Penny Whitwell debates the likely impact of the EC's competition inquiry on the London market

If you were to believe all the stories circulating about the impending EC competition inquiry into the commercial insurance sector, you might be under the impression that the practices and procedures of the London market were about to receive their last rites.

Those companies that receive questionnaires next month will undoubtedly have a very tough time collating, compiling and responding to them within the two to six week timescale, even with the necessary advice and assistance of experienced competition lawyers.

But what will be the outcome of this sector inquiry for the market as a whole? Will we have to change the way we do business? Will the subscription market be significantly curtailed? Will trade associations and market committees still be able to draft standard market wordings and endorsements? An overview of relevant law will help to find the answers to these questions.

The Competition Act 1998 in the UK introduced two prohibitions. The Chapter I prohibition broadly prohibits agreements and practices between undertakings which have the effect of preventing, restricting or distorting competition in the UK.

The Chapter II prohibition prevents abusive conduct by one or more undertakings that occupy a dominant position in the UK market.

The relevant EC competition law is set out in Articles 81 and 82 of the EC Treaty and is similar to the Chapter I and II prohibitions, except that the articles apply where there is an effect on trade between EU member states.

Chapter I, for example, would cover agreements between competitors (for example underwriters in the market) and Chapter II could apply to an undertaking (for example a broker or underwriter) which had such a dominant position in the market that its conduct had the effect of restricting competition. We have seen examples of this with Microsoft in the computer industry.

However, what has not been highlighted by recent comment is the fact that any such agreements and practices to be caught by the Act must have an appreciable effect on competition.

As far as a Chapter I violation is concerned, the parties involved must have at least a 25% share of the relevant market, and for Chapter II, an undertaking must enjoy a market share greater than 40%.

Block exemption
Even though 'relevant market' is likely to be defined narrowly, and despite the consolidation of insurers into a smaller number of larger groups in recent years, one struggles to think of any examples of practices in the course of day-to-day underwriting that are likely to reach these thresholds.

In addition, the direct market also has the benefit of an EC block exemption, and related parallel exemption, which exempt (within defined rules) the following types of practices:

  • The joint establishment and distribution of non-binding standard policy conditions
  • The establishment and management of insurance and reinsurance pools
  • The testing and acceptance of security equipment
  • Joint studies and joint calculations of pure premiums.
  • Perceived wisdom suggests that the Commission will focus on London's practices in relation to standard policy wordings, which are a specific feature of the subscription market, to see whether they do actually meet the block exemption criteria.

    But regardless of the block exemption, can it really be said that such market wordings distort or affect competition?

    With the large number of competitors in the London market, the plethora of new clauses and endorsements drafted by individual insurers and syndicates which appear weekly on the market wordings database, as well as the considerable number of bespoke broker policies in circulation, it is hard to believe that jointly-drafted standard wordings have any adverse effect on competition at all.

    In fact, brokers in the London market today are far more likely to foist their own bespoke policies on underwriters (or significantly endorse an insurer's own policy form to meet a client's requirements) than they are to accept standard market wordings.

    If jointly-drafted standard market wordings were significantly affecting competition, a large number of contract draftsmen in underwriters' back offices would be unemployed.

    Cartel activity
    The Commission will also look at other areas. We know from the experience of the aviation market that it will target trade associations and market organisations.

    There is a perception that the competition authorities believe trade associations, or more specifically their sub-committees, to be 'hot beds' of cartel activity where underwriters meet to discuss particular risks and fix premiums. Anyone who has sat through such meetings will know this is far from the truth, as their minutes and agendas will clearly show.

    Following the Spitzer investigation into placing/market service agreements and the subsequent uncovering of practices such as bid-rigging, price fixing and market blocking in the US, it is likely that the Commission will be on the lookout for similar practices in the European market - although, by all accounts, none has yet been discovered in the London market.

    So, we come back to the question posed at the start. What will be the outcome of this inquiry into the commercial insurance sector?

    If the settlement reached in the aviation sector inquiry is anything to go by, the answer will be very little: minor tinkering with the procedures for drafting standard market wordings and more formalised procedures for the meeting of executives from different trade associations.

    Although the powers of the competition authorities shouldn't be underestimated, it is hoped that the final reckoning will be painless.

    ' Penny Whitwell is head of legal at Markel International

    Competition inquiry - the facts

  • Why is it happening?
  • The European Commission launched the inquiry in June 2005, some two months after reaching a settlement with the aviation market. There is little doubt that both the aviation inquiry and the Spitzer investigations in the US have contributed to the current investigation.

  • What can the market expect?
  • The inquiry will start with an information-gathering exercise by way of a detailed questionnaire which will be sent to selected brokers, insurers, reinsurers, trade associations and buyers of insurance across the EU.

  • What will the Commission look for?
  • The Commission will be seeking to ascertain the existence of anti-competitive agreements or practices in the market place and, if necessary, instigate measures to restore competition.