Thursday, 6 June 2013
Ferma urges EC to leave subscription market alone
Ferma has warned the European Commission that any restrictions to the subscription insurance market will work to the disadvantage of business and insurance buyers.
European Commission building
The European federation told the EC that an attack on the subscription systems would reduce market capacity or make it more difficult to access.
As was made clear during Commercial Risk Europe’s Global Risk Frontiers conference in London last month, Europe’s risk managers seek ways to increase capacity for large and complex risk, not limit it.
Any move by the EC against the subscription market would therefore be viewed as a serious backwards step.
Ferma’s concerns were raised on 3 June in a position paper commenting on the findings of a study by Ernst & Young on co(re)insurance practices.
The study was commissioned by the EC ahead of its next review of the Insurance Block Exemption Regulation (BER).
The BER grants an exemption to co(re)insurance pools from EU anti-competition rules and will expire in its current form on 31 March, 2017.
The EC is concerned about the competitive nature of the subscription market and pooling arrangements.
In the conclusions of the 2007 business insurance sector inquiry (BISI), the Commission expressed concerns over ad hoc agreements in the subscription market regarding the practice of premium alignment, stating that ‘the mechanisms behind this general market practice are not clear’.
In 2011 it therefore sanctioned the Ernst & Young study to provide a European-wide overview of the practices of pools and ad hoc agreements in the subscription market.
Its objective is to gain a better understanding of the rationale and the functioning of existing pools and subscription markets throughout the EU.
In its latest position paper Ferma said that the subscription market ‘plays a critical role in covering industrial risks’. Changes to its operation would be to the disadvantage of commercial insurance buyers, it added, explaining that the insurance market shares its concerns.
“Co(re)insurance practices are part of the basic functioning of the insurance market in Europe (both the London and the continental European markets). They are the only way to find the huge financial capacities needed in the business insurance sector and no individual market players could meet these needs on their own. As it has been working properly so far and proved its benefits, it should not be hindered. Rather, it should be permitted and allowed to continue,” said Ferma.
The federation points out that the first phase in the subscription process, the selection of the lead insurer, is highly competitive.
Once the lead insurer is selected, this practice is time-efficient, avoiding heavy and complex individual negotiation with every possible co-insurer, it added.
The practice brings legal certainty for the parties involved when handling claims and resolving disputes, stated Ferma.
The system also makes sure that terms and prices are clear and consistent among all participants, argued the federation.
Because of this recognised efficiency, the subscription market attracts a great diversity of insurance companies, which is in the corporate insurance buyers’ ‘best interest’, continued Ferma.
“The subscription process allows non-specialised insurers to provide capacity to cover a risk relying on the leader’s expertise in that specific area of risk. Consequently, a whole range of large risks can find coverage,” it explained.
Ferma welcomed this latest opportunity to restate its confidence in co(re)insurance practices that it says have fostered beneficial cooperation between insurers and the risk management community.
The federation added that it would gladly collaborate on any future initiative at EU level. Ferma also noted that at a national level some insurance pools are ‘needed where the traditional insurance market is not interested or can’t solve temporary market problem on its own’.
They are sometimes the only way to find huge financial capacities in the business insurance sector, it said.
“These pools are considered so necessary because there is no viable alternative in the member state for coverage of large and new risks. Pool members on their own would not be able to provide the necessary capacity for the (re)insurance of these risks,” said the federation.
However Ferma did concede that if kept in place with a monopoly position, pools could work as barriers for potential new entrants to the market. Therefore, they have to be checked regularly against market reality so the insurance market remains dynamic and competitive, it concluded.