Remuneration of Insurance Brokers: A Fresh Angle Under EU Competition Law

March 21, 2013

On March 14, the Court of Justice of the European Union (ECJ) provided guidance on the anti-competitive nature of certain agreements between providers of repair services and insurers in the markets for motor insurance and repair services (see Case C-32/11).

Background on the Matter

The judgment, rendered in response to questions put to it by the Hungarian Supreme Court, examined whether the payment by insurers, Hungarian subsidiaries of the Allianz and Generali groups, of certain incentives to insurance brokers in order to increase the sales of policies may constitute a restriction of competition “by object.”

Allianz and Generali agreed with auto dealers in Hungary (either individually or through an association of authorised dealers) on the rates and conditions applicable to repair jobs for vehicles insured by the two companies.  In addition to repairing cars insured by Allianz or Generali, the auto dealers sold customers motor policies of these two companies.

The Hungarian National Competition Authority (NCA) found that the following decisions and agreements had infringed national competition law:

  • Decisions by the authorised dealers association setting out “recommended prices” for car repairs and which were applicable to the insurers;
  • Framework agreements between the authorised dealers association and Allianz and individual agreements between certain dealers and Allianz and Generali, respectively, providing for an hourly repair charge dependent on the number of insurance policies signed; and
  • Agreements between Allianz and Generali and two auto dealers – acting as insurance brokers – fixing the dealer’s remuneration according to the number of policies taken out with the insurer.

The NCA found that, together and individually, the agreements had as their object the restriction of competition in the markets for motor insurance contracts and car repair services.  The Budapest Municipal Court partially reversed the NCA’s decision which was subsequently upheld by the Regional Court of Appeal.  The parties then appealed to the Hungarian Supreme Court, which referred questions to the ECJ.

The Proceedings before the ECJ

The ECJ analysed several alleged breaches of competition law.  First, the ECJ referred to a possible horizontal agreement or concerted practice between Generali and Allianz to enter into such agreements and partition the motor insurance market.  If such an agreement existed, it should be treated as a restriction by object. As a result, the vertical agreements concluded to implement such horizontal agreement would be unlikely to be justified and would be, hence, unlawful.

Next, the ECJ considered that a decision by the authorised dealer association addressed to its members, which pertained to the adoption of “recommended prices” for the repair service to be charged to insurers, could amount to price-fixing (with the support of the insurers).

However, the more interesting part of the judgement is the ECJ’s analysis of the impact on competition in the motor insurance market of the remuneration system of the brokers on the latter’s duty of independence and to act on behalf of the policyholder, and, ultimately, on competition in the market.  The ECJ leaves it to the referring court in Hungary to analyse whether “in those circumstances and in light of the expectations of those policyholders” there was a significant disruption of the functioning of the motor insurance market that amounts to a restriction by object.

The ECJ further explains that these brokerage agreements would also amount to a restriction by object if competition on the market were eliminated or seriously weakened due to these agreements.  Such restriction of competition shall be assessed in view of “the structure of that market, the existence of alternative distribution channels and their respective importance and the market power of the companies concerned.”

Commentary

The ECJ’s finding that the payment by insurers of economic incentives to brokers (so as to increase the sales of their insurance policies) may constitute a restriction by object in the motor insurance market is surprising.  Economic incentives paid by suppliers to distributors to incentivise sales have not been traditionally considered by their very nature as restrictive of competition.  Rather, rebates and other fidelity-enhancing payments are usually reviewed under an effect-based approach and will depend, inter alia, on the market position of the parties, the efficiencies brought by such schemes and the potential (or actual) risk of foreclosure of other insurers.

In this case, the ECJ seems to take a stricter stance towards incentives paid to brokers by insurers for the volume of business that brokers have brought in over a relevant period.  However, an effect-based analysis by the ECJ would have gone beyond the scope of the question raised, which was limited to examining whether the various conducts at hand could fall within the scope of restrictions by object.

The ECJ’s reasoning is also particularly interesting for the current debate on remuneration of intermediaries as part of the review of the Insurance Mediation Directive (IMD).  Under the IMD, insurance brokers have a duty to provide independent advice to the prospective policyholder for remuneration which is borne by the customer. That advice depends on a “fair analysis” of a “sufficient number of contracts.”  This role contrasts with that of an insurance agent who acts on behalf of one or more insurers.

The duty of a broker to analyse a sufficient number of contracts as a basis for a recommendation to their customer should, as such, be pro-competitive.  Furthermore, disclosure of remuneration is typically a consumer protection concern, and has traditionally not been dealt with under competition rules.  What is less clear is whether economic incentives paid to brokers, the so-called “commission bias,” should be deemed to constitute a restriction of competition by object (or, even, by effect).

The Hungarian Supreme Court is now bound to apply the ECJ’s ruling in the national proceedings before it.  The ECJ’s ruling is also binding on other national courts and competition authorities.  It might therefore set a dangerous precedent with unpredictable consequences for certain arrangements in the insurance sector, in particular those where commission payments to brokers are common practice.