As was the case with Spitzer's probe two years ago, the lack of transparency in broker remuneration and "conflicts of interest" have once again made headlines. This time business insurance in Europe is under antitrust scrutiny, reports Helen Yates.

European businesses could be paying too much for their insurance in a fragmented market where anti-competitive practices are rife. These are some of the preliminary findings from one of the most wide-ranging investigations into business insurance in Europe ever undertaken. As was the case two years ago when former New York Attorney General Eliot Spitzer began his probe into brokers' fees and commissions, potential conflicts of interest were again high on the list of concern. Although not due to be published in its finality until September, the initial findings of the European Commission's year-and-a-half long sector inquiry has narrowed its focus to five key areas:

- Significant differences in insurers' underwriting profitability in different EU member states, suggesting a degree of market fragmentation and the potential for price reduction. There is also the concern that small to medium-sized enterprises (SMEs) in some member states are being charged too much for their insurance;

- Long-term insurance contracts and networks of exclusive agents that control market distribution networks could be considered barriers-to-entry for newcomers to the market;

- Reinsurers' "best terms and conditions" clauses, whereby a reinsurer benefits from the most favourable terms negotiated by one of its peers, to the detriment of the reinsured;

- The potential for conflicts of interest to arise where insurance intermediaries provide not only advice and services to their clients, but also to insurers and/or receive remuneration from the insurers; and

- The lack of transparency of broker remuneration.


On 9 February, at a public hearing in Brussels to discuss the preliminary findings, European Commissioner for Competition Neelie Kroes praised the role of business insurance in the European economy. "It enables every company in Europe to protect themselves financially against major risks, such as property damage and legal liability," she said. "A competitive environment in business insurance is therefore key to European economic growth: the whole economy will be strengthened if companies can buy better insurance services at a better price."

Explaining why the inquiry had been launched in 2005, she said there was concern that the cross border supply of insurance remained limited and that there may not be enough cooperation between different players in the market. "A proactive investigation of the market was called for," she added. What Kroes did not mention at the hearing, but what was likely to have been a big influence on the Commission's thinking at the time, was the outcome of Spitzer's investigation.

Broker conflicts and commissions

At this stage, Kroes is not accusing any individual company of wrongdoing. This is in sharp contrast to Spitzer, who kick-started his investigation by filing a suit against Marsh, alleging that it had rigged bids and fixed prices. Marsh eventually settled for $850m. Other brokers fell under Spitzer's gaze, including Aon and Willis, and insurers ACE, AIG, The Hartford and Munich American Risk Partners, with the resulting damage to reputations, share prices and ultimately bottom lines, amidst a spate of high profile job losses. Speaking at a press conference in October 2004, Spitzer said: "The insurance industry needs to take a long, hard look at itself. If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."

And reform came swiftly as Marsh, as part of its settlement, said it would ban contingent commissions (bonuses paid to brokers by insurers for bringing in lots of business) and adopt a new business model designed to avoid conflicts of interest. It issued a public statement apologising for "unlawful" and "shameful" conduct and promised to adopt reforms to help achieve greater transparency. Spitzer commented that, "To its credit, Marsh is not disputing the problems identified in our original complaint. Instead, the company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past." Others under Spitzer's gaze soon followed suit, denouncing contingent commissions and promising similar reforms. "It was very challenging ... but ultimately very rewarding and has forced us to articulate the depth and breadth of services and resources we bring to our clients," said Willis' outgoing vice chairman Richard Bucknall, speaking at the public hearing in Brussels.

But it is unlikely that a level playing field has been achieved in just two years and while some brokers have made good progress, Kroes' findings suggest that other intermediaries in Europe have not embraced the transparent approach. "The way the market operates is complex and the issue has to be European because local agreements can't allow good transparency on a European basis," said Thierry van Santen, director of the Federation of European Risk Management Associations, speaking in Brussels. "After Spitzer there was a drive to make some kind of disclosure - but strong opposition to disclosure by the large majority of the rest of the market has led to large distortions within the market." Bucknall voiced concern over what could happen if that distortion continued. "Sensitive business information from those who are transparent could be used by those who aren't," he said. "We don't see why all intermediaries shouldn't be transparent."

Panel member David Harari, chairman of European Federation of Insurance Intermediaries, said it was essential for companies to identify and put in place robust systems to mitigate conflicts of interest. But he added that, "Contingent commissions represent about 1% of remuneration of intermediaries so it's important to keep this particular issue in perspective". According to Kenneth Underhill, a partner at Reynolds Porter Chamberlain (RPC), it is difficult for the market to agree to dispel contingent commissions. "There have been a lot of attempts to resolve transparency issues," he says. "But little market work on contingent commissions."

One point raised at the hearing was that the Insurance Mediation Directive (IMD), in its infancy in Europe, might provide a solution to some of the issues raised in the preliminary findings. The IMD sets minimum standards across the EU for the sale and administration of both general insurance and life insurance. "Let's wait and see how it functions," recommended panel member Luc Hendrickx, director at Union Europeenne de l'Artisanat et des Petites et Moyennes Entreprises. But Underhill has his reservations. "The IMD is insured-facing, ie making sure the insured is aware of what it is buying. It's not to do with how a broker is paid and who he acts for," he explains.

Hendrickx also questioned why there was a need for broker remuneration to become more transparent. Using the analogy of buying a car he pointed out that the customer generally only cares about the ultimate price of the car and not how much commission the salesman might be making. But Willis' Bucknall quickly retorted: "Could I be bold enough to suggest there is a difference between an insurance intermediary and a car salesman. I accept levels of interest into what a broker earns do vary, but certainly if you put it all out on the table nobody can accuse you of being opaque."

Competition and cooperation

Reinsurance practices were also put under the microscope in both the preliminary findings and at the hearing. The prevalence of "best terms and conditions" clauses has Kroes worried, as outlined in the interim report:

"The 'best terms and conditions' clause imposed by the reinsurers aims at harmonising terms and conditions at the highest level to the benefit of the reinsurers imposing it and to the detriment of the reinsured.

"Original differences in reinsurance terms (construed as premiums and commissions) may, for instance, result from differences in solvency strengths and ratings of reinsurers or from differences in reinsurers' underwriting policy. They are also closely linked to a particular reinsurer's skills and experience and its assessment of the risk or portfolio of risks to reinsure.

"By lifting the impact of these differences on the final premium paid by the reinsured, this type of clause contributes to maintaining higher premiums in the market than under fully competitive conditions."


According to Underhill, the incidence of such clauses in the subscription market, where it is prevalent, has the possibility of being anti-competitive, and he added, "It's very difficult to know if insureds or reinsureds, particularly those that are unsophisticated or don't understand practices in the London market, are aware of the practice." Speaking in Brussels, Thomas Steffen, vice chairman of CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) said: "Reinsurance is relatively concentrated and the scope for outright competition is limited. It's limited but it's very global." But he acknowledged that, "Outsiders may see some characteristics as restrictive".

Perhaps unsurprisingly, given the varying levels of maturity of the many different markets within Europe, particularly the contrast between Eastern and Western European countries, Kroes' investigation also revealed "sustained differences" in insurers' underwriting profitability in the various European markets. "This could indicate that the European Union does not yet benefit from a fully integrated market in business insurance - meaning that many companies in some Member States might be needlessly paying more for insurance than their competitors in other Member States," Kroes hypothesised at the hearing.

Fabio Maniori, chief legal officer, Generali Group, noted that differences seem to arise from the degree of market concentration. He said cooperation tends to be higher in markets such as Germany, where concentration is low, than it is in Eastern European markets, which tend to be subject to monopolies. Where only one dominant player exists they are "already in a very strong position and therefore there is little incentive to share information with the rest of the market". Maniori agreed that horizontal insurance cooperation is useful and helps to encourage entry into new markets.

Next steps

Kroes has not indicated whether, once the final results of the investigation have been released, she will pursue individual companies. But she did warn: "We will now assess whether there is indeed foreclosure by working together with the National Competition Authorities. Should this prove to be the case, any problems will be tackled through antitrust enforcement measures, either at a national or community level." Kroes has shown her mettle in other Europe-wide sector probes, which triggered antitrust investigations, particularly in the telecoms and energy sectors. The Commission has the authority to fine companies that break antitrust rules up to 10% of their global annual turnover. "It would make people sit up and listen," says RPC partner Andrew Hobson on the potential for the Commission to fine individual companies. "But you would hope it wouldn't come to that."

- Helen Yates is editor of Global Reinsurance.