The European Commission looks set to recommend abandoning the rule that allows insurers to share compilations, tables and studies and to run co-reinsurance pools without infringing competition law. It believes the Insurance Block Exemption Regulation, which expires on 31 March 2017, is of only limited benefit and that few of the small number of existing pools consider themselves covered by it.
The commission accepts that statistical data should be exchanged and that co-reinsurance is needed for certain risks, but thinks that both are possible under European Union competition rules.
It suggests, without Iber, EU guidelines on horizontal cooperation, perhaps along with specific guidance from the commission, would allow the legality of cooperation to be assessed, as in other sectors. “This would be more flexible than a block exemption regulation and could more easily be adapted to changing circumstances,” it said.
At a lacklustre Iber consultation meeting in Brussels recently, the commission demanded better reasons to justify Iber’s renewal. “We need data, we need evidence,” said Cecilio Madero Villarejo, deputy director-general for antitrust in the commission’s Directorate-General for Competition, referring for example to claims that costs would be higher in a non-Iber world.
The Iber review has focused on whether insurance has distinctive features that justify enhanced cooperation and, if yes, whether an instrument such as a block exemption regulation is needed, said Joaquín Fernández Martin, head of the financial services antitrust unit in DG Competition.
The present Iber allows cooperation and exchange of information for better understanding of risks, for more accurate risk measurement and pricing. Insurers argue that without it, they would be more cautious in accepting risks, except at higher prices.
“By working together, insurers can collate more reliable statistics, which facilitates the rating of risks,” says the Association of British Insurers. “This also gives insurers greater confidence when pricing risks, as they are able to do so with greater accuracy.” The ABI adds it is particularly so for smaller firms.
Ania, Italy’s association of insurance companies, says its diffusion of data has allowed more competition and innovation, typically by helping firms to enter the market for motor third-party liability policies in conjunction with black boxes. Italy is deemed to be the worldwide leader in such policies, which account for one in ten private vehicle covers.
Ania claims similar effects in other markets, including natural hazard insurance for agriculture, freight transport and aviation: “The [Iber] exemption does not represent a barrier to the entry in the market and, above all, it encouraged the newcomers.”
Similarly, the European insurance federation Insurance Europe argues that in Malta new market entrants have benefited from joint compilations by the country’s insurance association – without contributing to them: “Over the past five years, this has provided it with access to the local general insurance market. These new entries have fostered competition, in particular, in the motor insurance market, despite the fact that the loss ratio has deteriorated.”
“We believe that the need for cooperation may increase,” Alastair Evans, chair of Insurance Europe’s conduct of business committee and head of government policy and affairs at Lloyd’s, told the commission meeting. “Iber has facilitated the entry of insurers into new and existing markets.”
Zurich Insurance told the commission that insurers needed shared actuarial data: “In the event the current Iber was not renewed in full, there would be risks to the insurance market’s efficiencies and competition within it.”
AIG Europe has pointed to the emergence of new risk categories such as cyber attacks: “To provide insurance against these novel risks, insurers need to share information, to increase their understanding of the nature, incidence and impact of the risks involved and, thereby, make better individual pricing decisions.”
Much of the sector argues that Iber allows insurance by pools of large risks that could be uninsurable by single companies.
According to the Actuarial Association of Europe, a single company insuring a huge risk, before buying reinsurance, “would create a significant counterparty risk for the policyholder, which could make insuring such huge risks impossible”. Such a counterparty risk would not in itself justify establishing a pool under EU competition law.
“On that basis, abolishing Iber in this area would not serve public good. Insurance-linked securitisation might help with counterparty risk but the ILS market is very underdeveloped, especially in Europe.”
Julia Graham, president of the Federation of European Risk Management Associations, noted: “We represent consumers and users of these reinsurance pools. Non-renewal of the block exemption would change radically the coverage of certain type of risks, but not widen choice for commercial insurance buyers.”
AIG Europe argues that Iber has helped increase the use of broker-led co-insurance pools: “These co-insurance pools provide an efficient route to market for insurers, by enabling brokers to offer a faster and more cost-effective response to their needs by reducing transaction costs and promoting process efficiency.”
Less legal certainty
If Iber lapses, the sector fears less legal certainty under EU competition law, despite EU guidelines. According to Insurance Europe, internal legal self-assessments would become more of a burden and more costly, particularly for smaller firms, and some reinsurers might end cooperation for fear of breaking competition law.
The federation adds non-renewal of Iber could also lead to a messy mix of approaches by national competition authorities. “The only thing that provides legal certainty is the Iber,” says William Vidonja, Insurance Europe’s head of single market and social affairs. He claims to have examples of local courts having stopped cooperation moves.
“The guidelines lack the degree of certainty that the Iber, as a legal instrument, can afford,” says the ABI. “As such, the Iber can help reduce insurers’ compliance costs, as insurers may be less likely to require detailed and costly legal advice for each and every arrangement that they enter into.”
The joint tables and studies under Iber have also been cited as necessary for the modelling needed under the risk-based prudential insurance regime Solvency II. Pools can be an instrument of good risk management, says Insurance Europe.
The commission will carry out more Iber consultations this year and complete two further studies, on the switching of assets between products relevant to pools and the impact of co-reinsurance on competition.
However, the sector might have a tough time persuading the commission that Iber should be renewed.