Sally Ann Southwell asks: how will competition law apply to pools going forwards?
The European Union (EU) Insurance Block Exemption Regulation (IBER), which provides a safe harbour from EU and UK Competition Laws for certain activities in the insurance sector, will expire from 1 April 2017. From that date forwards, all activities in the insurance sector will be subject to competition laws in the same way as in other financial sectors.
CHANGES FOLLOWING THE EXPIRY OF THE IBER
The two practices that will no longer benefit from the IBER are:
â Statistical information exchange for the purpose of joint compilations, tables and studies on the occurrence of risk and past cost;
â Insurance and re-insurance pools set up by insurers to cover new risks; or in respect of which participant insurers have less than a 20% combined market share (or 25% in the case of
The fact that statistical data exchanges will no longer be covered by the IBER is relatively uncontroversial, as the principles set out in the European Commission's (EC) Horizontal Cooperation Guidelines suggest that the exchange of this type of data will continue to be unproblematic. The focus for insurers in working out the impact of the expiry of the IBER is therefore likely to be on pools.
According to a study undertaken by Ernst & Young in 2014, there were only three pools in the UK that fell within the strict requirements of the IBER. In particular, broker-led and ad hoc pools had emerged which, according to the European Commission, did not benefit from the IBER as they did not meet the criteria of having been set up by insurers. However, in reality there are thousands of pools in the UK that have taken comfort from the existence of the IBER to date.
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The expiry of the IBER should prompt insurers (and reinsurers) to consider their pool arrangements and to question whether they are compliant with competition laws. Pools will continue to be a feature of the insurance market, but the expiry of the IBER will create greater uncertainty and a need for self-assessment.
At least as far as the rules on anti-competitive arrangements are concerned, it is unlikely that there will be any significant change to the competition law regime in the the UK in the short term as a result of Brexit. UK competition laws (as set out in Chapter 1 of the Competition Act 1998) mirror the equivalent provisions of EU Competition Law (Article 101 of the Treaty on the Functioning of the European Union). The competition law assessment of pools outlined above is therefore equally applicable under the EU and UK regimes (both of which were covered by the IBER to date).
The Financial Conduct Authority has had the power to investigate potential competition law breaches in the UK insurance sector since 1 April 2015 and it may only be a matter of time before we see it bring a competition law case in the UK insurance sector (particularly as insurers are required to proactively report as soon as they become aware of any potential 'significant' breach).
COMPETITION LAW ASSESSMENT OF POOLS
From 1 April 2017, the following analysis will determine competition law compliance for pools. The EC has said that insurance pools should be looked at as joint production arrangements (ie as a cooperation to create a new product), such that the joint premium setting that is inherent to a pool is regarded as indispensable and therefore is not problematic in and of itself.
1. Pools that fall outside of competition law
Where insurers cannot insure the risk covered by the pool acting alone, they are not regarded as competitors and therefore, competition laws do not apply to the pool. Nuclear pools fall into this category, even though participants may have a 100% combined market share.
It may be easier for an insurer to demonstrate that they cannot act alone where the category of insured risk is unconventional (such as for cyber security, natural catastrophes, nuclear incidents, terrorism, ecological damage), the insurer is moving into new categories of risk that require them to free up their balance sheet, or participation in a pool is mandated by government or by policy.
2. Market share-based assessment
The market power of pool participants will remain relevant to competition law risks. Where pool participants have a combined market share of less than 20%, a pool can be considered compliant with competition laws (according to the Horizontal Cooperation Guidelines on joint production arrangements).
3. Risk weighting factors in other cases
In all other cases, the competition law analysis is not clearcut. The more efficiencies that can be shown to result from the pool, the easier it is to defend, such as if the premium is reduced through the pool, the pool brings a new product onto the market or enables a product to be offered with a greater maximum limit of indemnity.
The following scenarios also present reduced risk of competition law scrutiny:
â Where competition takes place for the role of lead insurer and in particular where a number of insurers compete on premiums in order to win the lead role.
â Where the pool is broker led and the information exchanged between lead and follower insurers is reduced, such as protocols that limit information exchange at quarterly meetings.
â Where participants in the pool are not restricted from providing insurance outside of the pool.
4. Control of information exchange
In all cases, care must be taken to ensure there are no spillover effects in relation to the unrelated activities of pool participants where they do compete. As with any competitor cooperation, information exchange should be limited to what is strictly necessary to make the pool work.