The EU Commissioner Kroes has made it her mission to unearth anti-competitive practices within the industry, explains Chris Mckevitt

For the last month or so, investigators from the European Union's Competition Directorate have been wading through what we can only assume is some pretty voluminous insurance correspondence. That is the harvest from this summer's early inquiries into just how competitive the commercial insurance market is across the 25 EU member states. And this is only the postbag from the different representative associations within the insurance sector. The next stage - contacting individual companies - has yet to begin.

The sectoral inquiry into business insurance was launched in June when Commissioner Neelie Kroes said the inquiry (along with a second into retail banking) was, "an important first step in allowing the Commission to identify ways to improve competition in EU financial markets and thus increase the competitiveness of the EU economy." That euro-speak roughly translates into the Competition Directorate doing its bit to help meet the Lisbon Accord targets for economic growth by 2012. And they also dovetail neatly with the campaign of fellow Commissioner, Charlie McCreevy who heads up the Internal Markets brief, to create a barrier-free single market for financial services.

Across borders

The Commission is concerned about a general lack of cross border supply of business insurance. It's also wary of the level of vertical and horizontal cooperation between the players in the industry, especially the setting of standard policy conditions by representative associations. Furthermore, concerns have been raised about barriers to market entry amongst potential new players including access to risk data and lack of access to distribution channels.

Following this summer's inquiries, the Competition Commission now knows which company is a member of which insurance trade association; what the various sub committees of these associations are up to; the issues that associations have provided guidance to their members on in the last five years; as well as any involvement they might have had assisting cooperation between insurers. There has also been a specific emphasis on co-insurance in these inquiries. And the Commission has been most anxious to learn all about databases, what's on them and who has access to them. One question alone had 14 sub clauses making answering the Commission's enquiries an endurance feat of almost biblical proportions.

Getting the answers wrong carries a penalty. According to the rules of an EU Commission initiated sector inquiry, either deliberately or through negligence, carries a fine equivalent to up to 1% of a company's global turnover.

The key question now is whether the EU has embarked on a giant fishing exercise for information of a vital business area about which it feels it needs to better understand, or if it has a shopping list of issues it wants to tackle and correct. The Competition Commission's missives are forever talking about identifying anti-competitive practices and correcting them in the interests of wider economic growth.

By the end of next month, we should have a preliminary report on how Competition Commissioner Kroes' investigation is progressing. And that report should signpost any specifics of the European market that she will "zero-in" on for further scrutiny. That process will involve dawn raids, confiscations, on-site inspections and interviews with personnel. Few within the industry are prepared to speculate on what direction the insurance inquiry will take next.

Trade associations confirm they have completed Commissioner Kroes' questionnaire but suggest discussing the matter further would be inappropriate. Take the Insurance Underwriters Association. "We were sent a questionnaire by the Commission which we have now completed," says Steve Farley the association's press manager. Ask him about the general tenor of the association's response to Europe, and he replies: "I can't give you an answer as to how, as an association, we've responded." And asked to suggest what might happen with the inquiry next, or what direction it might take, and the answer is similarly tight lipped. "We really wouldn't be able to offer a view," he says. "That's a question for the Commissioner."

Meanwhile in Brussels Commissioner Kroes' press spokesman, Jonathan Todd, says the Commissioner is not making any comment until her inquiry is complete. And that is not expected until after 2006.

The British Insurance Brokers Association has not been contacted by Brussels thus far. However, at time of going to print, it was expecting a questionnaire. The association's chief executive Eric Galbraith says the enquiries are not an especially key issue compared to the bedding down of domestic Financial Services Authority regulation and ongoing business challenges.

He also notes that existing insurance originating from the EU has yet to be adopted by many member states. "Perhaps the EU should focus its resources to ensure that all those countries which have not yet implemented the Insurance Mediation Directive, actually do so. Perhaps then other issues, such as competition, can be reviewed with at least the directive applying across the EU." He highlighted the highly competitive nature of the commercial insurance market in the UK. Much of the gratitude for that, he believes, ought to rest with his members who place the bulk of the business. The influence of independent brokers in the UK contrasts with many other EU countries, where tied agents are more prevalent.

One figure within the London market, who didn't want to be named, said little that would be radical was likely to emerge from Neelie Kroes' investigation as far as the UK was concerned. "This inquiry isn't going to turn up too much in the London market. Perhaps elsewhere in Europe where there are other competition concerns, but here its impact will be benign."

That said, in Ireland, where the insurance market is not too dissimilar to that in the UK in the way business is done, the country's Competition Authority issued a blistering report on the insurance industry 12 months ago suggesting all sorts of barriers to new market entrants including a failure to share claims data. It also savaged the local broking community for failing to reduce commissions at a time of soaring premium increases.

An EU witch hunt?

In London, competition lawyer with Markel International, Andrew Bailey says EU Commissioners have had the power to launch sectoral reviews for some time, but have only recently begun to use them. "After September 11, the EU investigated the passenger surcharge in the aviation insurance market and whilst that is now closed, it may have whetted their appetite to look more closely into business insurance. The EU will also be considering barriers to entry into insurance markets and for any evidence of firms abusing a dominant position. It also comes against the background of Eliot Spitzer's activities in the US," he added.

Another competition law specialist, Nicholas Spearing of Freshfields Bruckhaus Deringer says the Commission is not engaged in a witch-hunt but probably does want to make a judgment call on "any excessive degree of cooperation" within the industry. "One has a feeling the Commission suspects the market is overly cosy, whether areas of cooperation, such as co-insurance aren't getting in the way of efficient, functioning cross-border markets." He says cooperation is an historic feature of the efficient running of an insurance market. "But they'll want to better understand how much cooperation is necessary for the efficient and effective running of the insurance market but at the same time maintaining a competitive market."

There is some confusion to what extent reinsurance may fall within the ambit of the next phase of the inquiry. The questionnaire sent to the trade associations asks for information on other associations representing the reinsurance sector. Some of the legal missives on the inquiry have variously described the focus as narrow and broad.

Munich Re says it has yet to hear anything and according to spokeswoman Anke Rsoumek. "We don't assume that reinsurance companies will be concerned in a nameable way."

Andrew Bailey says his understanding is that reinsurance falls outside the scope of the review and he suspects the London insurance market should get the thumbs up from the competition people in Brussels. "You only have to look at the volatility in results over an underwriting cycle and there are few barriers to entry," he points out. "We shouldn't forget that this review looks at all 25 EU members. So potentially you have insurance markets that have developed in 25 different ways and if they identify anti-competitive behaviour elsewhere, it could present opportunities for UK companies to sell their products in the EU."

In the meantime, and before the Commissioner comes knocking, the key advice is to take some time to evaluate business practices with a heavy emphasis on competition infringements. Where there's a problem, the best solution seems to be to telephone Neelie Kroes' office.

Incidentally, the first company to volunteer enough information to prove a competition infringement unknown to the Commission can escape all of the fines that would otherwise be levied on it and its peers. The Commission has a willingness and a duty to not only uncover and publicise anti-competitive practices, but also to prosecute those it deems responsible.

- Chris Mckevitt is a freelance journalist.


April 20, 2005: Speech by Charlie McCreevy, European Commissioner for Internal Market and Services, on "The integration of Europe's financial markets and international cooperation". Concluding Remarks, Euro Conference (New York):

"My colleague Neelie Kroes, Commissioner responsible for Competition in the EU, has just announced powerful competition enquiries in the areas of retail financial services and insurance. Shining the light in some areas ... flushing out what is going on. We will also look at obstacles to cross-border consolidation. Companies have to be able to fully exploit the economies of scale and scope an integrated European market offers. To reduce costs. Streamline their commercial platforms; and to make our economies more competitive. Based on the outcomes of these exercises, after consultation I will decide, where to act, if at all."