Background
Article 81(1) of the Treaty of Rome prohibits restrictive business practices and domestic law, for example the Competition Act 1998 is construed in accordance with this. Competition provisions have been held to apply to the insurance sector. However, Article 81(3) of the Treaty provides exemptions to Article 81(1). Until recently, in order to ensure the enforceability of a potentially prohibited agreement under Article 81(3), parties would need to seek an exemption from the Commission on an individual basis.
To remove the need for separate and time consuming individual exemptions the Council introduced the Block Exemption Regulation (BER). This grants an exemption to the application of competition rules for certain types of agreements in the insurance sector, namely:
- Joint calculations, tables and studies
- Standard policy conditions and modls on profits
- Common coverage of certain types of risks (pools)
- Security devices/safety equipment
Lifespan of the BER
The first BER was adopted in December 1992 and expired at the end of March 2003. It was replaced with the second BER, which is due to expire on 31 March 2010.
No definitive conclusions in relation to renewal of the BER have yet been reached.
Consultation and reform
On 13 June 2005 the Commission decided to initiate a sector enquiry into the provision of insurance products and services, based on its competences under EC competition rules. The BER was considered as part of this and a report was published in September 2007.
In April 2008 a consultation paper was issued which sought the sector’s views, it specifically focused upon the BER itself. The deadline for industry responses was on 17 July 2008 and the Commission is currently analysing the replies and undertaking follow-up work. The Commission is required to submit a report to the European Parliament and Council on the functioning of the BER by 31 March 2009.
Industry support for an extension to BER
The Commission has noted that, on the whole, the insurance sector was in favour of extending the BER and that in most cases the practices covered are unproblematic or desirable in the market.
The main arguments put forward in favour of renewal the are:
- The BER creates legal certainty as to the anti-trust status of a given practice.
- The existence of the BER reduces costs for the sector, which if incurred would have to be passed on to consumers through higher premiums.
- Without the BER there is a risk that competition rules would be applied inconsistently across the 27 member states.
- Forms of co-operation (i.e. shared knowledge) allowed under the BER effectively facilitate market entry to insurers.
- The lapse of the BER would cause a large number of compliance issues for firms.
Commission’s view
Although no definitive conclusions have been reached by the Commission, they believe, “sector specific block exemption regulations are exceptional legal instruments and the question arises as to whether there remain sufficient grounds to justify block exempting certain types of agreements in the insurance sector”.
As the BER will naturally lapse it is the Commission’s view that a case must be made to renew it. Press releases have made clear that to date they have not yet found any compelling reason to do so.
The Commission has also noted that:
- Many of the sector’s arguments fail to distinguish between the desirability of the cooperation permitted by the BER and the desirability of the BER itself. Practices would not necessarily lose their exemption, rather the means of achieving it would change.
- Additional uncertainty as to the exemptability of a practice under Article 81(3) would not necessarily be created, as the guidelines on horizontal cooperation agreements would apply.
Procedural change under Article 81(3)
What appears to be the Commission’s main point however is that the conditions under which the BER was made no longer exist.
From May 2004 there has been a change in procedure regarding exemptions under Article 81(3). Instead of going to the Commission to seek exemptions on an individual basis, parties are now required to self-assess the compatibility of their behaviour in relation to the competition rules.
With the removal of the prior decision requirement and the advent of self-assessment the Commission has become significantly less well disposed towards specific sectoral block exemptions. This can be seen in the aviation and maritime sectors where similar exemptions have been allowed to lapse.
It is also noted that the Commission no longer has a monopoly on the public enforcement of Article 81(3) and that the number of national bodies involved will hopefully prevent any bottleneck developing.
Conclusion
The consultation paper sought responses on how the BER impacts several aspects of the sector. Although there is no standard sector response, the main issues appear to be:
- Although the Commission recognises that joint calculation, tables and studies bring a benefit to the market, the BER could in theory allow much broader information sharing that could lead to suggestions of price-fixing.
- The common coverage of certain risks (pools) is not an area where an exemption would seem likely for the majority of risks, due to reduction in consumer choice. In contrast to this however some pools, the common example being nuclear, are necessary for such a risk to be covered at all. In such situations it cannot be said that the practice restricts trade, as is the requirement for Article 81(1) to apply. It should therefore be straightforward for the parties to determine whether common coverage of the risk will be prohibited or not.
- The use of standard policy conditions can be seen as anti-competitive in that they reduce choice for the consumer. Yet there are many industries, for example architects, where standard forms are widely used without an exemption or breach of competition rules. It is also noted that standard terms can facilitate new entrants into a market, reduce costs and increase contract certainty.
Although it looks like the loss of the BER is a real possibility, much will depend on the Commission’s view of the responses (and quantitative supporting evidence) submitted by the industry. Even if the BER is to be renewed there is no guarantee it would be in the same form as the current version and the Commission may find alternative solutions to some of the issues mentioned above.
The Commission’s report is due at the end of March 2009 and it should give a clear indication of whether the future includes a renewed BER or similar.