The European Commission called on insurers to justify or overhaul two practices it said create antitrust problems for the continent’s insurance industry.
The commission, the European Union’s executive arm, targeted the longstanding practice of aligning premiums for large risk contracts, which it said could lead to higher prices. It also raised questions about what it called unhealthy conflicts of interest by insurance brokers, which it said might inflate prices and reduce choice.
“The commission is serious about making markets work better, even where that means we need to question some established market practices,” said Competition Commissioner Neelie Kroes. The industry needs “to reform relevant business practices,” she added.
The commission didn’t give the industry any deadline for justifying the practices or making changes.
The most important finding concerned the practice of insurers, particularly reinsurers, setting their premiums and excluding others from offering lower premiums than those of the lead insurer, said Lesley Ainsworth, a partner in Lovells’ competition and EU law practice.
“This is the one thing in the report that will cause high blood pressure,” Mr. Ainsworth said. “It will change the way the market, particularly in London, works, making it more difficult for the subscription market leader to look at the risk and let everybody else tuck in behind him on the price.”
While the report says the practice may not break EU law, the commission said insurers should move fast to justify the practice or overhaul it. In practice, this will probably mean the lead underwriter should continue to publish his rates, but others should be able to follow or undercut them, Mr. Ainsworth said.
Europe’s insurance industry is allowed to cooperate on some pricing practices, under a European antitrust exemption in 2003.
In 2004, then-New York Attorney General Eliot Spitzer investigated conflicts of interests between insurers and brokers, forcing American International Group to give up more than $800 million a year in revenue from so-called contingent commissions from insurers. Another insurance broker, Marsh & McLennan, settled an insurance bid-rigging inquiry for $850 million.
The commission first opened a probe into competition in insurance in June 2005. At the time, Ms. Kroes said high premiums and fees might be hurting small business.
The long-awaited final report found evidence to back up these claims. Like Mr. Spitzer, officials expressed concern that insurance brokers faced a conflict of interest when brokers act both as an adviser to their clients, to the insured and also as a distribution channel for the insurer.
In response, the commission said it would review its so-called Insurance Mediation Directive.
“This seems soft — instead of firing off” antitrust cases, the commission seems to have “backed off,” Mr. Ainsworth said.
Some elements of the report were positive for business. The commission said most of its concerns about long-term insurance contracts had been resolved. Its only concern about this matter remains in Austria.
The commission’s initial finding questioned the extent of the industry’s antitrust exemption. This allows firms to cooperate on setting risk premium calculations and drawing up standard policy conditions, among other issues. The commission said it remained unsure whether the exemption is still necessary. But it held off judgment until a new report is published in March 2009.
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