Competition commissioner Neelie Kroes calls broker transparency and co-insurance pricing into question

The European Commission has adopted the final report of the competition inquiry on the business insurance sector.

The final report raises concerns about the operation of two areas of business insurance.

First, long-standing and widespread industry practices in the reinsurance and coinsurance markets involving the alignment of premiums, which may lead to higher prices for large risk commercial insurance.

The report leaves open the question of whether these constitute infringements of the prohibition on restrictive business practices, but invites the industry either to justify the business practices concerned under the competition rules, or to reform them.

Second, the Commission also confirms its concerns as to transparency of remuneration and conflicts of interest in insurance brokerage. The report says this practices need to be better regulated.

Competition commissioner Neelie Kroes said "Today's report shows that the Commission is serious about making markets work better, even where that means we need to question some established market practices when these may be harmful to consumers and competition. I invite the industry to respond positively to the findings of the report and, where necessary, to reform the relevant business practices."

The report looks inter alia at the coverage of large risks through co- and reinsurance. The Commission says it is concerned that the prevailing practice in the marketplace which excludes participants in the so-called "follow market" from offering lower premiums than that offered by the lead insurer, may not comply with competition law.

The report does not conclude that the law is actually being infringed, as this would only be possible in the context of a specific enforcement decision. Nonetheless, premium alignment is not, in the commission's view, intrinsic to the operation of the subscription markets.

The report also highlights conflicts of interest and lack of transparency in the way that insurance intermediaries are typically remunerated. There is a growing awareness in the market that such conflicts of interest may need to be better supervised or regulated.

In respect of the block exemption regulation for insurance (358/2003), which lapses in 2010, the Commission has yet to be persuaded that the Regulation – which treats the insurance industry differently to other industry sectors – is still necessary. It will review the matter definitively in a report in March 2009.