VVO s SPCs are non-binding, open to everyone and cover the major insurance

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1 European Commission DG Competition Antitrust Registry Ref.: HT.1221 stakeholder input 1049 Bruxelles/Brussel BELGIQUE/BELGIË Public consultation on revised draft Block Exemption Regulation for insurance sector Vienna, 30 November 2009 Comments by the Austrian Insurance Association (VVO) Dear Madam/Dear Sir, Christian Eltner with reference to the draft Block Exemption Regulation the Austrian Insurance Dieter Pscheidl Association (VVO) may submit the following arguments related to standard policy conditions (SPCs) in addition to our contributions dated 6 April 2007, Tel.: (+43) July 2008, 26 January 2009 and 11 June Fax: (+43) The status quo pscheidl@vvo.at Austrian Insurance Association Under the current BER there is a well balanced market basis to develop SPCs, a rz g platz 7 A Vienn a taking immediately into account all relevant aspects of current national legislation www. vv o.at and recent court rulings, also from proceedings against individual insurers. ZVR Zahl VVO s SPCs are non-binding, open to everyone and cover the major insurance lines, e.g.: life insurance unit-linked life insurance accident insurance contractor s all risk insurance loss of profits fire insurance burglary glass insurance general liability insurance home insurance motor insurance tap water insurance aviation machinery legal expenses storm insurance transport insurance environmental restoration expense insurance Unser Zeichen: Mag.DP/Bed Ausg Nr.: D-149/09 Page 1/7

2 All SPCs may be downloaded from VVO s website: In addition to the setting up of SPCs VVO is publishing a commentary on general liability insurance SPCs, a commentary on legal expenses insurance SPCs is currently under review. Page 2/7 2. Standard policy conditions - also a case for a renewed BER There are several reasons why a future Insurance BER should cover SPCs. In order to substantiate our view VVO may present the following four arguments: 2.1 The functional nexus of joint calculations, tables and studies and standard policy conditions In its report the European Commission acknowledged that there are good reasons to protect and facilitate cooperation in the area of joint calculations, tables and studies. 1 Under Article 81 of the Directive on the taking-up and pursuit of the business of Insurance and Reinsurance (SOLVENCY II), recently adopted by the European legislator and to be transposed into national law at the latest by 31 October 2012 insurance and reinsurance undertakings will be obliged to have internal processes and procedures in place to ensure the appropriateness, completeness and accuracy of the data used in the calculation of their technical provisions. SPCs define a specific architecture for insurance products and thus the related risk data. SPCs of all lines of insurance are based on uniform risk definitions, e.g. for property insurance a legal and technical definition of avalanches, landslides, storms, floods etc. Consequently these legal risk definitions directly shape the gathered risk data and derogations would decrease the quality of statistics. The European Commission tackled this issue already in and explicitly refers to it in the wording of the current BER. 3 1 cf. Report on the functioning of Commission Regulation (EC) No 358/2003 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector COM(2009) 138, p. 4 2 cf. Commission Decision 90/25/EEC - Concordato Incendio, OJL 015, 19/01/1990, p cf. Commission Regulation (EC) No 358/2003 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector, Article 3 para 1 lit a

3 Acknowledging the specificity of risk data in the insurance sector induces acknowledging the specificity of SPCs. As it has been argued during the public hearing on 2 June 2009 by panellist Pieter Loyson the nexus of risk data and SPCs equals the question What came first the hen or the egg?. Therefore a renewal of the Insurance BER necessarily has to cover both, the areas of risk data and standard policy conditions alike. Page 3/7 2.2 Reference and difference to other economic sectors The European Commission addresses the question whether agreements on standard policy conditions are special to the insurance sector and refers exclusively to the banking sector. In its report the European Commission states that it has been argued by representatives of the banking sector that it does not require a legislative framework (such as a BER) in order to set policy conditions. 4 Generally speaking VVO wonders why other economic sectors were asked to comment in such a way on the Insurance BER. 5 As performance and timing of an insurance contract are uncertain, this sector can t be compared to others. The amount of insured losses and the date when the insured risk materializes are unknown when the contract is concluded. However, the price i.e. the insurance premium has to be set in advance. This uncertainty underlying premium calculation is not a normal business risk. Insurance contracts i.e. SPCs have to meet this unique challenge. The principle of guaranteed insurability makes these contracts different to those sold in other industries. In this context we may refer to the five principles of insurability: 1. uncertainty: the time at which the insured event occurs must not be predictable 2. independence: the occurrence of the insured event must be independent of the will of the insured 3. assessability: the expected loss burden must be assessable 4. uniqueness: the occurrence of claims must be rare 4 cf. Report on the functioning of Commission Regulation (EC) No 358/2003 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector COM(2009) 138, p. 4 ff 5 cf. Question 5 of the questionnaire DG COMP/D2/EMCC/LS/D(2008) sent on 12 December 2008 to the banking sector: 5. If you have any other comments you would like to make in relation to the review of the BER, please let us know.

4 5. size: a large number of people who are at risk must combine to form a risk community 2.3 Market access for small mutual insurers The establishment of SPCs covered by the BER provides for an efficient and effective functioning of the whole insurance market. This is underlined by the fact that VVO s SPCs are also used by non-members. In Austria, there are operating 55 small mutual insurers, each writing total annual premiums below 5 mn. 6 Some of these local providers are existing for over 200 years, the oldest dating back to Page 4/7 Small mutual insurers are often run by volontary functionaries and neither dispose of office infrastructure nor permanent staff. For this reason these providers use the following VVO standard policy conditions: fire insurance property insurance storm insurance tap water insurance burglary and theft insurance glass insurance home insurance As a result small mutual insurers lacking the means and resources would lose their working basis by a non-cooperation of insurers in the field of SPCs. 2.4 Consumer protection The nature of insurance products can lead to information asymmetry as insurance products may be complex, consumers have limited understanding of them and are infrequently purchased by retail customers. SPCs provide guidance on basic product types and thus prevent consumers from being over- or underinsured, e.g. in case of breakage of glass it is important to know if this risk is normally covered by a household or a homeowner insurance. As a result SPCs induce mobility of policyholders as they serve as a neutral reference point for product comparisons and thus decrease indirect switching costs for the consumer. Recent data from the European Commission confirms the consumer s strong wish in several Member States to compare financial products. 7 6 cf. Austrian Insurance Supervision Act 62 ff 7 cf. European Commission: Special Eurobarometer Consumer protection in the internal market, October 2008, p. 120 ff

5 3. Alternative arrangements to standard policy conditions Except for some compulsory insurance lines like Motor Third Party Liability Insurance, national or European legislation does not provide for any insurance product specificities. Directive 73/239/EEC 8 only assigns numerous risks to classes of insurance. Against the background of the need for SPCs set out under Page 5/7 point 2 there remain two alternatives: 3.1 Product specifications by market leaders An abolishment of SPCs set up by insurance associations would have the following effect: larger market players would set up their own specific conditions and smaller insurers lacking of means and resources would simply have to follow, thus forcing them into a passive role. 3.2 Product specifications by regulation VVO agrees with the Commission that national regulations reduce the need for cooperation. 9 Consequently a second alternative would be to put the onus on the regulator or even the legislator to provide for product specifications. However, this would be contradicting the freedom of product design established by the so-called third generation of Insurance Directives The need for a legal instrument VVO has reason to expect tangible difficulties for insurers in the absence of a legislative framework such as the BER as the possibility that SPCs trigger a certain product standardisation can t be completely ruled out. This aspect was also mentioned during the public hearing on 2 June 2009 by panellist Jean-Paul Coteur. 8 First Council Directive 73/239/EEC on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, Annex A 9 cf. Report on the functioning of Commission Regulation (EC) No 358/2003 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector COM(2009) 138, p cf. Article 5 of Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life insurance Directive) and Article 6 of Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life insurance Directive).

6 Even though VVO would have to assess the conformity of its SPCs regarding antitrust rules it should be clarified that it is ultimately VVO s members, the Austrian insurers, that would have to bear the consequences. As a matter of fact, this will affect ex ante the level of cooperation negatively and most probably lead to a scenario as described under point Further assessment needed Although the European Commission investigated several aspects with regard to the Block Exemption Regulation, some important elements deserve further scrutiny such as Page 6/7 the regulatory depth of standard policy conditions in comparison to general terms and conditions in other economic sectors and a qualitative impact assessment of functional effects in insurance markets lacking standard policy conditions (see also point 3.1). Finally we may reiterate the European Parliament s support of a full renewal of the current BER. With best regards, ir. Louis Norman-Audenhove )irector General Austrian Insurance Association Cc: Prof. Dr. Karel Van Hulle and Dr. Tomás Kukal

7 About VVO Founded in 1899, the Austrian Insurance Association (Versicherungsverband Österreich, VVO) is the legal interest representation of all private insurance companies operating in the Austrian insurance market regarding legal, economic and fiscal matters on national, European and international level. Austrian insurance companies are operating in more than 20 EU Member States. VVO is a founding member of the European Insurance and Reinsurance Federation (Comité Européen des Assurances, CEA). Page 7/7