Thomas F. Bush asks whether subscription insurance markets present US antitrust risks.

The European Federation of Insurance Intermediaries (BIPAR) issued last spring a set of ‘High Principles’ applicable to the operation of subscription insurance markets. The most noteworthy of these principles expressly prohibits the issuance of a ‘best terms and conditions’ (BTC) commitment, which requires that any better terms given to a following insurer be offered to the lead insurer.

BIPAR’s proposal is a response to the European Commission’s Final Report for its Sector Inquiry into Business Insurance. That Final Report, issued in September 2007, was highly critical of the operation of subscription insurance markets, and BTC commitments in particular, due to their tendency to align premiums at potentially higher levels. A Commission representative has said of BIPAR’s proposal that “if practices change in accordance with these principles it will remove our immediate concerns.” Other associations of European insurers and intermediaries also have expressed their support for the BIPAR High Principles.

The BIPAR principles also have received attention in the US, but before this initiative is invited to cross the Atlantic, some consideration should be given to the antitrust risks involved. When a subscription insurance market operates normally, it does not violate US antitrust laws. On the other hand, an effort like BIPAR’s to eliminate BTC commitments by collective action, could create antitrust risks, if replicated in the US.

US insurers are protected from some antitrust risks by the McCarran-Ferguson Act, which provides immunity from federal antitrust liability for activities constituting the “business of insurance.” This immunity, however, is limited, and it applies only to the federal antitrust laws. Each one of the states has its own antitrust laws, and most provide no immunity for insurance companies. Moreover, state insurance regulators and state attorneys general have been very active in recent years in investigating the insurance industry for antitrust violations. Hence, notwithstanding the limited statutory immunity, insurance companies do face antitrust risks.

Under the relevant state antitrust statutes, an agreement or concert of actions between two or more actors is an essential element. Unilateral action will not support a violation. Most aspects of subscription insurance markets that have attracted criticism on competition grounds involve unilateral action. During the tender phase, the insured, or the broker acting on its behalf, unilaterally makes the threshold decision that more than one insurer will participate in the same risk. Similarly, the insured or its broker decides unilaterally to offer the lead’s terms to the followers. Alternative methods are available. The insured could invite multiple insurers to make separate and independent proposals for shares of the risk. The insured could also refrain from disclosing to the followers the premium proposed by the lead, and invite the followers to submit their own premium bids. So long as the insured decides unilaterally to forego these alternatives, no antitrust violations will be found.


One feature of the subscription market process that is not unilateral is the BTC commitment, which clearly is some form of agreement, at least an implied one, with the lead insurer. But does that agreement violate US antitrust laws? A US court would test the legality of a BTC commitment under a standard known as the “Rule of Reason,” which considers whether the agreement does more to impair the competitive process than to enhance it.

A BTC commitment could impair competition in at least two ways. First, insurers could be less inclined to compete for the role of lead insurer, because they anticipate an opportunity to participate in the risk as followers, accepting the same terms as the lead. Second, followers could have less incentive to offer the insured a better premium in the subscription phase, in the hope of capturing a larger share of the risk, if they anticipate that their bid will be matched by the lead and then by all other followers.

On the other hand, a BTC commitment could enhance competition. The lead frequently has a reputation for expertise with the particular risk, and the followers rely on that reputation in their own decision to accept a share of the risk. In effect, the lead carries out some of the underwriting process for the followers. This process lowers the cost of underwriting, and it opens up to participation those insurers who lack sufficient confidence in their own expertise to underwrite the risk entirely on their own.

A lead would have less incentive to provide this benefit if doing so enables following insurers, who lack the same expertise and who do not undertake the same underwriting review, to underbid and capture a bigger share. A BTC commitment protects leads against later underbidding and thereby encourages insurers with strong reputations to take on the role of lead insurer.

A BTC commitment, therefore, could impair competition or enhance competition. A US court applying the Rule of Reason would resolve the issue primarily on the basis of the lead insurer’s market position. If the court were to find that the lead insurer has market power, meaning that it can impose higher premiums and less beneficial terms on insureds without losing so much business to competitors that the effort is not worthwhile, the court could conclude that the insurer has the ability to impose a BTC commitment in circumstances where it does more to impair than to enhance competition.

However, in the highly competitive markets for insuring large commercial risks, market power is not common. In the more likely situation of a lead insurer that lacks market power, the insured or its broker can choose to give a BTC commitment only if it believes that the commitment will be beneficial. If a potential lead insists on a BTC commitment, the insured and broker have the real option of selecting a different lead. In these circumstances, a US court should not find an impairment of competition and would not have grounds to find an antitrust violation.

antitrust risks

The use of BTC commitments does present antitrust risks in the US. Those risks, however, can be managed effectively, because they arise in peculiar circumstances. First, in an exceptional situation, a lead insurer might have market power, a dominant insurer in an isolated niche market, for example. An insurer in this situation should seek the advice of US antitrust counsel on how to proceed in subscription markets.

Second, the insurers participating in subscription markets could reach additional agreements among themselves. For example, potential lead insurers might agree with one another that they will not accept the lead role without a BTC commitment. Following insurers might agree to share information on the lead’s premium bid, in the event that the insured chooses not to disclose that information. These examples are all horizontal agreements that a US court is likely to find illegal. However, agreements of this type are not essential or even common features of subscription markets. An antitrust compliance program can train employees to identify and avoid such agreements.

Should US insurers follow the lead of the Europeans? Because BTC commitments do not violate US antitrust laws in most circumstances, an absolute prohibition in the US comparable to the BIPAR High Principles is unnecessary. The BIPAR example would be problematic in the US for a more fundamental reason. When competitors agree among themselves not to give certain pricing terms to customers, a violation of US antitrust laws almost always will be found. If a trade association of intermediaries or underwriters were to follow the BIPAR example and encourage its members not to give BTC commitments, a court could find that the association, and its members, have committed an antitrust violation.

It does not follow that participants must use BTC commitments. Any broker may inform insurers that its client will not give a BTC commitment, so long as the client acts independently. It is the cooperative effort that should be avoided.

European companies find themselves, fairly or not, under pressure to respond in some manner to the Commission’s criticisms of subscription markets. US companies are not under the same pressure and would be well advised to avoid attempting any similar form of collective, industry-wide action.

Thomas F Bush is a partner in the litigation and arbitration practice at Lovells LLP’s Chicago office.

How subscription markets work

In a subscription market, multiple insurers, or reinsurers, agree to cover percentage shares of the same risk.
The cover typically is assembled by the broker for the insured, or the broker for the cedant in the case of reinsurance, who proceeds in two phases:
Tender phase. The broker presents the risk to one or more insurers, who if interested, respond with premium rate quotes, any other essential terms and the share that it is willing to accept. The broker selects one of the responding insurers to serve as the “lead.”
Subscription phase. The broker presents the lead’s quote and terms to other insurers, who are invited to accept shares of the risk at the same premium rate and terms. If interested, each of these “following” insurers responds with the percentage share that it will accept.
In hard markets, one or more of the following insurers may demand a better premium rate than the lead originally proposed. Anticipating this development, the lead might obtain a BTC commitment either orally or in writing guaranteeing that it will also receive the better premium.