Commission gets tough on Block Exemption
On the 5 October the proposal for a revised insurance Block Exemption Regulation was launched by the European Commission’s Directorate General for Competition (DG Comp). Commissioner Neelie Kroes warned that DG Comp intended “to be tougher on monitoring and enforcement to ensure compliance with the rules”. These comments and the proposed limitations will interest many (re)insurers that currently rely on the safe harbour created by the current agreement.
DG Comp has invited comments on the proposed text by 30 November 2009, but it should be considered to be in near-final form. It provides for Block Exemption coverage in relation to standard policy conditions, joint approval of security devices, and significant amendments to provisions relating to sharing joint calculations and participation in pools.
In a March 2009 report, the Commission criticised industry perceptions of the pools exemption. It noted that: (i) many pools mistakenly believe that they require the Block Exemption for legal certainty when, in fact, they fall outside its scope; and (ii) many insurers incorrectly use the pools exemption as a “blanket” exemption.
The new proposal addresses issues identified in the March report. First, it clarifies that pools will not require protection from the Block Exemption’s safe harbour where they relate to risks that could not be covered by one insurer acting alone. Second, it states that ad-hoc “pools” (including in the subscription market) will not benefit from protection, meaning that such arrangements would need to be reviewed for compliance with the EU’s competition rules outside the Block Exemption. Finally, it amends the way market shares are calculated for purposes of the 20 percent and 25 percent maxima. The market share amendments mean that fewer pools (and participants) will benefit from the automatic Block Exemption protection.
The criticism over how the pools exemption is perceived and the significant amendments set out in the new proposal suggest that Commissioner Kroes’ warning of tougher monitoring and enforcement may relate largely to pool-related practices. (Re)insurers relying on the Block Exemption’s safe harbour for pools are advised to study the proposals closely and test current practices for compliance.
EC reviews $3.5bn Towers Perrin/Watson Wyatt deal
DG Comp was notified of the proposed merger between professional services firms Towers Perrin and Watson Wyatt on 14 October, with a first phase review scheduled for completion by 19 November. The deal – announced on 28 June – initially fell to be notified in four separate EU Member States (Germany, Spain, Netherlands and the UK) but will now be reviewed only by DG Comp according to the “one-stop-shop” principle applicable under the EU’s Merger Regulation (ECMR). Under the terms of the ECMR, customers and competitors of the merging parties are afforded an opportunity to submit comments on the proposed deal.
EU/South Korea trade deal seeks to level playing field
October’s landmark EU-South Korea free trade deal may offer advantages for EU insurers looking to engage in the Korean market. The deal contains a number of high-level safeguards relating to financial services market access and regulation that will interest to banks and insurers. However, buried deep in one of its annexes, the deal also makes specific reference to the levelling of the playing field between private insurers and state-backed cooperatives – which are among the most important providers of cover on a number of South Korean insurance markets.
EU raises VAT question
The ECJ ruled on 22 October that a cross-border sale of a portfolio of life reinsurance contracts rendered the transferor liable to account for VAT in its jurisdiction. Specifically, the ECJ ruled that the sale – although cross border – did not fall outside the scope of VAT in the transferor’s jurisdiction, and was not exempt from VAT. The implications of this decision have yet to be fully worked out, particularly as regards non-life reinsurance contracts (which would typically have a negative value, unlike most of the contracts in this case).
US federal anti-trust exemption under threat
On 21 October, the US House Judiciary Committee voted in favour of a bill that would eliminate the insurance industry’s “antitrust exemption”. The bill’s stated purpose is ensuring that health and medical malpractice insurers cannot engage in price fixing, bid rigging, or market allocations to the detriment of competition and consumers. The insurance antitrust exemption is contained in the 1945 McCarran-Ferguson Act, which gave individual states the authority to regulate insurance and exempted the “business of insurance” from federal antitrust law provided that an insurer’s activities are: (i) regulated by state law; and (ii) do not involve boycott, coercion or intimidation.
Industry groups are questioning the need for the legislation, arguing that insurers are already subject to vigorous state insurance regulation and to state antitrust laws, while insurance rates are increasingly competitive. Further, the scope of the exemption has been increasingly narrowed by federal court decisions since 1945. However, Democrats in both the House and Senate argue that eliminating the exemption will create more competition in the health insurance market. In fact, before it is considered by the full House and Senate, the proposed legislation may be merged with a current proposed bill to overhaul the health insurance markets in the US – H.R.3200, entitled “America’s Affordable Health Choices Act of 2009”.
Lehman swap ruling
The judge overseeing the Lehman Brothers proceedings in the US Bankruptcy Court for the Southern District of New York ruled on 15 September that Section 2(a)(iii) of the ISDA Master Agreement – which states if one party is in default the other party may withhold performance – was invalid if the default is bankruptcy. As such, the non-defaulting party has to perform its obligations under the Master Agreement. The judge stated that upon Lehman’s bankruptcy the non-defaulting party could have simply terminated the Master Agreement rather than continue to perform. Since the non-defaulting party had done nothing for a year into the bankruptcy, the judge found that it had waived its right to terminate the Master Agreement through its inaction. As such, the Master Agreement continued in force and the non-defaulting party was still obliged to make payments to the Lehman counterparty. In the Lehman case, swap counterparties could include a number of insurance companies.