A gentle makeover

European regulators are pushing for change to the co-insurance system, but the insurance industry is loath to upset established business practices. Living up to the European commission’s expectations, however, may not be as painful as some expect.

There is quite a bit of confusion surrounding the commission’s position on co-insurance, the sharing of risk between more than one insurer.

As it stands, the Lloyd’s subscription market – the most popular way of placing risk with multiple insurers – falls outside the industry’s block exemption from certain competition rules, making it subject to competition law.

The European competition directorate has been pretty clear how it feels about some market-wide practices that lead to premium alignment. The problem, as the commission sees it, is that when multiple insurers agree to underwrite cover, the premium charged is aligned towards the price set by the first insurer to take on the risk.

Yet buyers do not feel they are being ripped off. They are aware of the process and, in the main, are happy because it provides quick and easy placement of cover for big risks.

The competition authorities have urged the market to come up with a solution that serves buyers’ needs. The response was a set of principles for the placement of business with multiple insurers, which the commission accepted as a useful first step. But these principles do not represent a fundamental change in the way the subscription market operates.

However, the industry’s block exemption rule, which lets insurers off some competition rules, is expected to be lifted next year and attention could turn to other parts of the market that are felt to be uncompetitive. When the block exemption ends, the commission could set its sights on the workings of the subscription market.

That is no reason to panic. The directorate is not about to overhaul hundreds of years of market practice. The sense is that it will be happy as long as it sees that buyers’ interests are being respected and they are considering other alternatives – some of which are already in use, such as vertical placement.

Vertical placement still involves a lead insurer that agrees cover and deals with claims, but rather than subsequent insurers signing on and fixing their price to the one already set, the following insurers bid against each other and choose their own price in exchange for a share of the risk.

This system is common in the aviation market, but not restricted to it. Buyers who have trialled vertical placement say it delivers a fairer price, which is set by the market. It could also attract new insurers for certain business lines, which had previously been unattractively priced. If the price of the risk is not already set, insurers are free to decide their own price for the risk, which may be higher or lower, based on their own assessments.

The flipside is that smaller insurers find a traditional subscription market approach easier because they can follow the lead insurer rather than provide their own quotation.

Insurers should not be too worried about the European commission delving into the business insurance market. It does not herald the end of the Lloyd’s subscription market.

If policyholders are left to decide for themselves which system best suits their needs, quite a few are likely to choose the ease of arranging a traditional subscription placement over the cost savings of an independently priced placement.

In any event, the market has shown itself capable of adapting and change may not be a bad thing.

nathan.skinner@strategicrisk.eu