourable to the (re)insurer, whether or not express BTC clauses are actually used.

While there may be administrative benefits in having a single, harmonised set of terms and conditions, the Commission believes there might be circumstances where different agreements with different (re)insurers would be more favourable to the (re)insured.

Not indispensible

Anti-competitive practices and agreements can be exempted if they contribute to improving the production or distribution of goods or services while satisfying certain other criteria. One of these is that the restrictions are indispensable to attaining these objectives.

The Commission has not yet been persuaded that harmonisation practices are indispensable but says it will deal with the issue on a case-by-case basis, taking into account the widespread nature of such practices and the fact that they may have been considered normal in certain markets for a long time.

In the meantime, however, the report invites the industry "either to reform its practices or to ensure that they meet the conditions required for compatibility with EC competition law".  

These comments were strongly criticised in the London subscription market, which pointed out that the Commission had not consulted with the industry before publishing the report.

The CEA (the European insurance and reinsurance federation) has offered to facilitate an exchange of views and the Lloyd's Market Association, Lloyd's and the International Underwriting Association are currently preparing submissions. 


The main issue regarding brokers is the potential for conflicts of interest arising, not only from the dual role played by many brokers in advising the insured and providing services to the insurer, but in the way they are remunerated.

Most brokers are still paid by commission. Yet the inquiry found a very low rate of spontaneous commission disclosure in almost all member states. The Commission believes this lack of transparency affects competition because it means many business insurance clients are unable to make fully informed decisions about which broker they use.

Even when disclosure is made, the Commission found that it is not always in a form that is comprehensible to the client. As a result, many small and medium sized businesses grossly underestimate the cost of mediation services.

Larger clients are generally better informed. The main problem for them, however, appears to be the lack of transparency in relation to contingent commission, including profit commission, whereby the broker earns additional commission if he brings business to a particular insurer.

These, and any similar arrangements, are of particular concern to the Commission because of the potential conflict between the broker's commercial interests and the objectivity of the advice he provides his client.

The report concludes that practices aimed at inciting brokers to place business with a particular insurer undermine fair competition. No firm recommendations are made, however, beyond the suggestion that disclosure "may help mitigate conflicts of interest". 

But, the Commission warns, "it is questionable if disclosure alone is sufficient to mitigate conflicts of interest, in particular in relation to those types of remuneration that specifically aim at aligning the interest of brokers with that of insurers". 

The issue will be revisited in the Commission's planned review of the Insurance Mediation Directive in 2008-9.

Contact: Alan Davis ([email protected] / 020 7418 7026)

See: The European Commission's final report on its business insurance sector inquiry (9-page / 142KB PDF)

See also: The insurance Block Exemption Regulation, an OUT-LAW Guide

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