EU Antitrust Law in the Area of Financial Services
TABLE OF CONTENTS
CHAPTER 1 ANTITRUST POLICY IN THE BANKING SECTOR
Section 1 Price competition issues
Subsection 1 Multilateral client fees (nrs 8 to 14)
Subsection 2 Multilateral interchange fees (MIF) (nrs 15 to 50)
A. The Commission's position so far (nrs 18 to 32)
a. Eurocheque - Package Deal I (1984)
b. ABB (1986)
c. ABI (1986)
d. Dutch Banks (1989)
e. Eurocheque - Package Deal II (pending)
f. Dutch Banks II (pending)
B. State of play (nrs 33 to 50)
a. Applicability of Art. 85.1 to MIF : (nrs 34 to 45)
the notice on cross-border credit transfers
and its follow-up
b. Applicability of Art. 85.3 to MIF : (nrs 46 to 50)
from the notice on cross-border credit transfers
to current thinking
Subsection 3 No-discrimination-rule (NDR) (nrs 51 to 65)
A. The Commission's position so far (nr 52)
B. State of play (nrs 53 to 65)
a. Applicability of Art. 85.1 to NDR (nrs 54 to 57)
b. Applicability of Art. 85.3 to NDR (nrs 58 to 65)
Section 2 Non price competition issues
Subsection 1 Acces to essential facilities (nrs 66 to 68)
Subsection 2 Other non-price competition issues (nr 69 to 71)
CHAPTER 2 ANTITRUST POLICY IN THE INSURANCE SECTOR
Section 1 Concentration on gross premiums
Subsection 1 Verband der Sachversicherer (1984) and the(nrs 73 to 75)
ban on collectively agreed gross premiums
Subsection 2 Verband der Sachversicher (nrs 76 to 79)
some side issues
A. Recommendation of an association of undertakings:
a decision within the meaning of Art. 85.1 ?
B. Recommendation of a national association of undertakings:
effect upon interstate trade within the meaning of Art. 85.1 ?
Section 2 Block exempted or exemptable agreements
Subsection 1 Concentration on net and risk premiums (nrs 80 to 86)
A. Nuovo Cegam (1984) and Concordato Incendio (1989)
B. Title II Regulation n/ 3932/92
Subsection 2 Standard policy conditions for direct insurance(nrs 87 - 92)
A. Concordato Incendio (1989)
B. Title III Regulation n/ 3932/92
Subsection 3 Co-insurance and co-reinsurance pools (nrs 93 to 128)
A. P&I Clubs (1985),Teko (1989), Assurpol (1992)
and LUA/ILU (1992)
a. Co-insurance
b. Co-reinsurance
B. Title IV Regulation n/ 3932/92
a. Are co-insurance or co-reinsurance
pools per se covered by Art. 85.1 ?
b. How does one correctly implement
the market share test under Art. 85.3?
(Art. 11 Regulation)
Subsection 4 Security devices (Title IV Regulation n/ 3932/92)(nrs 129 to 132)
Subsection 5 Settlement of claims (Council Regulation n/ 1534/91)(nrs 133 to 137)
Subsection 6 Registers of, and exchange of information on,(nr 138 to 140)
aggravated risks (Council Regulation n/ 1534/91)
1. For the sake of conceptual clarity it should be pointed out right away that the notion "financial services" covers a vast plethora of activities undertaken by financial as well as non-financial institutions in the field of banking and insurance. Both fields will be covered in this paper.
2. In the field of banking, services can be classified on the basis of a number of criteria such as the nature of the services, the type of customers or the type of suppliers. Whatever classification one reverts to, one will notice that EU antitrust policy outside merger control has sofar covered only a tiny fraction of the banking services. Indeed, under Art. 85 EU Treaty, six out of the seven formal decisions adopted by the Commission essentially deal with one single type of financial services, namely payment services. These decisions more specifically concern operating rules of certain payment systems. The same holds true for the only (quasi-) regulatory antitrust action which the Commission has undertaken sofar in the banking field. In 1995 it adopted a notice on the application of the EC competition rules to cross-border credit transfers. Payment systems raise price-competition as well as non-price competition issues. The price-competition issues will take up the bulk of this paper's chapter on competition policy in the banking sector.
3. One price-competition issue can be regarded as settled but needs nevertheless a brief comment, namely the issue of common price fixing whereby banks participating in a payment system set the tariffs charged to their clients. Such price fixing is illegal (infra nos. 8-14).
Four of the Commission's decisions as well as the notice on cross border credit transfers deal with a price-competition issue which remains considerably more controversial and which the Commission hopes to clarify once and for all in the near future: how should one assess the compatibility of multilateral interchange fees with Art. 85 (infra nos. 15-50)? An interchange fee (IF) is a commission which one bank (often, but not necessarily, the creditor's bank) pays to another bank (the debtor's bank in our hypothesis) when they cooperate in handling a particular payment through a given payment system to which they have adhered. A multilateral interchange fee (MIF) is a commission the amount or calculation formula of which all banks participating in the payment system agree upon at the moment they adhere to it.
There is another price-competition issue which the Commission needs to resolve, namely the legality of the no-discrimination-rule (NDR) under Art. 85. Pursuant to the NDR, banks prohibit their merchant clients who accept a particular means of payment, from imposing a surcharge on (or granting a rebate to) their customers who use that means of payment. Sofar the Commission has not yet taken a formal position regarding the NDR (infra nos. 51-65).
Payment systems also raise a number of non-price competition issues which will be very briefly addressed in this article (infra nos. 66-71). Conditions for access to a payment system or any other mechanism designed to handle payments, especially when this system or mechanism constitutes an essential facility, is just one such issue. The Commission's notice on cross border credit transfers already contains some black letter law on this but the Commission hopes to clarify its thoughts here as well in the context of individual cases.
4. In the field of insurance, a traditional distinction is made between life and non-life insurance products. One finds this summa divisio in the three generations of the EU Council directives concerning the harmonization of national insurance legislations. Non-life insurance can be subdivided further into a number of branches such as accidents, sickness, fire, liabilities or damages. For the transport sector (automobile, marine, aviation, etc.) there are special liability or damage branches. In non-life insurance (and also - but to a lesser extent - in life insurance) it is further useful to distinguish between direct insurance and re-insurance, i.e. in simple terms insurance of insurance allowing insurers to spread their risks. The number of Art. 85 decisions in the insurance sector (seven) equals that of the decisions in the banking sector but these decisions cover a slightly wider range of activities and deal with a greater variety of antitrust issues.
5. In its Art. 85 decisions the Commission has sofar addressed three issues: the fixing of common (either net or gross) premiums, the fixing of standard policy conditions and the setting up of co-insurance and co-reinsurance groups (or at least of certain rules concerning their functioning). These three issues constitute the core of a block exemption regulation which the Commission adopted in 1992 (infra nos. 73-128) The co-insurance and co-reinsurance groups (or pools) raise by far the most complex questions (infra nos. 93-128). Since they often cover a vast range of risks, they complicate an exercise which is crucial for their assessment, namely the definition of one or more relevant product and geographic markets. As the block exemption does not provide guidance with regard to market definition, it is especially with regard to pools that the Commission is expected to shed more light on its policy.
In its block exemption regulation, the Commission also covers a fourth type of arrangement: that by which theft insurers set standard technical specifications for security devices which the insurable goods need to be equipped with and prescribe standard procedural rules for the approval of these devices. In spite of the degree of detail already provided by the regulation's provisions, the Commission will need to clarify in one or two cases under which conditions such arrangements are exemptible (infra nos. 129-132).
6. Finally, a few words need to be said about two other types of arrangements for which the Commission has been empowered by the Council to adopt a block exemption regulation but declined to use its powers: those about settlement of claims and those aiming at the drawing up of registers of aggravated risks and the exchange of information on such risks (infra nos. 133-140).
CHAPTER 1: ANTITRUST POLICY IN THE BANKING SECTOR
7. As said, all Art. 85 decisions but one deal essentially with operating rules of certain payment systems. These rules mainly raise price-competition issues, some of which need further clarification (infra section 1). Payment systems (and - by extension other systems used for the handling of payments or rules issued by national banking organizations) might also raise some non-price competition issues which will be briefly discussed (infra section 2).
SECTION 1: PRICE-COMPETITION ISSUES
SUB-SECTION 1: MULTILATERAL CLIENT FEES
8. If there is any gospel with regard to price-competition issues raised by payment systems, it is that banks participating in such systems infringe Art. 85(1) when they agree on a common client fee. A complainant may, however, find it difficult to provide convincing evidence of such price fixing. The Court's preliminary ruling in Züchner illustrates this well.
The facts were as follows. Mr. Züchner held an account at the Bayerische Vereinsbank. He drew a cheque on his bank for an amount of 10.000 DM to be transferred to a payee living in Italy. His bank charged him a fee of 0,15% (a fee which it charged for all cross-border credit transfers above 4000 DM whatever the country in which the payee resided). In contrast only a nominal fee was charged for amounts of less than 4000 DM or for national transactions. Other German banks also appeared to charge a O,15% fee (although some adopted a different threshold or applied different conditions for smaller amounts). Mr. Züchner took his bank to the Amtsgericht Rosenheim for participation in a concerted practice among German banks to charge a uniform client fee for the handling of cross-border credit transfers in violation of art.85. This national court suspended the case and requested a preliminary ruling from the Court of Justice on whether the uniform service charge of 0,15 DM amounted indeed to a concerted practice contrary to Art. 85.
9. The Vereinbank argued to start with that Art. 85 did not apply because the handling of cross-border credit transfers constituted a public service (a "service of general economic interest") within the meaning of Art. 90.2 EU Treaty and this service would be obstructed if the treaty's competition provisions were to be applied to it. It also contended that considerations of economic policy, in particular those related to balance of payments (at that time covered by Art. 104 et seq. of the Treaty), militated in any event against the application of the competition provisions. The Court dismissed summarily both arguments and thus established for the first time that the antitrust rules apply in full to the banking sector.
10. The Vereinbank then went on to address Züchner's allegation regarding the existence of a concerted practice among German banks to charge identical (debtor) clients fees for the transfers. The Vereinbank did not deny the existence of parallel conduct on behalf of the banks but explained that the identical client charges merely resulted from the costs banks incurred when handling cross-border credit transfers. The Court confined itself to observing that there would be a concerted practice in violation of Art. 85 "if it is established by the national court that such parallel conduct exhibits the features of coordination and cooperation characteristic of such a practice..." and that this would be the case "if a concerted practice enabled the banks participating in it to congeal conditions in their present state thus depriving their customers of any genuine opportunity to take advantage of services on more favourable terms which would be offered to them under normal conditions of competition". These statements are rather woolly and fail to address the Vereinsbank's cost-justification argument upfront.
To be meaningful, this argument must have implied that all German banks incurred identical costs when handling cross-border transfers. Since there is no objective reason why these costs should indeed be identical, the argument must have further implied a) that all German banks had agreed to pay foreign (creditor) banks a uniform interchange fee as compensation for any costs borne by the latter and b) that they then quite naturally, i.e. without any need for concertation, passed on this fee to their clients. The gist of the argument must therefore have been that it was the existence of a uniform interchange fee which produced a "knock-on effect" on the (debtor) client fees and caused them to be identical. If this is correct, the real competition issue in Züchner was not about the legality of a uniform client fee but about the legality of a multilateral interchange fee (MIF). There is, however, no indication that the Court had an MIF in mind when it referred to "a concerted practice (enabling) the banks participating in it to congeal conditions in their present state" even though that is precisely what an MIF is likely to do. As we have already pointed out in our introduction, the legality of MIFs is an issue which remains controversial today and will be dealt with at length in the next subsection.
11. A few years after Züchner, the Commission received notifications of agreements which - this time without contestation - did provide explicitly for uniform client fees. In Association des Banques Belges (hereafter "ABB") as well as in Associazione Bancaria Italiana (hereafter "ABI"), the banks abandoned the relevant provisions in these agreements after having received a statement of objections from the Commission.
12. In Eurocheque "Helsinki Agreement", the existence of a multilaterally agreed client fee was also undisputed as it was the very subject-matter of the (notified) agreement. This time the Commission had to go all the way to formally prohibiting the price cartel and even imposing fines upon the participants. It is useful to restate the facts briefly.
In 1983 French banks and the Eurocheque Assembly concluded the Helsinki Agreement on the acceptance by French merchants of eurocheques drawn on foreign banks. The Groupement des Cartes Bancaires (CB) which was created in 1984 after the major French banks had agreed on the inter-operability of the three existing card networks (Carte bleue, Crédit agricole, Crédit mutuel) and which replaced the French banks as contracting partner in the agreement, notified it to the Commission in 1990. The agreement remained in force until 1991. By virtue of the Helsinki agreement, French banks agreed to charge merchants who accept eurocheques a fee which would not exceed the fee charged to merchants accepting payments effected by CB card. This agreement derogated from the normal regime set forth in Eurocheque's Package Deal which had initially provided that the acceptance of eurocheques was free of charge for the payee (infra nos. 18-20) and had later restored the banks' freedom of action with regard to the charging of a merchant fee without prescribing one particular charge (infra no. 29). The French banks defended the uniform fee as a device that would help Eurocheque develop its market position in France where cards are so popular.
The Commission prohibited the uniform client fee as a straigthforward price cartel. The Court of First Instance upheld the Commission's decision though it qualified the client fee (rightly) as a maximum, not a fixed fee. Neither the decision, nor the judgement require a lengthy analysis.
13. However, like the Züchner judgement, the Eurocheque - Helsinki Agreement decision contains language which, confusing as it may be, sets in perspective the controversy about the legality of multilateral interchange fees. In the context of Art. 85.1, the Commission (rightly) notes that the Helsinki Agreement is at variance with Eurocheque's initial Package Deal rules which set in place the principle of a zero merchant fee (meaning that the payee of a eurocheque received the amount in full and that all costs were borne by the drawee). It then goes on to "clarify" that it had exempted the MIF in Eurocheque - Package Deal precisely because the agreement had also provided for a zero merchant fee thus preventing the payee's bank from getting compensation twice (once from the drawee's bank through the MIF and once from the payee through a merchant fee). Incidentally, this obiter dictum echoes language from a press release which the Commission issued years earlier in the course of its review of the MIF in the amended version of the Package Deal which no longer contained the zero merchant fee principle, i.e. restored the payee banks' freedom to charge a merchant fee if they so wished. We do not comment this obiter dictum any further here.
Another point in the Eurocheque - Helsinki Agreement case that must be touched upon is the definition of the relevant market. The Commission only addresses this point in the context of Art. 85.3's last condition. It holds the view that the Helsinki Agreement substantially restricts competition on the market of foreign eurocheques (i.e. issued abroad) drawn in the trading sector in France. According to the Commission, this is the relevant market since substitutability between cheques and other payment means like cash, cards or other cheques such as travellers' cheques is limited. The Court upholds this market definition on grounds which are its own: "by reason of its volume, the market for foreign eurocheques drawn in the trading sector in France (...) constitutes a specific, sufficiently homogeneous market which is distinct from that of other international payment means"(italics provided).
14. Before closing this sub-section on multilateral client fees, one question needs to be addressed briefly. If banks infringe Art. 85 when they set client fees in common for a particular service, one queries whether they are allowed to achieve the same result by charging a joint venture with the supply of the same service at a (quite naturally because single) uniform fee. For example, it is pretty clear that banks acquiring merchants in the context of a particular payment system (e.g. a credit card system) would violate Art. 85 if they were to agree on a uniform merchant fee. Can they get round the probition set out in Art. 85.1 by charging a sort of joint sales venture with the handling of all their acquiring business on terms which are bound to be identical? This is still an open question but one that the Commission will have to look into. Besides, this question can also arise with regard to financial services other than those supplied in the framework of payment systems.
SUB-SECTION 2: MULTILATERAL INTERCHANGE FEES (MIF)
15. The MIF-issue remains controversial today in spite of the fact that the Commission has addressed it straightforwardly in four formal Art. 85 decisions and has cleared the MIFs in all of them. In Uniform Eurocheques - Package Deal (hereafter Eurocheque - Package Deal I) concerning the package of operating rules governing the Eurocheque system, the Commission finds the MIF to be contrary to Art. 85(1) but exemptible pursuant to Art. 85(3). Subsequently, in ABB, the MIFs contained in the notified payment systems are all exempted. Then, in ABI (regarding a variety of payment systems notified by the Italian banking association), the Commission clears the MIFs in some payment systems under Art. 85(1) because they do not produce an appreciable effect upon trade between Member States (but indicating obiter that they do restrict competition) and exempts the MIFs of other systems under Art. 85(3). Finally in Nederlandse Bankiersvereniging (hereafter "Dutch Banks I") the MIF of one notified payment system (basically one for making contributions to charity organizations) is cleared under Art. 85(1) for lack of appreciable effect upon interstate trade. As in ABI, this decision contains an obiter dictum that the MIF restricts competition within the meaning of Art. 85.1. In addition, the Commission suggests in the factual part of its decision that MIFs will only exceptionally qualify for an exemption under Art. 85.3 (infra no. 28). The Dutch banks participating in the agreement sought annulment of the Commission's decision because they felt harmed by these observations but the Court of First Instance decided that they had no standing.
16. The banking world generally felt somewhat uncomfortable about these decisions because in none of them the Commission had clearly articulated why MIFs restrict competition within the meaning of Art. 85.1 and, assuming they do, why they should not always be granted an exemption pursuant to Art. 85.3.
The bankers' misgivings turned into dismay when the Commission subsequently issued statements of objections concerning MIFs in two payment systems cases which were perceived not to be materially different from those formally cleared before. The first case actually concerned the review of the previously exempted but now amended Eurocheque - Package Deal (hereafter "Eurocheque - Package Deal II"). The second case was about the Dutch acceptgiro system which operated in exactly the same way as the system which was at stake in Dutch Banks I but covered a much wider variety of payments (hereafter Dutch Banks II).
17. We need to restate first the Commission's rationale in its formal decisions and its statements of objections as well as point at the perceived flaws in it (infra nos. 18-32). This will allow us to identify the issues on which the Commission is expected to create legal certainty in the market place once and for all. We can then confront this rationale with the Commission's current thinking (infra nos. 33-50). As said above, the Commission's 1995 notice on cross-border credit transfers contains a first attempt to clarify matters. Building on experience gained in the preparation of this notice, the Commission services have now reached the position that all MIF merit an exemption under Art. 85.3 if they meet certain conditions. These conditions are more or less stringent according to the market position occupied by the payment system at hand.
A. The Commission's position so far
a) Eurocheque - Package Deal I (1984)
18. In this case the Commission refers under Art. 85.1 simply to concertation whose "object (is) the fixing of the price of a service" and whose "effect (is) the prevention of competition between the banks in any country (...) in the encashment of uniform eurocheques drawn on banks in other countries". It does not explain in which relevant market that restriction of competition occurs. Since the MIF is described as a (uniform) "price of a service" which is situated at interbank level, one tends to believe that the Commission situates the restriction of competition exclusively on some sort of interbank market.
19. Lack of clarity increases as the Commission acknowledges in the context of the third condition of Art. 85.3 that "the common and uniform determination of the remuneration for this service (...) is inherent in and ancillary to the cooperation between the banks and their national clearing centres and between clearing centres, which enables the acceptance and international clearing of cheques drawn abroad". This time the Commission does explain: "variations in commissions from one bank to another would imply bilateral negotiations between 15.000 banks which are party to the scheme (....)" and "any centralized clearing would thus be made impossible and the cost of processing eurocheques would substantially increase". This makes sense. But surely, if the MIF is an ancillary restraint to an otherwise lawful cooperation, one would have expected the Commission to say that Art. 85.1 does not apply at all.
The Commission's attitude is very comparable to the attitude it has so often adopted with regard to joint ventures. While qualifying them as forms of cooperation infringing Art. 85.1 because parties could have entered the market alone, the Commission has always admitted that they met the indispensability test under Art. 85.3. This admission seems to imply recognition of the fact that it was not economically realistic to expect the parties to enter the market alone. The Commission usually rebuts this criticism by arguing that this is a misunderstanding: parties could have entered the market alone (hence applicability of Art. 85.1) but it would have entailed higher costs and/or more time (hence applicability of Art. 85.3). There is much to be said for this (unless the extra costs and/or time are so substantial that sole entry is purely theoretical). It does, of course, imply that the term of art "indispensable" appearing in Art. 85.3 no longer means "indispensable" but rather "useful", or perhaps "particularly useful".
20. The Commission finally sheds some light on the relevant market issue in the context of the fourth condition of Art. 85.3. The concept of an interbank market (if at all present in the Commission's mind under Art. 85.1) is left for what it is. The Commission now says that a) within the Eurocheque payment system drawee banks (who pay the MIF to the payee banks) entirely keep their freedom of action regarding "the extent to which commissions are passed on to the customers" and b) in any event, these banks have little market power since Eurocheque competes with a variety of other international means of payment such as cash, travellers' cheques, credit cards, debit cards used in ATM's (Automatic Teller Machines) and postal payment orders. The first observation points at the absence of an agreed restriction of intrasystem competition at least in the bank/client relationship, which is precisely the relationship where the MIF can be expected to have a knock-on effect (in casu drawee bank and debtor/client). The second observation is based on a broad intersystem market definition (actually much broader than that used in the Helsinki Agreement case). Here too the reader is left somewhat puzzled. How does the MIF restrict competition appreciably within the meaning of Art. 85.1 if drawee banks are - at the intrasystem level - free to determine their pricing policy towards their clients and if - at the intersystem level - the Eurocheque payment system faces competition from the other means of payment.
b) ABB (1986)
21. Here the Commission largely copies its Eurocheque - Package Deal reasoning. This time three payment systems are at stake. The first system regarding the handling of securities transactions contains a fixed MIF (for technical reasons called "rebate"), the second system concerning the processing of cross-border payments provides for a maximum MIF (also called "rebate") and the third one relating to the collection of cheques and commercial bills originating abroad merely lays down the principle that the collecting bank is entitled to charge an interchange fee at the level it sees fit. Each time, the Commission perceives a violation of Art. 85.1 because the agreements restrict the banks' freedom of action to negotiate fees bilaterally.
22. And yet, in the context of Art. 85.3 (third condition) the Commission repeats that the multilateral arrangements on the interchange fee are indispensable for the proper functioning of the systems. This time, the Commission gives more than one reason why this is so. With regard to the first payment system, it merely reiterates the transaction cost argument it already advanced in Eurocheque - Package Deal: the costs of processing securities transactions would be considerably higher if the 84 participating banks had to start negotiating interchange fees bilaterally. As to the second system, it introduces a new consideration: the maximum MIF is a device protecting the interests of the smallest banks who have few correspondents and are likely to act mainly as payee banks (in ABB the ones having to pay the fee). In the third case, the Commission also brings in a new element: some banks would step out of the system altogether if they could not charge an interchange fee.
23. Examining the agreements in light of the fourth condition of Art. 85.3, the Commission - probably in the absence of evidence of intersystem competition - merely highlights the absence of any appreciable restriction of intrasystem competition. In the first two cases, it refers to the lack of any knock-on effect of the MIF in the bank/client relationship and in the third case, it does not even look beyond the interbank relationship indicating that there is "scope for competition (...) in this area between banks which can charge different commissions for the same service".
c) ABI (1986)
24. In ABI one essentially reads more of the same with regard to the interchange fee arrangements featuring in two payment systems which the Commission considers to affect trade between Member States in an appreciable manner but here too, as in ABB, the Commission throws in a few novel thoughts. These two systems - one for the collection of Italian bills and documents, the other for the issuing of a new type of travellers' cheques - contained a fixed MIF. Only the novel thoughts are reproduced here.
In the context of Art. 85.1, the Commission looks for the first time beyond the interbank "market" by stating that "the fixing of (interbank) commissions (...) influences the possibility for parties to determine the conditions they wish to apply to their customers in the light of their internal profitability situation - notably the cost of the operations - their specialization and their business policy.
25. Here, as in the two previous cases, the Commission's observations in the context of Art. 85.3 (fourth condition) do, however, call into question whether the restriction is actually appreciable within the meaning of Art. 85.1. The Commission admits there is no evidence that the MIF restricts price competition among payee banks in their relationships with their clients. It further adds - with respect to the collection service system - that clients choose a bank on the basis of quality as well as price (so that even a knock-on effect produced by the MIF certainly does not eliminate competition among them) and - with respect to the supply of travellers' cheques - that it is exposed to intersystem competition as customers can choose among cash, postal payment orders, credit cards, debit cards usable in ATM and Eurocheques.
26. In the context of Art. 85.3's third condition, the Commission repeats that the negotiation of bilateral interchange fees between a substantial number of banks (in casu 1.100 as compared with the 84 in ABB and the 15.000 in Eurocheque Package Deal I) would raise considerably the cost of processing the transactions. It adds, however, that banks involved in the processing "render a service to users who are neither their customers nor those of other banks in the same place". The Commission thus acknowledges that these banks do not freely choose their contracting bank partner and admits (at least implicitly) that they can therefore not be considered to be suppliers of services in an interbank market.
d) Dutch Banks I (1989)
27. In this case the Commission deals inter alia with a payment system concerning transfers relating to fund-raising acceptances which are of a predominantly voluntary nature and have a mainly charitable objective. This system provides for a fixed MIF to be paid by the payee (creditor) bank to the drawee (debtor) bank. The Commission takes the view that this system falls outside the scope of Art. 85.1 because it does not affect interstate trade appreciably. It does, however, state once more obiter that the system restricts competition within the meaning of Art. 85.1 because it prevents banks from agreeing bilaterally on interchange fees. Moreover, as in ABI, the Commission describes the effect of an MIF on the bank/client relationships. Since the MIF prevents payee banks from negotiating a lower interchange fee with the drawee banks and passing on the cost advantage to their customers, "competition between the relevant banks for customers is (...) indirectly restricted for the services related to the relevant transfers".
28. This observation "bites" even more when read in combination with another observation featuring in the factual part of the decision according to which parties have not shown that the MIF is necessary for the successful implementation of the system and that "the position of the Commission is that only in exceptional cases, where such a necessity is established, may agreements on interbank commissions be capable of obtaining an exemption under Art. 85.3". As already said, these observations led the national associations of Dutch banks to seek annulment of the negative clearance addressed to them. The Court rejected their application as inadmissible.
e) Eurocheque - Package Deal II (pending)
29. In its July 1990 statement of objections the Commission advanced two reasons for not renewing the exemption granted to the Eurocheque - Package Deal in 1984. It appeared that the drawee banks systematically a) paid an interchange fee equal to the maximum MIF and b) passed on that cost to their clients. The latter practice meant, according to the Commission, that the agreement on an uniform interbank fee had become de facto an agreement on client fees. In its October 1992 supplementary statement of objections the Commission added a third reason for qualifying henceforth the MIF arrangement at hand unexemptable. The Eurocheque - Package Deal I exemption was based on the principle that the payee banks would not charge the merchants accepting the cheques any fee and pay them the full amount appearing on the cheque. In its 1984 decision the Commission had identified this zero client fee arrangement as one of the features of the Package Deal that allowed users to obtain a fair share of the benefits within the meaning of Art. 85.3 This did not attract particular attention until the Commission announced in a 1988 press release that the zero merchant fee had been no less than a real condition on which the 1984 exemption of the MIF had been based. This point was not embodied in the July 1990 statement of objections but it did re-emerge in the October 1992 supplementary statement of objections. This linkage between the MIF and the zero merchant fee is of course paradoxical since the latter is - no more, no less - a multilateral client fee arrangement which belongs to the category of price cartels which are in principle unexemptable (supra nos. 8-14). The Commission observed, however, that it did not see why payee banks should be remunerated twice (once by the drawee bank through the MIF and once by their client through a merchant fee).
30. As will be explained below, the Commission services have now reconsidered the matter and plan to renew the exemption. As to the three sticking points featuring in the statement of objections, they take the following view. Firstly, there is not much point in replacing a fixed MIF by a maximum MIF but whether the agreed MIF is fixed, maximum or minimum, it should be a default fee from which banks should be free to deviate if they so wish. Secondly, the systematic knock-on effect of the MIF in the relationship between drawee bank and cheque holder is relevant in the context of Art. 85.1 but is no obstacle for an exemption under Art. 85.3. Thirdly, the absence of a multilateral agreement concerning a zero client fee (or any other client fee) is, far from being an obstacle to an exemption of the MIF, a sine qua non for such an exemption (infra no. 49).
f) Dutch Banks II (pending)
31. The payment system at stake in this case functions in a way similar to the system that was granted a negative clearance by the Commission in Dutch Banks I (supra nos. 27-28). It is a system that is widely used by Dutch citizen for regular payments such as energy and telephone bills, insurance premiums and subscriptions to magazines. For every payment a uniform maximum MIF of O.30 florins is paid by the creditor bank to the debtor bank. The MIF is set at half of the costs incurred by the most efficient debtor bank (who handles the payment before it is centrally cleared). The other half of these costs is borne by the debtor bank. The introduction of the interchange fee resulted in an increase in charges to creditors as all creditor banks decided to pass on the MIF to their customers. This triggered a number of formal complaints against the MIF by some creditors.
In its June 1993 statement of objections the Commission doubted strongly whether the MIF is indispensable for the proper functioning of the system. It referred to factual evidence showing that the system had functioned before - though in a less integrated form - without an MIF and that the MIF had been introduced at the request of one of the three major banks. The Commission perceived no technical necessity for such a fee. It further argued that the transaction costs resulting from a set of bilateral interchange fees would not be considerably higher since the number of participating banks (in 1993: 39) were rather limited. Here one cannot help asking oneself which critical number would make these costs unacceptable. In ABB the Commission stated that 84 banks should not be forced into bilateral negotiations on interchange fees. The Commission also relied heavily on the systematic knock-on effect of the MIF at the credit side, as it did in Eurocheque - Package Deal II (where the knock-on effect was situated at the debit side). In the Commission's view it was irrelevant that the MIF was set by reference to the costs of the most efficient debit bank and that the debit bank in each case bore half of these costs (the MIF received by it representing the other half).
32. In this case, like in Eurocheque - Package Deal II, the Commission services have reconsidered their position and have come to the conclusion that the MIF - at least if given the character of a default fee - merits an exemption if certain conditions are fullfilled.
B. State of play
33. In a nutshell, the Commission services' current thinking with regard to compatibility of multilateral agreements on interchange fees with Art. 85 is that they are all liable to restrict competition within the meaning of Art. 85.1 but also that they merit an exemption pursuant to Art. 85.3 if a number of conditions are met. The Commission's 1995 notice on the application of the EC competition rules to cross-border credit transfers contains the first seeds of the new thinking. These seeds are particularly noticeable in the passages on the applicability of Art. 85.1 to MIF. In contrast, the passages regarding the exemptibility of MIF under Art. 85.3 remain, by and large, tributary to the Commission's "old" thinking as set forth above. For each issue, we will first restate the relevant passage of the notice, then summarize the critique and finally present the Commission services' thinking today. It is hoped that this will - at last - create the legal certainty in the market place regarding the compatibility of MIF under Art. 85.
a) applicability of Art. 85.1 to MIF: the notice on cross-border credit transfers and its follow-up
34. Before going into some detail, we need to recall that this notice fits into a broader regulatory framework. A draft version of the notice indeed featured along with a draft directive on cross-border credit transfers as annex to a communication which the Commission transmitted to the Council on 25 November 1994 concerning EU Funds Transfers: Transparency, Performance and Stability. The gist of this communication was to enhance the banks' performance in handling cross-border credit transfers.
The draft directive first of all aims at creating more transparency for customers sending cross-border credit transfers to a beneficiary by requiring their banks to inform them how long these transfers take and how much they cost. Although transparency should provide already by itself a tonic to the banks' (so far unimpressive) performance with regard to these transfers, the draft directive also seeks to improve that performance in a direct manner. It requires banks to operate the transfers within maximum five working days unless they arrange things differently with the sender (default time limit). Furthermore, unless authorized by the sender, banks are not allowed to deduct charges from the amount transferred to the beneficiary as compensation for costs generated by the cross-border nature of the transfer. In other words, the OUR transfer is considered to be the default (and thus the preferred) option. Meanwhile Council has adopted a common position on the draft directive and Parliament has rendered its opinion in second reading. They agree on all the points just mentioned.
From the very beginning, the idea behind a notice regarding the application of Art. 85 to cross-border credit transfers was to provide guidance to banks who would eventually cooperate for the very purpose of handling such transfers more efficiently in accordance with the objectives set forth in the draft directive. The compatibility of MIF with Art. 85 is one of the issues addressed in the notice.
35. The notice explains - albeit in a nutshell - why an MIF may raise antitrust concern under Art. 85.1. The Commission makes three points. The first one refers to the notorious concept of competition in an interbank market. The second one concerns the effects which an MIF can produce on the competition among banks offering the payment system to their customers (hereafter intrasystem competition). The third one is about competition among payment systems (hereafter intersystem competition). For each of these three points we will give a short explanation, give an overall picture of the reactions from the banking world and state the Commission services' current view.
36. Let us start with the concept of an interbank market. The Commission states that an MIF "restricts the freedom of action of banks individually to decide their own pricing policies". Like similar statements found in its Art. 85 decisions of the eigthies, this statement is not beefed up by further explanation as to why this implies the existence of a restriction of competition within the meaning of Art. 85.1. Not surprisingly this statement has met with fierce criticism. The gist of the critique goes as follows.
37. According to the critics, the notions of "freedom of action" and "individual pricing policies" are hollow concepts because market forces do not play at the interbank level. They contend that, if a particular payment system contains an MIF, it is simply because it would not function properly without an MIF. Consequently an MIF is inherent to the payment system. Or, to put it in ortodox antitrust jargon: it is an ancillary restraint to an otherwise legitimate cooperative arrangement. To deny the presence of an interbank market, the critics advance several converging or even overlapping arguments Firstly, the relationship between the banks is merely one between cooperating partners who have adhered to a particular payment system. They cooperate for the common benefit of their respective clients (sender X and beneficiary Y) who call on them to execute one leg of their transaction, namely the payment (in the context of a sale/purchase of a good or service). Secondly, these banks have not chosen each other. It is the sender X and the beneficiary Y who have each chosen their bank. When they happen to conclude a transaction for which a payment is due, their banks find themselves cooperating with each other. These banks are obligatory partners to each other. Thirdly, as X and Y must have the absolute guarantee that the payment will be honoured, the payment system which X has chosen and Y accepted must be fully reliable. This would not be the case if banks could do what is so typical for a market activity, namely freely negotiate a price (an interchange fee) for the services without which the payment could not be made. Such a negotiation indeed creates the risk that the bank who owes the interchange fee is confronted with an excessively high fee which it refuses to pay.
38. The Commission's services take the view that the painting of banks as obligatory partners and potential hostages of each other requires some qualification.
Before banks adhere to a payment system, they still do have a negotiating position. There seem to be only two aspects of their market behaviour on which they need to limit their freedom of action in order to make the system reliable. Firstly, they must commit themselves to handling at all times payments through the system which they have adhered to. In other words, they should accept each other as partners who will be bound to cooperate for the common benefit of their respective clients when these happen to conclude a transaction for which payment is required. Clearly the system would otherwise not be reliable. Secondly, banks need to decide whether they will charge each other interchange fees and, if so, what sort of interchange fees. A multilateral IF is one option (infra no. 48).
The possibility that the interchange fee arrangement agreed ex ante (i.e. before operation of the system) be reviewed by the participants after they have adhered to the system should not be ruled out. It is conceivable that one participant bank informs the others of its intention to impose an interchange fee different from the one that they all agreed at the moment the system was launched because of technical changes in the handling of the payments (for instance, electronic processing replacing a paper-based handling). Of course, in order not to put the system in jeopardy, that participant would have to give sufficient notice.
As suggested, the interchange fee arrangements can take a variety of forms. The feasibility of each form needs to be assessed case-by-case. First, banks could agree that they will be entitled to charge an interbank fee unilaterally to the others as long as they announce the amount of the fee in advance. Second, they could agree to enter into bilateral negotiations on interchange fees before operating the system. Bilateral negotiations between clubs of banks (each led by a chef de file) constitute a variation on this theme. In an international setting, these clubs could be set up on a country-by-country basis. Thirdly, they could agree on some multilateral arrangement for interchange fees. Several variations are conceivable. Banks could arrange that each will bear its own costs. They in fact then agree on a zero interchange fee. They could also agree on a formula for the calculation of an interchange fee. Finally they may want to determine the exact level of the fee. In this case, they may further qualify the MIF as a fixed one, a minimum or maximum one or a default one.
39. The Commission's second point in the notice about the applicability of Art. 85.1 to MIF concerns intra system competition. It states that the MIF "is likely to have the effect of distorting the behaviour of banks vis-à-vis their customers". This is not a novel point either. In several Art. 85 decisions the Commission refers to the possibility that banks paying the MIF pass on this cost systematically to their customers. The underlying idea is that such parallel pricing behaviour, if it occurs, restricts intrasystem competition. In such cases the MIF represents a uniform floor in the all banks' client commissions and thus compresses the margin within which they indulge in price-competition. In Eurocheque - Package Deal II and Dutch Banks II the Commission found evidence of such parallel conduct and qualified this as a ground for objecting formally to the MIF.
40. The main critique here is that there is no antitrust problem as long as the banks participating in the payment system have not explicitly agreed among each other to pass on the MIF to their customers.
41. In its notice the Commission observes that, apart from the restriction of competition at the interbank level, "there will be another restriction of competition under Art. 85.1 when there is an agreement or concerted practice between banks to pass on the effect of the interchange fee in the prices they charge their customers" (italics provided). This observation should not be interpreted as meaning that the MIF falls outside the scope of Art. 85.1 if there is no such agreement or concerted practice. It should indeed be recalled that Art. 85.1 prohibits agreements or concerted practices "which have as their object or effect the prevention, restriction or distortion of competition" (italics provided). The Commission's services take the view that an agreement concerning the payment of MIF produces such an effect when de facto all participating banks pass-on the MIF to their customers by increasing the client commissions with an amount corresponding to the MIF. If it does, the MIF restricts intrasystem competition among banks.
In the (perhaps less likely event) that there is no evidence of such pass-on practices, it seems hard to maintain that the MIF somehow restricts competition in the bank-customer relationship. The absence of such evidence would indicate that the banks have absorbed the MIF into their overhead costs. This would mean that all the banks' clients pay their part of the MIF, including those who have not had recourse to the payment system operating with an MIF. This cross subsidization distorts the natural allocation of costs between banking services but Art. 85 does not prevent banks from causing such distortion as long as they decide independently to do so.
42. With its third point in the notice the Commission seeks to clarify when an MIF entails an appreciable restriction of intrasystem competition within the meaning of Art. 85.1. It measures this by reference to the degree of intersystem competition. The Commission observes: "sufficiently strong intersystem competition could restrain the effects of the interchange fee on the prices charged to customers...provided that the competing systems do not themselves also contain similar multilateral interchange fees". The concept of intersystem competition raises the relevant market issue. In this regard, the Commission formulates three remarks. First, a cross-border credit transfer being a remote (as opposed to face-to-face) payment instrument, one must examine which other instruments can serve as reasonable substitutes for transfers (cash, cheques, cards?). Second, within the category of remote cross-border payments (or transfers, if no other instrument is a good substitute) "there may well be separate narrower markets" depending on the value of the payment, the type of beneficiary or the required speed for the execution of the payment. Third, "it may well be appropriate in individual cases to consider cross-border credit transfers (or particular segments, such as retail cross-border credit transfers) as the relevant market".
43. If anything, the Commission's view that restrictions of intrasystem competition may be harmless in the presence of sufficient intersystem competition, has met with a certain degree of enthusiasm in the banking world. Misgivings remain though about the Commission's intentions regarding the application of this view in individual cases. It has regularly been submitted that the Commission tends to define relevant markets in the field of payment services too narrowly.
44. Clearly it is only in individual cases that the Commission will be able to evacuate any misgivings about the definition of relevant markets and make its case for what it considers to be sound economic thinking in this respect. In Eurocheque Package Deal II, its services have defined the relevant market as encompassing cheques as well as cards.
In the course of 1996, the Commission's services have examined three (notified) systems regarding specifically the handling of cross-border credit transfers. In line with paragraph 17 in fine of the notice (supra no. 42), they have - in each of these three cases - considered that the relevant product market comprises all cross-border credit transfers.
45. The agreements in the first two cases specifically concerned the cross-border leg of the credit transfer (i.e. the leg linking up the originator's bank located in one Member State with the correspondent bank in another Member State where the beneficiary is located). In the first case (IBOS), the eight banks involved had not agreed on an MIF. In the second case (Eurogiro), fourteen postal offices had originally agreed on a minimum MIF of 5 Ecu for urgent transfers but later decided it was better to have a system of bilaterally agreed interchange fees for such transfers. So neither IBOS nor Eurogiro raised an MIF issue. They each did raise a non-price issue which will be developed later: membership (and thus access to the system) was restricted. Defining the relevant market as comprising all systems handling cross-border credit transfers, the Commission's services saw, however, no reason to object to the restrictions (infra no. 68).
The agreement in the third case had been notified by the Danish Bankers Association and differed from the two just mentioned in that it only concerned the domestic leg of the credit transfer linking up the correspondent bank with the beneficiary's bank in the destination country. Furthermore, in contrast with the agreements at stake in IBOS and Eurogiro, the agreement, in which virtually all Danish banks participated, did contain a maximum MIF of roughly 13,5 Ecu (to be paid by the beneficiary's bank to the correspondent bank) for one particular category of cross-border credit transfers, namely those made and settled in a foreign currency. Relying once again on the above mentioned market definition (all cross-border credit transfers), the Commission's services took the view that the restriction of competition resulting from the MIF was not appreciable within the meaning of Art.85.1. The transfers "hit" by the MIF represented less than 1% of the number as well as the value of all cross-border transfers made into Denmark. Morover, it could not be excluded that beneficiaries who would pay the MIF as part of their customer fee would switch to alternative modes of transfer. Since these beneficiaries were essentially companies, they could indeed be considered as customers that had the power to either negotiate the terms on which they receive international payments or eventually switch to a mode of transfer not involving the MIF.
For the sake of completeness, it should be added that since the MIF fell outside the scope of Art.85.1, the Commission's services did not have to examine whether the MIF was actually cost-related. As will be explained (infra no. 46), the Commission has indicated in its notice on cross border credit transfers that an MIF is exemptible only if there is an objective cost justification for it.
b) applicability of Art. 85.3 to MIF: from the notice on cross-border credit transfers to current thinking
46. With respect to the exemptibility of MIF under Art. 85.3, the Commission makes a clear distinction in its notice on cross-border credit transfers between, on the one hand, SHARE or BEN payments and, on the other hand, OUR payments. This distinction appears to be largely inspired by its positions in Eurocheque Package Deal I and II.
On the one hand, the Commission shows a negative bias towards payment systems which provide for the charging of an MIF in situations where the transfer is SHARE or BEN. It states that it cannot see why an MIF is indispensable for the proper functioning of the system in these situations since they allow the beneficiary's bank to charge all costs related to the cross-border nature of the payment to its client. This view appears to be in line with its obiter dictum in Eurocheque - Package Deal II (supra no. 29): the MIF is not exemptible if there is a possibility for the bank receiving it to get compensation twice (once from the sender's bank or its correspondent and once from its client). Taken literally, this means that the Commission would have to reject the exemptibility of just any interchange fee, whether it is a multilaterally agreed one or not.
On the other hand, the Commission is willing to exempt MIF-arrangements related to cross-border credit transfers for OUR transfers. Here it follows a reasoning which is the flipside of the Eurocheque - Package Deal II rationale: when handling OUR transfers the beneficiary's bank cannot recover any of its costs from its client, so it is entitled to an interchange fee even if it is multilaterally agreed. In the notice the Commission is even more severe than in Eurocheque - Package Deal II as it requires banks to justify the level of the MIF charged in OUR transfer situations by reference to incurred costs. Banks must demonstrate a) that the recipient of the MIF (i.e. the beneficiary's bank) carries out one or more of the extra tasks linked to a cross-border credit transfer, b) that it is bound to be the recipient of the MIF (and not the originator's bank, the correspondent bank or an ACH) who carries out these tasks and finally c) that the MIF is set (and revised regularly) at the level of the average additional costs of participating banks acting as beneficiary's banks. The Commission also requires the MIF to be a default fee allowing members of the system to negotiate bilateral fees below the reference level. If banks meet these requirements, they fulfil the indispensibilty test (third condition for an exemption under Art. 85.3).
47. The main critique against the above position falls apart in two segments. First of all, one argues that it is entirely up to the banks participating in the payment system to decide how to allocate the operating costs of the system through an interchange fee and thus that banks should be entirely free to agree on a multilateral interchange fee (whether the payment is SHARE, BEN or OUR). By reserving the exemptibility of MIF to OUR-payment situations, the Commission looses its neutrality to which it must commit itself (at least when acting as antitrust authority) and favours one cost allocation arrangement over the other. Secondly, an MIF is the least costly and the most efficient device for allocating operating costs. In particular bilaterally agreed interchange fees raise higher transaction costs at the moment banks negotiate these fees as well as later when they handle the payments.
48. The Commission's services now basically agree with this critique and are prepared to consider all MIF as necessary for the proper functioning of the payment system concerned. In other words all MIF fulfill the indispensibility test as set forth in the third condition of Art. 85.3. The reasoning goes as follows.
First of all, banks are in principle entitled to allocate the payment system's operating costs to the two sides of the demand (debtor and creditor) in a manner they see fit. An IF contributes to achieving this allocation. In other words, the IF can be considered to be a legitimate demand optimizing device.
Secondly, a multilateral IF is a more efficient cost-allocating device than a set of bilateral interchange fees. In this regard one has to bear in mind that a payment system has two demand sides and that each side has a complex composition (typically millions of people whose transactions usually trigger the intervention of a considerable number of banks). One must further take into account that bilateral interchange fees raise higher (sometimes probably much higher) transaction costs: negotiation of such fees as well as the handling of payments subject to bilateral MIF are more costly.
Thirdly, while the Commission's services have no difficulty identifying multilateral arrangements on interchange fees that are less restrictive than others they find it at this stage impossible to determine whether the least restrictive IF is at least as efficient a cost-shifting device as the other multilateral arrangements. As has been pointed out before, there is a variety of MIF arrangements. Sometimes the MIF corresponds to a uniform amount (either fixed or maximum). In some other cases a limited number of banks agree bilaterally on interchange fees as chef de file for a multitude of other banks who have concluded a contract with them. Banks might also agree on a uniform formula for the calculation of interchange fees which is fed by a number of parameters that vary from bank to bank. Clearly some of these arrangements are more restrictive than others. The Commission's services lack sufficiently reliable economic data to assess the efficiencies achieved by the various MIF arrangements. Under these circumstances, they are prepared to consider all these arrangements as "indispensable" within the meaning of the third condition of Art. 85.3. Obviously they thus stretch the term "indispensable" to a wider notion of "reasonably necessary" or "particularly useful".
49. With regard to the fourth condition of Art. 85.3, the starting point of the reasoning is that a bank who pays the MIF is likely to pass on the cost to its customers. As has been explained above, the MIF is a cost-allocating device. It shifts costs from one component of the demand side to the other (mostly from the debit to the credit component but the other way round in a system like Eurocheque - Package Deal. The cost shifting mechanism comes to genuine fulfilment if its effects extend beyond the interbank relationship to reach the bank/client relationships. The question is to assess when this raises antitrust concern. The short answer surely must be that it depends on the degree of intersystem competition. If intersystem competition is substantial, it is unlikely that the bank will be in a position to charge its customers an excessively high fee (even if including the MIF). In these circumstances, the MIF would satisfy the fourth condition of Art. 85.3.
When intersystem competition takes place on an oligopolistic market, the restrictive effects of an MIF could be contained within acceptable boundaries if the banks preserve not only their individual freedom to determine the level of the client fees but also the freedom of their clients to negotiate the costs generated by their use/acceptance of the system at stake. This would mean that the creditor would remain free to impose a surcharge or grant a rebate to the debtor using a particular payment instrument and thus to price discriminate between various means of payment. The abolition of the no-discrimination-rules raises, however, issues of its own (i.e. partly unrelated to those raised by the MIF). We will address them later (infra nos. 53-65). There are less controversial (though perhaps also less effective) requirements for exempting a system's MIF operating in an oligopolistic market. Firstly, the MIF could be converted into a default one allowing banks to agree bilaterally on different fees. One may observe that it is unlikely that banks will charge lower interchange fees because when handling a payment, they do not operate on a market where output increases as prices decrease. And - so the argument continues - the absence of such a market is due to the fact that demand is entirely steered by the banks' customers. The argument needs certainly qualification. The MIF being a cost-shifting device, it is bound to have an impact beyond the interbank relationship on the bank/customer relationships. Secondly, the existence of an MIF (and its level) should be known to the customers. In other words, banks should not only preserve their freedom to determine the level of the client fees. They should also indicate to their customers the amount of the MIF they pay or receive. This transparency requirement might strengthen the customers' negotiating position vis-à-vis banks. Thirdly, banks participating in one system should be free to join other competing systems.
The "worst scenario" is that of an MIF contained in a system which does not face any substantial competition from other systems. Here a few additional requirements would need to be fulfilled to bring the MIF arrangements in line with the fourth condition of Art. 85.3. These deal directly with the relationship between banks and seek to keep the level of the MIF at a reasonable level. First of all, it seems entirely justified to require that banks participating in the system regularly renegotiate the agreed MIF. In some cases for example, the MIF is claimed to correspond to the costs of the bank who handles the payment at the lowest cost. Regular revisions audited by an independent body would make sure that the MIF continues to bear a close relationship with those costs. Secondly, it would appear appropriate to require from banks not to use the MIF for payment operations which, though channelled through the system they have adhered to, are of an intrabank nature because the creditor and debtor involved are its clients. In the absence of an MIF for intrabank operations, banks would have the opportunity to offer their clients an attractive fee for intrabank operations. It would of course be up to them to decide whether they want to avail themselves of this opportunity.
50. This new approach regarding the exemptibility of MIF thus comprises - even in cases of oligopolistic or monopolistic intersystem competition - no more than a few process-oriented requirements which aim at containing the level of the MIF within reasonable boundaries. These requirements differ from the cost-justification requirement featuring in the notice on cross-border credit transfers (supra n046). The latter converts the Commission's competition services to some extent into price regulators. The requirements set forth in the notice impose upon the banks the burden to demonstrate that the MIF - being a price for an interbank service lent by the beneficiary's bank - covers no more than the cost of that service (or at least no more than the average cost incurred by all beneficiaries' banks). This more "ambitious" approach can be explained by the intimate link between the notice and the draft directive on cross-border credit transfers. The notice is designed to contribute to the achievement of the main objective pursued by the latter, namely to enhance the banks' performance in handling cross-border credit transfers.
SUB-SECTION 3: NO-DISCRIMINATION-RULE
51. The third price competition issue is about the compatibility of the so-called no-discrimination rule (NDR) with Art. 85. One should distinguish between payment operations and cash withdrawals. In the first case, the NDR covers the relationship between debtor and creditor. It prohibits the latter from imposing a surcharge on or offering a rebate to the debtor using a particular means of payment. In the second case, banks providing the withdrawal facilities are not allowed to charge directly the debtor. As with MIF, it is useful to restate the Commission's position in the past with regard to the NDR. This will take up little space as the Commission's record is meager (infra no. 52). We will then move on to today's state of play (infra nos. 53-65). It will be seen that the observations concerning the applicability of Art. 85.1 to the NDR are tributary to concepts which are central to those developed concerning the applicability of Art. 85.1 to MIF.
A) The Commission's position so far
52. We can be very short here. The DGIV services have once objected to an NDR that was part of an agreement between four oil companies who offered payment cards to international transport companies for use in designated gas stations. The agreement aimed primarily at making the cards of each of these oil companies (Aral, BP Oil, Italiana Petroli and Mobil Petroleum) interoperable. This would allow a transport company using say an Aral card to tank in a gas station which in the past only accepted one of the other three cards. The notified version of the agreement prohibited gas stations from imposing any surcharges on the transport companies using any of the four cards. Upon request of the DGIV services, the parties deleted this NDR from their agreement and obtained a comfort letter. That same year the then Director General of DGIV wrote to his colleague from the Dutch competition authority (Ministry of Economic Affairs) that the NDR did not seem exemptible under Art. 85.3. Shortly later, the Dutch authority prohibited the NDR. The UK competition authorities had already taken a similar decision. More recently, the Swedish competition authority refused to grant both VISA and Europay a negative clearance for the NDR contained in their credit card systems. For the sake of completeness, it should, however, be added that the French competition authority authorized the NDR.
B) State of play
53. It does not take much effort to see why the NDR restricts competition within the meaning of Art. 85.1. As announced above, one is bound to make a delicate balancing exercise when it comes to examining the exemptibility of the NDR under Art. 85.3. Today the Commission's services feel that this balancing exercise pleads against the exemptibility of the NDR.
a) applicability of Art. 85.1 to NDR
54. In the cash withdrawal hypothesis, the NDR simply amounts to a multilateral price agreement on client fees albeit one providing for a zero fee. It is interesting to note that the Canadian Competition Tribunal issued a consent order in 1996 specifying inter alia that Interac will no longer be able to prohibit its members from charging consumers directly for services provided at an automated banking machine. In the case of payment operations, NDR restricts competition in at least two ways.
55. At the intrasystem level, the NDR always reduces the creditors' power to negotiate the merchant fee they owe their banks. This is the case whether or not the merchant fee contains an MIF which the creditor's bank has paid to the debtor's bank. But let us assume - for the sake of illustrating our point - that the payment system does contain such an MIF. The effect upon the bargaining power of creditors becomes apparent if the MIF is raised. The merchant fees can be expected to rise as well. Once they have accepted the means of payment at stake, merchants have no choice but to accept the fee increase since the NDR prevents them from passing on the extra cost to their customers. They could of course decide not to accept the means of payment any longer. However, they may be discouraged from taking this drastic decision if the debtor banks pass on the increased revenue flowing from the increased MIF to their clients and thereby stimulate their demand for the means of payment. In fact, the NDR which is situated at the client/client level produces - like the MIF which is situated at the (other horizontal) bank/bank level - a knock-on effect in the (vertical) relationship bank/creditor.
56. The above observations allow us to identify a second restriction of competition which this time is situated at the intersystem level. In a nutshell, the NDR distorts the demand for payment systems. As the banking world itself has repeatedly highlighted, the demand for these systems is a composite of two sides: debtors willing to pay with payment means X, Y or Z and creditors ready to accept these means. Healthy intersystem competition thus implies that demand for payment means X, Y or Z reflects the aggregated debtors' and creditors' perceptions of costs and benefits. The NDR obstructs the aggregation of their perceptions or, at least, modifies the aggregation process radically. Indeed, on the one hand, it prevents debtors from being aware of all costs generated by their using payment means X, Y or Z and thus artificially stimulates demand on their side. On the other hand, it leaves the creditors with no other option than the radical one, namely not to accept any longer payment means X, Y or Z, although they have an interest in selling as many goods or services as possible and thus in accepting as many payment means as possible. To go short, the NDR may lead to over-consumption of payment means X and under-consumption of means Y or Z. This would result in a bad allocation of resources. In the absence of an NDR, the aggregation process would be restored as creditors would be able to let their preference play at full by either surcharging payment means A or offering rebates for the use of payment means Y or Z.
57. One should observe that the NDR does not restrict competition in an appreciable manner if the system containing it already faces intense intersystem competition. As in the case of MIF, the cumulative effect of NDR contained in a considerable number of payment systems would obviously need to be examined (supra no. 49).
b) applicability of Art. 85.3 to NDR
58. There are two powerful arguments militating in favour of an exemption for all NDR but, upon closer analysis, they do not seem convincing. The Director General of DGIV has informed VISA and Europay about his services' sceptical position regarding these arguments in November 1996.
59. The first argument is that it is all very well to describe the NDR as a device that distorts demand for payment systems but that one ought not forget that this description rests upon the premise that in the absence of an NDR creditors would never pass on more than the actual costs generated by these payment systems. This is the abusive surcharge argument: creditors might extract from their clients commissions which exceed those costs. Clearly, those advancing this argument basically agree that the NDR misallocate resources but contend that the absence of an NDR will produce overkill: even assuming that the creditor were to be a hostage of the payment system in the presence of an NDR, the payment system might become a hostage of the creditor in the absence of an NDR.
60. Obviously the argument - certainly striking a chord with anyone who has found himself in a captive customer situation - gains strength when it is supported by facts showing that the abusive surcharge scenario would become widespread if the NDR were to be abolished. No such evidence has been brought to the Commission's attention sofar. Therefore the abusive surcharge issue should be de-dramatized. One should bear in mind that several major payment systems nowadays operate successfully without an NDR, e.g. Dean Witter's Discover card (a US general purpose credit card which - to be true - grew out of a retailer card), Banksys' Bancontact/MisterCash (an essentially national Belgian debit card) or Europay's edc/maestro card (an international debit card).
Besides, even if the Commission were faced with evidence of systematic abusive surcharges in the absence of NDR, it could remedy this problem by allowing those managing the payment system(s) concerned to prohibit merchants from imposing surcharges going beyond a ceiling which would correspond to the system's actual costs.
61. The second argument in favour of the NDR is more radical than the first one because it rejects the idea that the NDR misallocates resources and points at the (certainly at first sight) manifest advantages of an NDR for the debtor. Apart from any fees the debtor might have to pay its bank, the use of a payment system containing an NDR indeed does not cost the debtor anything. The abolition of the NDR in the name of competition would expose "the consumer" to the risk of higher costs.
62. This surely seems to be a most unfortunate result for a policy which ultimately aims at consumer welfare. However, this argument erroneously views "the consumer" as the user of the particular means of payment for which an NDR applies. This is too narrow a view. Consider the current situation where the NDR applies to some means of payment but not to others. This leads to a phenomenon of cross-subsidization which distorts conditions of healthy intersystem competition. If a NDR applies to means of payment X, users of another means of payments Y to which no NDR applies will subsidize the costs generated by the use of X. Indeed a merchant who cannot impose any surcharge for X will incorporate the costs related to X into his overhead costs and thus increase the end price of the product or service sold. All customers buying that product or service (including those reverting to Y as a means of payment) will make their contribution to the coverage of this incremental cost.
63. A classic counter-argument is that cross-subsidization is entirely justified when the means of payment X to which an NDR applies (e.g. credit cards) is cheaper and safer than the means of payment Y to which no NDR applies (e.g. cash).
64. This argument is certainly seductive but does not stand up to further scrutiny. If cash is an expensive and unsafe means of payment, it is perfectly conceivable (as well as) feasible to discourage the use of cash by imposing a "price" upon it. On the one hand, banks can make cash more expensive by charging for cash withdrawals at the counter or the ATM (Automated Teller Machine). It should be noted that VISA's and Europay's NDR for credit cards also applies when the card is used for cash withdrawals. It follows that the abolition of this NDR would contribute to making cash more expensive. On the other hand, bona fide merchants can - when the NDR disappears - grant rebates to card users. In any event, the abolition of the NDR would follow the current market trend of cash losing ground to other means of payment. Consider in particular the unstoppable growth of "new generation" cards such as the electronic purses: VISA has launched its VISA cash card, Europay has its Clip card and Mastercard has acquired a majority stake in Mondex, a company which offers an electronc purse which contains a range of currencies.
65. All in all the abolition of the NDR will have the merit of enabling the debtor to acquire full knowledge of the costs generated by the various payment systems and hence to make an informed choice between them. Undistorted intersystem competition means that the consumer can make his choice on the basis of all relevant parameters: not only quality (in its broadest sense and thus including such factors like convenience and safety) but also price. Consumers who perceive the quality of payment means X to be superior to that of payment means Y will be ready to pay a premium. And that is how it should be. The enhanced transparency of costs resulting from the abolition of the NDR can be expected to drive down these costs.
SECTION 2 NON-PRICE COMPETITION ISSUES
SUB-SECTION 1 ACCESS TO ESSENTIAL FACILITIES
66. One set of non-price competition issues under Art. 85 revolves around membership rules governing a payment system or - by extension - other systems or banking organizations which provide facilities for the handling of payments. For instance, certain institutions which supply financial services may fail to get access to a system which constitutes for them an essential facility for the handling of a particular payment service. Those who run a payment system - or any other system used for the handling of financial transaction - which constitutes an essential facility have to meet one substantive and one procedural requirement. On substance, they must establish objectively justified membership criteria and apply them in a non-discriminatory way. These criteria could include "requirements for members concerning their financial standing, technical or management capacities and compliance with a level of creditworthiness". On procedure, they must give a written justification for any refusal of membership and allow for the refusal to be subject to an independent review procedure.
67. The Commission defines "essential facility" in general terms as "a facility or infrastructure without access to which competitors cannot provide services to their customers". It goes on to specify that a payment system constitutes an essential facility "when participation in it is necessary for banks to compete on the relevant market" and thus "(when) lack of access to the system amounts to a significant barrier to entry for a new competitor". This inevitably begs several questions. What is the relevant market? And how significant a barrier must the lack of access to a system be for it to qualify as an essential facility?
The term of art "essential facility" is best known in the transport sector where the Commission has used it to describe a network (such as a computerized reservation network) de facto owned by one company who thus controlled access to it by its competitors or an infrastructure (such as an embarkation point in a harbour or a slot in an airport) access to which was legally reserved to one (monopolist) company. In the field of financial services the term refers neither to facilities which have been granted by law to one single company nor to facilities which are de facto held by one competitor who for that reason finds itself in sort of judge and party role vis-à-vis its competitors. Rather it is a label which - for want of something better - refers to systems which occupy such a prominent place in the market that outsiders would have to invest in an alternative facility at a cost which may be prohibitive or at least out of proportion in light of the expected performance of that new facility. Those who run such a facility will therefore not be able to shirk their duty to put in place an objective access policy by merely arguing that the market can bear more than one such facility. The key issue is at what cost such a new facility would be put in place. Of course, free riding should not be encouraged. An entry fee not exceeding "a fair share of the real cost of past investments in the system" is therefore justified.
It can not be excluded that a facility which is "essential" today, is no longer so tomorrow (infra 68). The market situation may evolve from one in which at some point in time there is one single "essential" facility to one in which there are "several" essential facilities. The yardstick is not so much whether these facilities are, alone or collectively, dominant but whether there is room to create another facility in addition. When there is a problem of access to an "essential" facility, it is a problem that needs to be addressed under current market circumstances, not in light of speculations or even prospects about how these circumstances might evolve in the future.
68. Two notified systems for the handling of cross-border credit transfers, namely IBOS and Eurogiro (supra no. 45), contain restrictive membership rules based on nationality (IBOS) or type of credit institution (Eurogiro). The Commission's services did not object to these rules because neither of the two systems could be considered as an "essential facility" within the meaning of the 1995 notice. Conversely, the Commission has issued comfort letters in two cases in which it has taken the view that the notified systems constituted an essential facility but fulfilled the access criteria set forth in the notice.
The first case concerned the operating rules of ECHO (Exchange Clearing House), an organization which deals with multilateral clearing and settlement of foreign exchange transactions. Today one is allowed to entertain doubts about the "essential facility" character of ECHO. As has been reported by the press, a consortium of large international banks called "The Group of 20" (led by Chase Manhattan) is currently developing a new foreign exchange clearing house. Their work has alarmed some medium-sized banks (led by Den Norske Bank) who fear that they will be squeezed out of a global foreign exchange settlement bank.
The second case involved EBA (Ecu Banking Association) who has set up a multilateral clearing and settlement of ECU transactions. This system may also quickly face strong competition from TARGET (Transeuropean Automated Real-Time Gross Settlement Transfer System). The latter system differs from EBA's system in that it is public (it will be put in place by central banks) and - as its name indicates - that it will operate on a gross, not a net, settlement basis.
As already suggested (supra n/67), the category of essential facilities should not be confined to entities holding monopoly power. The key question is whether a particular market on which a few competitors are already active can bear the arrival of a new entrant. Take the field of multilateral gross settlement of international securities transactions where two market operators dominate the scene: CEDEL and EUROCLEAR. It would seem that participants in a duopoly might each constitute an essential facility even if neither of them holds a dominant position of its own or even if the two companies together do not hold a collective dominant position.
SUB-SECTION 2 OTHER NON-PRICE COMPETITION ISSUES
69. Other non-price competition issues result from a payment system's operating rules which limit the participants' commercial freedom of action.
70. Thus a payment system may prohibit its participants from adhering to other systems. Commissioner Van Miert recently objected to a draft rule of this kind whose adoption in Europe was envisaged by Visa but challenged by AMEX and Dean Witter. The draft rule stipulated that a bank's membership in the VISA system automatically terminates if it (more precisely the bank, a parent or a subsidiary) issues AMEX or Discover cards (the latter being offered by Dean Witter) or "any other card deemed competitive by the Board of Directors". Complaignants had argued that the proposed rule would restrict competition among banks as these would not be able to issue the entire range of general purpose cards. They further contended that it would (more importantly for them) restrict intersystem competition among card systems as it would foreclose access to a distribution channel which was crucial to further penetrate (in the case of AMEX) or enter (in the case of Dean Witter) the European market. They also considered the proposed rule to be plainly discriminatory as it would not apply to Eurocard/Mastercard and perhaps some other card systems (such as Diner's Club and JCB). Finally they stressed that that they did not seek access to VISA's system but only to one of its distribution channels so that the proposed rule could not be defended on free rider grounds.
71. Certain payment systems may contain rules preventing their member banks from supplying cross-border payment services. They would need to be scrutinized carefully. Suppose a merchant operating located in one Member State but operating a pan-european business wishes to accept a particular credit card as means of payment for its services throughout Europe. The merchant needs to conclude contracts with acquiring banks. It finds out that a bank situated in another Member State offers far better acquiring terms than any bank in its home Member State: the merchant fee is lower, the payment delays are shorter and the updates of the lists containing the numbers of invalid cards are more reliable. So the merchant wants to conclude a contract with that one acquiring bank and use it as a one stop shop. Clearly if the payment system contains a ban on cross-border acquiring, the merchant will have to shop around for an acquiring bank in every Member State where it does business and negotiate the terms there even if these are less favourable. Such a ban constitutes a private barrier to the freedom to supply cross-border services and needs to examined under the same legality standards as those applied in the context of Art.59 EU Treaty which prohibits national authorities from raising public barriers to the freedoml of services.
CHAPTER 2 ANTITRUST POLICY IN THE INSURANCE SECTOR
72. In the introduction six types of arrangements were mentioned for which either a block exemption already exists (four types) or could be adopted (two types). Each of these will be commented below. One should bear in mind that the Commission is under an obligation to prepare a "mid-term" review of its block exemption in 1999. Obviously the quality of this review will greatly depend on its investment with regard to the handling of the tens of pending notification concerning these types of arrangements. Before we expand on the block exempted or exemptible agreements, we need to pause for a while on a type of agreement which is manifestly unexemptable.
SECTION 1. CONCERTATION ON GROSS PREMIUMS
SUB-SECTION 1. VERBAND DER SACHVERSICHERER (1984):THE BAN ON COMMON FIXING OF GROSS PREMIUMS
73. A gross or commercial premium is the end price which an insurer charges the insured for the insurance product. This price falls apart in a so-called risk premium which covers the cost of the insured product, (sometimes) a security charge), overheads (such as distribution cost, company tax etc.) and profit. The risk premium itself is composed of two elements: on the one hand, the net premium which aims at covering the cost of the insured product based on statistical evidence concerning the past (frequency and scale of claims) and, on the other hand, a component which adjusts the net premium either upwards or downwards as it incorporates the results of studies concerning the future (i.e. general circumstances likely to materialize and to have an impact on the frequency or scale of claims). The risk premium will often be identical for all insurers. Those insurers whose portfolio is not large enough to guarantee that the risk premiums will be high enough to cover the losses resulting from the claims brought to them, will add a security charge to the risk premium.
74. It takes little imagination to understand why the Commission does not tolerate price agreements between insurers which set uniform gross premiums. They belong to the category of price fixing agreements which are per se illegal pursuant to Art. 85.1 sub a. In Verband der Sachversicherer (1984), the Commission condemned a recommendation from the German association of property insurers to its members concerning the increase of commercial premiums in the field of industrial insurance (i.e. fire insurance generally as well as consequential loss insurance covering specifically financial loss due to the disruption of business following the breakdown of or damage to machinery and equipment used in factories). In light of a rather worrying (cyclical) upward trend of the average loss ratio (i.e. ratio of losses to premium income), the Verband der Sachversicherer (VdS) had recommended its members to increase premiums for contracts of a certain size that were coming up for renewal by a fixed percentage. The stated objective was to re-establish viable conditions in the fire insurance sector and to avoid that insurers would continue to cross-subsidize their fire insurance activities with income generated in other insurance classes (in violation of national prudential legislation). The specialized German re-insurers had backed up this recommendation (at the VdS' behest) by inserting a premium calculation clause into their contracts with the direct insurers. This clause stipulated that a risk which was not rated in line with the recommendation would, in the event of a claim, be treated as an under-insured risk and the re-insurer's contribution would be reduced accordingly. The recommendation had received the blessing of the German supervisory authority (Bundesaufsichtsamt für das Versicherungswesen). The German competition authority (Bundeskartellamt) had not intervened against the recommendation. The national competition law (#102 of the Gesetz gegen Wettbewerbsbeschränkungen) provides that the general prohibition of agreements restricting competition does not apply to the agreements in the insurance sector when they concern matters which are subject to supervision by the Bundesaufsichtsamt and that the Bundeskartellamt can intervene only in cases where the agreements allow parties to abuse their market position.
75. The Commission observed that the VdS recommendation had nothing to do with a type of cooperation it considered legitimate, namely the gathering of industry-wide loss statistics yielding reliable loss ratios and thus giving members practical guidance for writing policies. The VdS simply advocated price increases between 10% to 30% of gross premiums applying a fixed expense component of 25% for overheads (whereas the individual expense ratios varied from under 20% to more than 46%) and a fixed profit component of 3%. Therefore, the recommendation clearly went beyond what was necessary to restore viability in the fire insurance class. Nor was the recommendation necessary to achieve the related objective of freeing other insurance classes of expenses for which they were not responsible. The Commission did acknowledge that there must be adequate safeguards for policy-holders against commercial malpractice by insurers who behave irresponsibly but opined that the powers of intervention of the supervisory authorities would probably be sufficient to remedy the situation. The Court upheld the Commission's decision observing that the premium increase "by reason of its general and undifferentiated nature (...) encompassed not only cover for the expenses resulting from insurance claims but also the operating costs of the insurance companies" and "was therefore likely to result in restrictions of competition going beyond what was necessary to achieve the intended objective".
SUB-SECTION 2 VERBAND DER SACHVERSICHERER: SOME SIDE ISSUES
76. The Verband der Sachversicherer case raised two other issues of a more general nature: on the one hand, can a recommendation such as the one at stake which presents itself as "non-binding" be qualified as a decision within the meaning of Art. 85.1 and, on the other hand, is the recommendation capable of affecting trade between Member States if it relates only to risks which are situated in one Member State? Both questions need to be answered in the affirmative.
A) Recommendation of an association of undertakings: a decision within the meaning of Art. 85.1?
77. The Commission took the view that "it is sufficient (...) that the recommendation was brought to the notice of members as a statement of the association's policy provided for in, and issued in accordance with, its rules". In the same vein, the Court observed that, "regardless of what its precise legal status may be, (it) constituted the faithful reflection of the (VdS') resolve to coordinate the conduct of its members on the German insurance market" and thus "amounts to a decision of an association of undertakings". The Court came to that conclusion in view of the fact that the VdS shared a common interest, that the VdS had sought and obtained the support of the German re-insurers and that the statutes empowered the VdS to coordinate its members' policy. To put it simply, Art. 85.1 applies to recommendations issued by a national association of undertakings, whether they bear the predicate "non-binding" or not, because the large majority, if not all its members can be expected to follow these recommendations. It is not necessary that these members formally commit themselves to give up their commercial freedom of action and subscribe to a commonly determined market behaviour.
B. Recommendation of a national association of undertakings: effect upon interstate trade within the meaning of Art. 85.1?
78. The Commission stressed that its conclusion according to which the recommendation restricted competition within the common market "is not invalidated by the fact that the recommendation related only to risks situated in Germany" and that "competition within the common market is still involved even if the demand for a particular good or service (...) is concentrated in one Member State. The Commission then went on to comment more specifically on the likelihood of the recommendation affecting interstate trade. The facts at hand showed that 17 of the 126 VdS members (accounting for 3% of the gross premiums) had their head office outside Germany but operated their business in Germany through branches (without legal personality). For the Commission the fact that these branches had underwriting authority and paid the claims out of financial resources available within Germany did not prevent interstate trade from being affected because "the crucial fact remains that the insurance contract - the acceptance of a specified risk in return for payment of the insurance premium - arises solely with and for the benefit and to the detriment of the foreign insurer (through his representative in the country)". The Commission further notes that "a branch office is merely an extended arm of the foreign insurer", that "much more so than a subsidiary, a branch office is entirely dependent on the goodwill of the foreign insurer that has set it up" and that "profits (...) eventually accrue to the foreign insurer and in the event of losses it is the foreign insurer that must replenish the branch office's local finances from its resources abroad". Upholding this view the Court observed that the recommendation was capable of affecting the financial relationship between the branch and the parent company and "that this is so regardless of the degree of legal independence of the branch". The Commission, herein again followed by the Court, also highlighted the fact that the VdS recommendation made access to the German market more difficult for foreign insurers. Since the (dominant) German reinsurers had inserted a premium calculation clause in their contracts with the German direct insurers and since the foreign insurers were bound to be followers, not leaders, at the direct insurance level, the latter had no choice but to adhere to the recommendation and thus refrain from attempts to offer a more competitive tariff.
79. The preceding observations inevitably raise the question whether a recommendation from a national association of undertakings would affect interstate trade if the foreign insurers involved have set up subsidiaries (in stead of branches) on the territory of the Member State concerned and/or if the recommendation does not raise entry barriers for them.
The latter part of the question is no doubt the easiest to address. Agreements among undertakings or decisions adopted by their associations are liable to affect interstate trade as soon as they are capable of diverting the flow of trade from its normal course, i.e. from channels it would have followed in the absence of such the agreement or decision. This means that an agreement or decision which is likely to increase (rather than to block) interstate trade is also covered by Art. 85.1. A nation-wide price cartel falls normally into this category as it pulls up the prices to a supra-competitive level. The VdS recommendation was in essence a price cartel producing such an effect but because of the particularities of the German direct insurance and re-insurance markets, foreign insurers could not undercut that price level.
Does a recommendation issued by a national association of insurers affect interstate trade if the foreign members of that association operate their business through subsidiaries instead of branches? It is submitted that it does. A recommendation can even affect interstate trade if no foreign company has adhered to the association which has issued the recommendation (for instance because no foreign company has entered the national market yet). Any agreement between national undertakings or decision of a national association of undertakings is bound to change the market conditions under which competition takes place on the territory of the Member State concerned and must be deemed to affect interstate trade because it alters the conditions under which foreign and national companies, whether they are actual or potential competitors, compete in that Member State. Whether the agreement or decision actually stimulates or chills competition between them is immaterial.
SECTION 2 BLOCK EXEMPTED OR EXEMPTIBLE AGREEMENTS
SUB-SECTION 1 CONCERTATION ON NET AND RISK PREMIUMS
A) Nuovo Cegam (1984) and Concordato Incendio (1989)
80. In Nuovo Cegam, a few months before adopting its decision in VdS, the Commission exempted - in what was actually its very first decision in the insurance field - a recommendation of an Italian consortium of insurers fixing net premiums for the cover of consequential loss risks. As indicated above, this insurance (also called industrial engineering insurance) is complementary to industrial fire insurance. The Commission expanded on the common fixing of net premiums many years later in another formal decision (Concordato Incendio) dealing with industrial fire insurance generally. These decisions (as well as the VdS decision prohibiting common fixing of gross premiums) constituted the basis for title II of the Commission's block exemption regulation which deals with the "calculation of the premium" (art.2 to 4).
81. It should be recalled that the net premium reflects the cost of covering a particular risk in light of past experience whereas the risk premium in addition takes into account forecasts on the future. The Nuovo Cegam and Concordato Incendio decisions largely focus on the joint calculation of the net premium (though both associations involved also undertook studies concerning the future development of the risk).
An insurer can only determine its net premium accurately by compiling statistical data concerning the frequency and the scale of claims made in the past. Often insurers will not be in a position to collect a sufficient number of reliable data on the basis of their own business alone. They will set up an association whose purpose it is to draw up reliable statistics on the basis of the aggregate data communicated to it by each of them.
The Commission accepts that insurers do so although they thus renounce their commercial freedom of action with regard to a key component of the final price of their product. In both decisions, the Commission points out that the joint compilation of statistics fulfills the first condition of Art. 85.3 because participants can acquire the necessary specialist expertise and will have recourse to co-insurance or re-insurance more easily. Consumers will get a fair share of these benefits within the meaning of the second condition of Art. 85.3 because they will better be able to buy policies adapted to their individual requirements. Neither in Nuovo Cegam, nor in Concordato Incendio has the Commission examined more closely the statistical data constituting the basis for the net premiums in order to find out whether the parties had really confined their cooperation to a statistical exercise.
82. In Nuovo Cegam the Commission indicated that the need for cooperation was particularly pressing because the engineering insurance market in Italy was characterized by weak demand and relatively limited supply. The 17 members of the association had 26% of the Italian market and competed with other powerful insurance companies, the biggest of which alone had 25% and the top three together (not including any member of Nuovo Cegam) 46%. In Concordato Incendio, the Commission more eloquently developed this new entrant rationale by observing that the technical assistance and resources made available by the association "facilitate access by certain undertakings to a market (...) which would otherwise have been acquired only with the greatest difficulty". Paradoxically, the 28 members of the association held at least 50% of the industrial fire insurance market (with the biggest four among them accounting for 28%).
B) Title II of Regulation no. 3932/92
83. The block exemption regulation contains "added value" compared to the two above-mentioned decisions in several respects.
84. In Art. 2, the Commission makes a clear distinction between, on the one hand, the joint calculation of net premiums ( which aims at determining the cost of insurance in light of past experience) and, on the other hand, the joint carrying out of studies concerning the probable impact of general circumstances external to the insurers on the frequency or scale of claims (which allows insurers to adjust the cost of insurance in light of future extraneous developments). With regard to concertation on net premiums more specifically, the Commission indicates that insurers will benefit from the block exemption only if they indulge in a genuinely statistical exercise. Indeed, pursuant to Art. 2 sub a), the common "calculation of the average cost of risk cover (pure premiums)" is exemptible only when these premiums "relate to identical or comparable risks in sufficient number to constitute a base which can be handled statistically and which will yield figures on (inter alia) the number of claims (...), the number of individual risks insured (...), the total amounts paid or payable in respect of claims (...) and the total amounts of capital insured" for a particular observation period. As to the carrying-out of studies, Art.2 sub b) provides no further detail but clearly indicates that the subject-matter of the studies must be confined to the impact of general circumstances external to the participating insurers on the frequency or scale of the insured risks.
85. In an introductory recital of its Regulation, the Commission notes that collaboration between insurers in the compilation of statistics "makes it possible to improve the knowledge of risks and facilitates the rating of risks for individual companies". In Nuovo Cegam and - to a lesser extent - Concordato Incendio it seemed to reserve the benefit of the exemption for collaboration among newcomers on a market or among incumbents operating on a market where the risk evaluation was particularly difficult. In the block exemption one does not find traces of these qualifications. The Commission does not distinguish between insurance markets with reference to entry barriers. Nor does it distinguish between new entrants and incumbents. The joint compilation of statistics on the number of claims and individual risks insured and on total amounts paid and capital insured is exemptible whatever the relevant market is and whatever the position of the participating companies on that market is. But, as indicated in the preceding paragraph, the Commission will examine carefully (unlike in Nuovo Cegam or Concordato Incendio) whether the cooperation does not trespass the boundaries of a genuinely statistical exercise.
86. Since the entry into force of the regulation, the DGIV services have been asked a couple of times to clarify the meaning of Art.2. The following two examples give a flavour of the issues most commonly raised by this provision.
In one case, a draft recommendation prepared by the German association of car insurers was considered not to be in line with the requirements set forth in Art.2 sub a) because the "statistical" data classifying risks per type of car and per region were so detailed that they went actually further than what was strictly necessary to establish a reliable statistical basis for the calculation of net premiums. In another case, the Belgian association of insurers UPEA had issued a recommendation which sinned in quite the opposite way. It had laid down minimum net annual premiums for group contracts concerning the cover of hospitalisation costs. The recommendation was not supported by any statistical data. In other words, in contrast with the German recommendation which was too detailed, UPEA's recommendation was too vague to qualify for a block exemption under Art.2 sub a). In fact this recommendation simply aimed at avoiding a price war among insurers and was ancillary to another recommendation proposing a standard cover as well as a standard excess (i.e. the part of the cover which the policyholder must pay himself). The latter recommendation (which will briefly be commented infra no. 92) set uniform policy conditions. Premiums would thus have become the only significant parameter for competition among insurers.
SUB-SECTION 2 STANDARD POLICY CONDITIONS FOR DIRECT INSURANCE
A) Concordato Incendio (1989)
87. In Concordato Incendio the Commission exempts a recommendation which did not only cover net premiums but also policy conditions for industrial fire insurance. The Commission does not explain why standard policy terms improve production or distribution within the meaning of the first condition of Art. 85.3. It does explain - briefly - why consumers benefit. According to the Commission, "the existence of standard conditions makes it easier for consumers to compare the terms offered by various firms and come to a decision in full knowledge of the facts" so that they "can compare and choose not simply in relation to the commercial premium which is being requested of them but also the extent of the coverage and all other services which an insurance company is supposed to provide, notably services as regards prevention and evaluation of damages".
88. The Commission further accepts that an association who recommends its members to charge a uniform net premium and standard policy conditions, obliges these members to notify any derogation from these standard conditions "when they are likely to affect the statistics" because this "makes it possible to guarantee the uniformity of the statistics". This duty to notify, while not depriving the recommendation of its non-binding character, encourages insurers strongly to follow the recommendation. The teaching of Concordato Incendio is that, at least in some cases, too many derogations from the agreed standard conditions might reduce the reliability of the agreed statistical data (which individual insurers need in order to set their net premiums with reference to costs).In the case at hand it may have been sensible for the Commission to accept the obligation to notify on these grounds. There is, however, some tension between this decision and Regulation no. 3932/92. As will be seen, the Commission regards the "purely illustrative" or non-binding character of any recommendation as a sine qua non for the automatic exemption of standard policy conditions for direct insurance (infra no. 90).
B) Title III of Regulation no. 3932/92
89. Standard conditions fall in principle under the block exemption because they "have the advantage of improving the comparability of cover for the consumer and of allowing risks to be classified more uniformly". The Commission does realize, however, that full standardization of all conditions would not leave consumers much to choose from. It copes with this problem in two ways.
90. On the one hand, it insists that the agreed conditions remain purely illustrative. This requirement will in practice often remain idle since a recommendation issued by a national association of undertakings will always reflect a broad consensus among its members. It may occasionally even be counterproductive. If the recommendation pursues legitimate objectives, it may indeed be that it pursues these objectives more effectively when having a binding character. In such circumstances, it may not be advisable to insist on the non-binding nature of a recommendation. This at least seems to be the teaching of Concordato Incendio (supra no. 88). However, in a block exemption regulation it is wise to preserve a maximum of freedom of action for the addressees of a recommendation and to subordinate any (perhaps) plausible justification for the binding character of the recommendation to the requirement that there be competition on policy conditions. among the members of the association. Clearly a non-binding recommendation restricts the freedom of action of its addressees less than a binding one and, as a consequence, restricts competition between these addressees to a lesser extent.
91. On the other hand, the Commission has drawn up a long list of "black" standard clauses in Art. 7.1. Some of them (those featuring in Art. 7.1 sub a to d) concern the extent of the cover: clauses excluding from the cover certain risks belonging to the class of insurance concerned (sub a), those making the cover of certain risks subject to specific conditions (sub b), those imposing comprehensive cover for risks to which a significant number of policyholders is not simultaneously exposed (sub c) and finally those indicating the amount of the cover or - the opposite - the so-called excess or amount not covered which the policyholder must pay himself (sub d). Another set of clauses (appearing in Art. 7.1 sub e to i) deal with the duration of the policy and all aim at avoiding that insurers create too captive a customer base. Insurers are not allowed to maintain unilaterally the policy if they alter its conditions (e.g. by cancelling part of the cover or increasing the premium without the risk or the scope of the cover being changed) without the express consent of the policy holder (sub e). Insurers cannot modify the contract period without express consent of the latter (sub f), nor can they impose a contract period of longer than three years upon the policyholder in the non-life insurance sector (sub g) or confront him with a renewal period of more than one year where the policy is automatically renewed (sub h). Art. 7.1 sub j refers to tying clauses which "require the policyholder to obtain cover from the same insurer for different risks". Finally Art. 7.1 sub k provides that someone who acquires a risk from someone else who has an insurance policy with a particular insurer cannot be forced into taking over this insurance policy.
92. Since the entry into force of Regulation no. 3932/92, the Commission's services have so now and then been called upon to clarify informally some of these clauses. They thus have once intervened informally in a case brought under their attention by Test Achats, the Belgian consumers organization. At stake were two recommendations issued by UPEA, the Belgian association of insurers, regarding the cover of hospitalisation costs. In order to restore profitability in this segment of the health insurance market, UPEA had recommended its members to apply a standard cover as well as a standard excess (i.e. the part of the cover which the policyholder must pay himself). It proposed to limit the cover to a level corresponding to twice the amount of costs the insured could recuperate as an affiliate of a basic social security institution and to set the excess at 10% of that cover (with a ceiling of 20.000 BF. The recommendation clearly infringed Art.7.1 sub d of the Regulation. Applying the Automec jurisprudence, the DGIV services explained their view informally in writing to Test Achats and copied that letter to UPEA. Indeed Test Achats was already suing UPEA and some insurers implementing the recommendation before the national court. The President of that court (the Brussels Tribunal de Commerce), referring inter alia to the DGIV letter, issued a cease and desist order in favour of Test Achats.
SUB-SECTION 3 CO-INSURANCE AND CO-REINSURANCE POOLS
93. In co-insurance cases the insured finds himself confronted with several insurance companies who are partly responsible for the cover of the risk. These companies are not jointly responsible vis-à-vis him. They each cover a part of the risk for their own account. One of them, the leading underwriter, will set the gross premium and the terms of the insurance contract. The others will subscribe to these conditions as followers. Insurers can give their co-insurance arrangements an institutionalized form by setting up a group who underwrites in their name and for their account the insurance of all future risks of a particular kind. This means that the group sets the gross premiums and terms of the insurance contract.
94. In re-insurance cases, only one insurer is responsible for the entire cover of a particular risk but it will cede all or part of the risk to one or more other insurers for reinsurance purposes. The insurer (cedent) will revert to re-insurance where he feels that the risk exceeds his financial capacity. The cedent will have to collect the reinsurers' contribution to the cover of losses once these have occurred. Insurers may re-insure on an ad hoc basis. They may also want to institutionalize the re-insurance and set up a co-reinsurance group. In such a case the group will usually set the terms of the insurance contract, including the level of the risk premium. Further distinctions can be made and should be briefly mentioned though they have sofar played no role in the Commission's analysis of co-reinsurance arrangements. Reinsurance may be facultative or obligatory. In the first case, an insurer determines for each case whether re-insurance is desirable and, if so, he contacts other insurers (or specialist re-insurers) who have, however, the right to reject each proposal. In the second case, the insurer concludes a convention with a re-insurer for a particular category of risks. Under that "umbrella" convention, the insurer must cede all or part of the risk and the re-insurer must accept the amount offered. As in the latter case there will be a treaty prescribing this, one usually speaks of "treaty insurance". The re-insurance itself may be organized either on a proportional or on a non-proportional basis. In the first case, the cedent and his re-insurer(s) share premiums and losses on a proportional basis (e.g. for 30% of the premiums the reinsurer assumes 30% of the losses). In the second case, two options arise. Under excess loss reinsurance, the reinsurer only contributes to the cover of a loss which is in excess of a threshold agreed in advance with the insurer (e.g. losses in excess of 1 mio Ecu). Often the reinsurer will also want to set a ceiling to his contribution. Under stop loss reinsurance, the reinsurer only contributes to losses in so far as they globally exceed by a certain percentage the premiums collected by the insurer (e.g. global losses represent 130% of global premiums).
A) P&I CLUBS (1985), TEKO (1989), Assurpol (1992) and LUA/ILU (1992)
a) Co-insurance
95. The Commission has examined the compatibility of a co-insurance group as such with Art. 85 only once. In TEKO, a German case in which the Commission scrutinized essentially a notified co-reinsurance pool for industrial engineering insurance (infra no. 101), parties had also notified a co-insurance pool for space insurance. Actually only four of the 21 insurers involved in the co-reinsurance pool for industrial engineering insurance had set up a co-insurance pool for space insurance. Their capacity was so low (DM 11,5 mio.) that they could do no more than offering insurance "with or in addition to other insurance companies". They had concluded no more than four contracts by the time the Commission adopted its decision. And yet the Commission took the view that this co-insurance pool was caught by Art. 85.1. It accepted that space insurance can in general only be underwritten on a co-insurance basis but it objected to the fact that the four parties had opted for a "permanent and institutionalized co-insurance pool" whereas it would have been possible for them "to participate on a case-by-case basis in co-insurance contracts with various third party undertakings on the basis of differing premiums and terms...". The Commission quickly disposed of the requirement that for Art. 85.1 to apply, the restriction of competition must be appreciable by observing that "despite the small market share involved, it cannot be ruled out that the restriction of competition is appreciable in view of the aggregate turnover of the four companies concerned which amounts to approximately DM 4000 mio and far exceeds the threshold value of 200 mio Ecu specified in the notice on agreements of minor importance...". It is submitted that this observation (though of course accurate in fact) is plainly wrong in law. It was abundantly clear that the four insurers, though they had of course chosen to restrict their freedom of action by subscribing to a co-insurance arrangement, were incapable of restricting competition appreciably and that, if anything, their cooperation stimulated competition in the space insurance market. Having declared Art. 85.1 applicable, the Commission cleared the pool under Art. 85.3. It confined itself to noting that the pool resulted in rationalization at the direct insurance level and that it helped parties to negotiate more favourable terms at the re-insurance level.
96. In Lloyd's Underwriters' Association and The Institute of London Underwriters, the Commission looked at two wide-scale, collective arrangements among co-insurers that went clearly beyond what was necessary for the operation of sound co-insurance in the sector concerned, namely marine hull insurance (which covers loss of or damage to ship and machinery). After parties had modified the arrangements, the Commission saw no longer any grounds for action under Art. 85.1 and granted a formal negative clearance.
The Lloyd's Underwriters' Association (LUA) groups underwriting agents which accept business on behalf of Lloyd's syndicates (groupings of Lloyd's Names who provide the Lloyd's underwriters with capital for insurance purposes). The Institute of London Underwriters (ILU) groups underwriting UK and foreign companies located in London but operating outside the Lloyd's "arena". The two associations operate a number of joint committees. One of these (the Joint Hull Committee) had worked out two agreements which were notified to the Commission. The first one (the Joint Hull Understanding) contained clauses recommending minimum premium increases for risks for which the cover came up for renewal and the loss ratio had worsened during the term of the preceding contract. In a statement of objections, the Commission qualified these clauses as straightforward horizontal price fixing. The LUA and ILU quickly deleted the clauses. The second one (the Respect of Lead Agreement) provided a) that the leading underwriters who had first insured the risk would continue to underwrite that risk when its cover came up for renewal and b) that each slip (order) had to be signed by two leading underwriters from each association. This agreement clearly restricted actual and potential competition at the level of the leading underwriters. The LUA and ILU amended the agreement in order to allow competitors to quote a risk that came up for renewal.
97. The situation in which one leading underwriter sets the premium and policy conditions for a particular risk, covers part of that risk and leaves the rest to be covered by followers at the terms set by it obviously must be distinguished from the situation in which all those acting as leading underwriters get together to discuss and approve each other's terms. Such a practice amounts to horizontal price fixing which goes even considerably further than the price fixing arrangement initially objected to in LUA/ILU. It is in principle per se illegal. This means that there is no need either to examine the parties' market position to verify whether they actually have power over price or to look into possible redeeming virtues. Leading underwriters are by definition those who have so much expertise to assess the risk at hand that followers are prepared to cover their part of the risk on the terms set by them. It is therefore difficult to believe that leading underwriters need to bring their expertise together and agree on identical terms for every risk that needs to be covered. Even if there were such need, from an antitrust point of view, one must prefer a natural selection of leading underwriters (even if this means a more concentrated market structure) over any collusive arrangement keeping the number of leading underwriters artificially high.
b) Co-reinsurance
98. In the field of co-reinsurance, the Commission has so far adopted two formal exemption decisions in which it assesses head-on the compatibility with Art.85 of co-reinsurance arrangements, namely TEKO and Assurpol. These decisions will take up most of the comment. They are to be distinguished from P&I Clubs, a third decision which only focuses on certain clauses of a co-reinsurance agreement (and, it must be said, of a particular kind of co-reinsurance agreement). This decision will be briefly presented first.
99. The Protection and Indemnity Clubs (P&I Clubs) are mutual non-profit associations of shipowners which insure their members' contractual and third party liabilities (e.g. cargo, passengers, damage to other vessels or to the environment, etc.). They hold around 90% of the relevant market. The remaining tonnage is either insured by some independent insurers or not insured at all. The P&I Clubs operate a Pooling Agreement. According to this agreement, each club bears claims up to a certain amount. The remaining part of any claim up to a second ceiling is shared by all clubs together. This claims-sharing arrangement is akin to a co-reinsurance agreement but differs from in it in that each participating club sets the terms of direct insurance independently. For claims exceeding the ceiling but remaining under a third ceiling, all P&I Clubs get together to purchase jointly re-insurance on the commercial market. The excess of any claim over the third ceiling (the so-called overspill) is again shared by all P&I Clubs. It should be noted that all clubs, by virtue of the Pooling Agreement, offer one single cover to their members, namely one that includes all four layers just described (club's retention, co-reinsurance among clubs, commercial re-insurance and overspill).
In addition to the Pooling Agreement, there is another agreement (called International Group Agreement) containing clauses which prescribe inter alia procedures to be followed by shipowners wishing to move vessels already insured or new vessels from one club to another. Another clause provides for certain rules regarding the quotation for tankers.
100. In its decision, the Commission exempted the clauses of the International Group Agreement (after they had been amended) observing that they struck the right balance between, on the one hand, the interest of having some degree of competition between the various P&I Clubs and, on the other hand, the need to preserve the mutual thrust and continued membership without which the Pooling Agreement could not operate.
The exemption, which had been granted for 10 years, expired in February 1995. The P&I Clubs sought renewal of the exemption and the Commission decided to give publicity to this request. At regular intervals, the European Parliament or some of its members have voiced an interest in this case. Attention has now shifted from the International Group Agreement to the Pooling Agreement. This is due to the fact that the latter agreement now contains a clause limiting each member's contribution to the overspill (i.e. the part of any claim exceeding the level for which the P&I Clubs jointly purchase commercial re-insurance) to 20% of the value of its shipping assets. Previously there was no limit to the overspill. Paradoxically, the capping of the overspill has raised concern although those who are concerned do not contest that it represents some improvement compared to the situation before. They consider the capping as not going far enough in preserving the viability of all clubs (through the viability of all their members).
As one can easily see, concern about the viability of clubs participating in a single pooling arrangement which requires clubs to offer a uniform level of cover and to participate in the sharing of claims reaching that level, inevitably raises the question whether the Pooling Agreement itself restricts competition within the meaning of Art.85.1 and, if it does, whether it is exemptible pursuant to Art.85.3. It is a question which the Commission has addressed in TEKO and ASSURPOL.
101. TEKO concerned a German co-reinsurance arrangement in the area of industrial engineering insurance (here called "machinery loss of profits" insurance). The second one (Assurpol) was about a French co-reinsurance arrangement covering third party liabilities for damage to the environment which originate in industrial or commercial installations. There is a good deal of overlap in the reasoning followed by the Commission in both decisions. In a nutshell, the reasoning which is - not surprisingly - strikingly similar to the approach adopted vis-à-vis cooperative joint ventures, is two-tier. The Commission first declares the pool itself contrary to Art. 85.1 but clears it under Art. 85.3. It then examines whether the clauses in the pooling arrangement which restrict the participants' freedom of action can be viewed as ancillary to the creation of the pool and exempted as well. Let us examine more closely these two steps one by one.
102. The first stage of the Commission's reasoning concerns the pools themselves and can be summarized as follows. Co-reinsurance pools restrict competition within the meaning of Art. 85.1 because they are a permanent and institutionalized type of cooperation for which there are less restrictive alternatives, namely individual re-insurance or - more likely in most cases - co-reinsurance on an ad hoc basis. These pools do, however, meet the requirements of Art. 85.3 and can therefore be exempted. They allow participants to improve their knowledge of risks, create financial capacity and develop technical expertise in insuring the risks. This results in substantial rationalization and cost-saving and enables each participant to obtain a more diversified and balanced portfolio.
In TEKO, the participants in the pool held a combined market share of 20%. The Commission considered that there was sufficient competition from third parties. Things looked much more worrisome in Assurpol where participants held 70 to 80% of French business in the general liability insurance class. This gave them a sort of captive client basis for the environmental liability segment. The Commission nevertheless felt that it could grant an exemption for seven years (i.e. until early 1998) because a) the 70 to 80% general liability policies "are not likely to give rise to the same number of Assurpol policies in the near future unless there is a sudden change in demand" and b) "the opening up of the insurance markets in the Community will afford the opportunity even for small and medium-sized enterprises to obtain insurance in another country". A sudden change in demand could happen if liability insurance for environmental risks were to be made compulsory. As to the competitive pressure likely to come from insurers located outside France, there seems to be some tension between this observation and those which led the Commission to believe that the relevant geographic market was still national. The tension disappears, however, if one considers the relevant market to reflect merely the actual conditions of competition and the height of its entry barriers to indicate the degree of potential competition.
The second stage of its reasoning concerns various clauses in the pool arrangement restricting the pool members' commercial freedom of action. The Commission declares that these clauses all restrict competition within the meaning of Art. 85.1 (since the pool is itself restrictive) but that they (like the pool) enjoy an exemption under Art. 85.3 if they are indispensable for, or at least beneficial, to the proper functioning of the pool. This "ancillary restraints" approach applies to the following main restrictions: the joint setting of risk premiums and conditions of direct insurance, the joint retrocession (or, conversely, the ban on retroceding individual shares), the standard individual retention (i.e. the share of the risks covered by the pool which participants cannot pass on for co-reinsurance) and the joint settlement of claims.
103. The Commission devotes most of its attention to the joint setting of risk premiums and conditions. It starts off observing that such a practice is contrary to Art. 85.1 because it "goes well beyond the influence of reinsurers that is otherwise customary on the market, since reinsurers generally confine themselves to checking the premiums and the terms and the conditions worked out by direct insurers and neither calculate the direct insurers' offers for them at the outset nor serve as a permanent joint information and advisory body for a specific group of undertakings". The practice of entrusting the pool's technical committee with rating the risks brought into the pool on a case-by-case basis is, however, exemptible where "the lack of statistical data and the characteristics of the risk prevent each member individually from having sufficient knowledge to be able to identify and rate it properly". The result will be that similar risks are quoted similarly but this price restriction is the unavoidable "price" for proper risk assessment.
Besides, in co-reinsurance cases, there will be another (unavoidable and therefore exemptible) uniform price component in the premium which pool members charge to their clients, namely the co-reinsurance premium. This premium covers, on the one hand, the operating costs of the pool and represents, on the other hand, compensation for the reinsurance service lent by the other members of the pool, a service which has its own "price".
A last word about the joint setting of premiums in co-reinsurance pools. In TEKO the Commission goes further than in Assurpol (and than what it was later prepared to exempt automatically under Regulation no. 3932/92). Indeed it exempts a practice whereby the pool calculated premiums on the basis of gross premiums which its members had charged in previous contracts. The Commission justified this on the ground that due to the small number of contracts and to the fact that they were spread among various branches of industry and a great number of different machines, there was insufficient statistical material for the calculation of net premiums. The Commission also minimized the impact of its unusual generosity by observing that the insurers could still compete on price through rebates in at least two ways: they were free to pass, in whole or in part, on the re-insurance premium they received for reinsuring risks brought to the pool by others to their clients or to refund part of the premiums where loss experience was favourable.
104. The other exemptible clauses featuring in pooling arrangements require less comment. The Commission exempts joint retrocession (i.e. re-insurance which is "of the second degree" as it is bought by companies already involved in re-insurance) on the ground that the co-reinsurance pool is likely to be in a stronger negotiating position in the international re-insurance markets than each insurer/re-insurer acting on his own. The Commission further considers the fixing of a standard individual retention to be "inherent in the functioning of the pool" because it ensures that "each insurer member continues to carry on the business of insurance and does not simply act as an insurance intermediary". Lastly the Commission has no difficulty with a clause providing for the joint settlement of claims. It constitutes the pendant of the loss sharing which is at the heart of co-reinsurance.
105. The Commission notes in TEKO and Assurpol that there is no obligation for the pool participants to bring all their risks into the co-reinsurance pool. This means that they can reinsure their risks individually or join other co-reinsurance pools. As will be seen later (infra no. 110), the Commission considers the requirement that all risks be brought into the pool (the obligation d'apport) as "excessive" and thus unexemptable in its block exemption regulation. It should be noted, however, that in Assurpol the Commission does exempt an obligation which falls just short of an obligation d'apport, namely one to propose for co-reinsurance all risks falling within the scope of the pooling arrangement in order to allow the pool's technical committee to set the terms at which these risks would be reinsured. Participants which disagree with these terms have the freedom to take out reinsurance elsewhere.
The Commission exempts this obligation on the ground that it is "indispensable in order to ensure a sufficient spread of risks and at the same time to prevent the risk of an adverse selection by each of the pool members". This makes more than good sense but seems equally applicable to a genuine obligation d'apport. Why should one preserve - in the name of competition - the pool participants' commercial freedom of action if in all likelihood the possessors of this freedom would only make use of it to keep the "good" risks for themselves and bring all "bad" risks into the pool? Moreover, to the extent that an insurer would lack the expertise to distinguish between good and bad risks, he probably has little interest in making use of his freedom to reinsure the risk outside the pool. As the Commission itself observed in TEKO, even in the absence of an obligation d'apport, "as a general rule (the companies) make use of the joint reinsurance and seek reinsurance outside TEKO only in exceptional cases". Of course one could argue that an obligation d'apport serves no purpose (and should thus be deleted) if the parties in any event will prefer to bring in all their risks into the pool. However, one queries whether from a competition policy point of view the argument should not be reversed. Is the only relevant question not whether the abolition of the clause containing such an obligation will enhance competition to an appreciable extent. If the clause "restricts" the freedom of action for companies in a way that will usually coincide with their own intentions regarding the use of that freedom, indeed one seems to gain hardly anything by insisting on its abolition.
106. Reversing this logic, one can argue that it is precisely because an obligation d'apport usually serves no purpose (since the parties will prefer to bring in all their risks into the pool) that it should be deleted. And one could add that, in any event, an insurer's preference today may change tomorrow. To put it differently, without an obligation d'apport, there is at least some potential for competition as insurers regain the freedom to insure a particular risk at the conditions they see fit (rather than at those determined by the pool).
107. This is no doubt a valid consideration under Art.85.1 though one would need to demonstrate that the clause restricts competition to an appreciable extent. In this respect, one may wonder to what extent an insurer will apply different conditions to risks brought into the pool and other risks left outside the pool. It is indeed likely that the pool conditions will produce a spill-over effect upon the "individual" conditions. Hence the abolition of an obligation d'apport is unlikely to add much competition in the market. As will be explained later in more detail (infra n0112), the market share test set forth in Art.11.1 of Regulation n03932/92 which pools must satisfy to be covered by the block exemption relies on this spill-over effect. Furthermore, as the Assurpol decision already suggests, an obligation d'apport (or a clause very much akin to such an obligation) may well qualify for an exemption under Art.85.3 when it ensures "a sufficient spread of risks" and hence a sound insurance product. As will also be explained more thoroughly later (infra n0118-122), this would make sense in particular when the risks brought into the pool are of a homogeneous nature.
B) Title IV of Regulation no. 3932/92
108. Art. 10 to 13 of Regulation no. 3932/92 spell out under which conditions institutionalized (as opposed to ad hoc) co-insurance and co-reinsurance pools are automatically exempted. One immediately realizes that the Commission's thinking on this matter is largely tributary to its traditional approach towards cooperative joint ventures. The pools themselves are deemed to be covered by Art. 85.1. They do not need to be individually notified, however, if the market share of the pool participants does not exceed certain thresholds (Art. 11). The meaning of Art.11 will be further clarified in detail (infra no.111-114).
109. The restrictive contract clauses featuring in the pooling arrangements which were exempted in TEKO and Assurpol re-appear in the block exemption regulation as "white" (i.e. automatically exempted) clauses (Art. 10 and Art. 12-13). Insurers may jointly fix insurance conditions (in co-insurance or co-reinsurance) as well as gross premiums (in co-insurance) or risk premiums where there is no sufficient experience to establish a simple risk premium tariff (in co-reinsurance). In the latter case, they may also jointly set a co-reinsurance premium. This premium includes both the operating costs of the group and the remuneration of the participants in their capacity as co-reinsurers. Insurers may also establish joint settlement procedures (in co-reinsurance only for claims "exceeding a specified amount"). They are further allowed to agree on joint re-insurance (of the co-insured risks) or joint retrocession (of co-reinsured risks). Finally they may back up this joint re-insurance or joint retrocession by imposing a ban upon themselves to re-insure (respectively retrocede) their individual share in the co-insurance (respectively co-reinsurance). In the case of co-reinsurance, they can provide for an additional ban to reinsure their individual retention.
110. To wind up this brief survey of the most important provisions featuring in Regulation n03932/92, we recall that the Commission earmarks the obligation d'apport as a "black" clause in one of the introductory recitals of its Regulation. We have already commented this clause extensively in the context of our review of the TEKO and Assurpol decisions (supra no.105-107).
111. Let us now revert to the market share test set forth in Art. 11 of the Regulation. Art. 11 no doubt contains the most crucial condition that the pools need to fulfil in order to benefit from the block exemption. Pursuant to Art.11.1, the insurance products underwritten by the participants (either individually or through the pool) must not represent more than 10% of the relevant market in the case of co-insurance pools whereas insurers participating in co-reinsurance pools should not hold a market share of more than 15%.
The reason for differentiating the market shares is that the mechanism of co-insurance requires from the pool participants that they apply, in addition to uniform conditions, identical gross premiums whereas co-reinsurers only need to fix in common the risk premium and the co-reinsurance premium (i.e. the co-reinsurance cost). In other words, price competition is eliminated in the case of co-insurance whereas it is not in the case of co-reinsurance.
112. It should be emphasized that the 10% and 15% market shares refer to all products underwritten by the pool participants, including those underwritten outside the pool. The reason for this is rooted in the Commission's traditional approach regarding joint ventures. When the parent companies remain active on the same market as the joint venture, the Commission takes the view that this joint venture distorts competition between the parents because they can be expected to align their commercial policy on that of their joint venture. This is often referred at as the spill-over effect. Art.11 of Regulation n0 3932/92 transcribes this notion to the co-insurance or co-reinsurance pools. As the 10% and 15% market share ceilings refer to all products underwritten by the pool participants, they take into account the spill-over effect of pool business on the pool participants individual business. It follows that the block exemption is inapplicable in cases where the insurance products brought into the pool by the participants account for less than 10% or 15% but where all the products underwritten by them exceed these ceilings. This is the letter of Art.11.1. Whether in practice there will often be a substantial discrepancy between the volume of business brought into the pool by the participants and that of all business underwritten by them (either individually or through the pool) is another matter. For normal risks the discrepancy is likely to occur more frequently than for aggravated or catastrophic risks. This brings us to Art.11.2 of Regulation n03932/92.
113. In the case of aggravated risks and catastrophic risks, Art. 11.2 provides for a (marginally generous) derogation from Art. 11.1. According to this provision, the market share percentages apply to the insurance products underwritten by the participants through the pool only. The derogation is, however, subject to the condition that "none of the concerned undertakings shall participate in another group that covers risks on the same market". This condition leaves the pool participants the total freedom to underwrite individually as much business as they like without losing the benefit of an automatic exemption for their pool, if that pool's market share does not exceed 10% or 15%.
114. One may of course query whether it is realistic to expect from insurers that they underwrite much business on their own when the risks are catastrophic or aggravated. As indicated above, the need to achieve sufficient capacity (and thus the tendency to create a pool) will normally be particularly compelling for insurers confronted with such risks. This is why we call the Art. 11.2 derogation only "marginally generous" as compared with Art. 11.1.
However, the Commission does not seem to share this view with regard to aggravated risks. Indeed, the Art. 11.2 derogation for these risks is subject to a supplementary condition, namely that "the insurance products brought into the group shall not represent more than 15% of all identical or similar products underwritten by the participating companies or on their behalf on the market concerned". In other words, the pool participants must achieve 85% of their turnover for the relevant product individually. It is submitted that this supplementary requirement "kills" the derogation altogether, unless one interprets the terms "identical or similar products" loosely, that is: referring to a broader category of risks of which the aggravated risks only constitute a segment.
An example may clarify this. If insurers set up a life insurance pool to cover the part of the population that is exposed to aggravated risks (higher probability of hearth failure, etc.), the supplementary condition of Art. 11.2, last indent, will raise no obstacle to the application of the Art. 11.2 derogation if the "identical or similar products" refer to category of life insurance products generally. However, if this is how Art. 11.2, last indent, must be interpreted, surely the same interpretation should be reserved for the terms "products that are identical or regarded as similar (...)" appearing in Art. 11.1, from which Art. 11.2 merely derogates. Under that interpretation, the pool participants would probably already fulfil the market share criterion set out in Art. 11.1: all aggravated risk business underwritten by them (individually or through the pool) would be likely to represent less than 10% or 15% of the market for all forms of life insurance business generally. There would be no need to revert to the Art. 11.2 derogation.
115. It should finally be recalled that the Commission may withdraw the benefit of the block exemption where "an insurance group which benefits from the provisions of Art. 11.2 has such a position with respect to aggravated risks that the policyholders encounter considerable difficulties in finding cover outside this group". In an introductory recital, the Commission specifies that this will "normally" not be the case "where a group covers less than 25% of those risks".
116. We submit that the co-insurance and co-reinsurance pools raise two main questions from a competition policy viewpoint. First of all, are they per se covered by Art. 85.1 (infra no.117-124)? Secondly, how can one, assuming that a particular pool needs to be examined under Art. 85.3, implement correctly the market share test contained in Art. 11 of the Regulation (infra no.125-128)?
a) Are co-insurance or co-reinsurance pools per se covered by Art. 85.1?
117. In an introductory recital of the Regulation, the Commission states that "the establishment of co-insurance or co-reinsurance groups designed to cover an unspecified number of risks must be viewed favourably in so far as it allows a greater number of undertakings to enter the market and, as a result, increases the capacity for covering particular risks that are difficult to cover because of their scale, rarity or novelty". Since these pools are "viewed favourably" in a block exemption Regulation, one must assume that pools which are indispensable for the insurers to achieve the capacity that is necessary to cover certain risks, invariably fall within the scope of application of Art. 85.1 but enjoy - under certain conditions which will be spelled out hereafter - an automatic exemption pursuant to Art. 85.3.
118. A different, admittedly less traditional, view could be taken. If a pool is really necessary for the coverage of particular risks, it could be considered as an inherently procompetitive form of cooperation that does not run foul of Art. 85.1. The fact that the parties deprive themselves of the freedom to offer insurance individually for these risks is immaterial from a competition policy point of view if anyway none of them would even think about making use of that freedom. This is the easy part of the reasoning. How does this theoretical starting point work out in practice? Can it work out in practice?
119. There is certainly no exhaustive, ready-made list of risks for which it is obvious that a pool is needed to create sufficient capacity. According to the above-mentioned introductory recital of the Regulation, three parameters play a role in determining whether the risk is of such a nature that insurers will tend to join a co-insurance or co-reinsurance group: scale, rarity and novelty. On the basis of scale and rarity combined, a distinction is normally made between normal, aggravated and catastrophic risks. The category of catastrophic risks includes risks with a high scale and a low frequency. There are no precise quantitative data which readily define a particular risk as catastrophic. Aggravated risks distinguish themselves from normal risks because of their higher frequency. Here too there is no hard-and-fast rule for determining when a risk is aggravated. It goes without saying that, if there is a gliding scale of normal, aggravated and catastrophic risks, the more one moves from the normal ones to the catastrophic ones, the more the insurers are likely to create a pool for the coverage of these risks. This is again a helpful theoretical point but not one that is immediately operational.
120. Is it possible at all to determine more precisely when a pool is really necessary for the coverage of a particular risk? In conceptual terms yes. The starting point is that insurers should not be taken for gamblers. They seek to collect a volume of premiums that allows them to cover the losses that occur. In more technical terms, insurers seek to obtain a minimal spread between premiums and losses. A key point is that the more the risks concerned are homogeneous and the higher the number of insured such risks is, the lower the spread will be. For example, in the class of third party liability car insurance, the accuracy with which an insurer can calculate the risk premium will increase in function of the degree of homogeneity of the risk insured (e.g. a sports car driven by youngsters up to 25 years of age as opposed to all cars driven by drivers of all ages) and in function the number of insured such risks. As to the latter parameter, it is crucial for an insurer to cover a sufficiently representative number of such risks in order to be certain that the level of risk premiums calculated on the basis of statistical data concerning losses for the total number of relevant insurance products will also allow him to cover the losses for which he will receive claims. For third party liability car insurance, this number will all in all be rather limited. It will constitute only a fraction of the total number of risks insured. For other risks, such as catastrophic risks, the picture will certainly look quite different.
121. Insurers who do not cover a sufficient number of such risks will not have sufficient capacity to reduce their spread to a safe margin. In those circumstances, they have basically three realistic options. They can take re-insurance individually, join a co-insurance pool or adhere to a co-reinsurance pool. The second and the third options involve cooperation between insurers and are thus by necessity more restrictive than the first option which involves no cooperation other than the conclusion of a bilateral re-insurance contract.
It is nevertheless submitted that co-insurance and co-reinsurance pools do not fall under Art. 85.1 if they allow the participants to bring the spread within acceptable boundaries (i.e. limits which do not jeopardize the viability of the insurers involved). It is further submitted that an antitrust authority should neither push the homogeneity criterion to impractical heights nor endeavour to determine with scientific precision how many homogeneous risks need to be insured before an acceptable spread can be reached for all insurers. A few things do seem clear however. The traditional insurance classes, as defined in the EU Council directives concerning the harmonization of national insurance legislations, are often far too broad to satisfy the homogeneity test. Hence, a pool covering one such class is likely to encompass too many heterogeneous risks to fall outside Art. 85.1. This is true a fortiori for a pool covering several such classes. Furthermore, it is not because an antitrust authority might be ill-equiped to determine with scientific precision how many homogeneous risks need to be insured to yield a minimal spread that pool participants should be discharged of their duty to make a plausible case.
122. An example may illustrate this. As already explained, the Commission granted a formal exemption, namely Assurpol. This pool covers all environmental liability risks. The pool participants have committed themselves to proposing for co-reinsurance all risks falling within the scope of the pooling arrangement. This commitment virtually amounts to an obligation d'apport. There is a wide range of liability risks involved. A French company involved in the business of detecting and removing asbestos from buildings informed the Commission that under French law it was obliged to take environmental liability insurance, that Assurpol held a monopoly position and that customers had no choice but to accept Assurpol's policy conditions. It argued that it was perfectly feasible for individual insurers to cover the asbestos risk at their own policy conditions. It seems safe to say that this risk is indeed distinctly different from other risks covered by the Assurpol pool, such as those incurred by companies operating Seveso-type of plants capable of causing considerable environmental damage.
123. All this is not to say that pools which are not, or at least not in their current form, necessary for the coverage of the risks concerned, should be broken up. These pools would simply need to pass scrutiny under Art. 85.3. It would mean first of all that the pool participants would be subject to the market share test contained in Art. 11 of the Regulation. Secondly, if they fail to meet this test, an individual notification would be required to put the Commission in a position to decide whether the pool fulfils the conditions of Art. 85.3. The Commission would be bound to reconsider the market position of the participants (Art. 85.3, fourth condition). But it would also have to examine whether the pool can be justified on grounds other than the one explained above (namely the need for insurers to achieve a critical dimension to reduce their spread). One such other ground probably the favourite one among pool participants would no doubt be that the pool allows the participants to cross-subsidize, i.e. to finance the cover of one risk with the premiums collected through the cover of another risk. Typically this cross-subsidization would be operated between premiums for risks which are large but rarely materialize and risks which trigger less high claims but occur frequently.
124. A final word on the applicability of Art. 85.1 to pools. Art. 17 of the Regulation stipulates that the Commission can withdraw the benefit of the block exemption when the pool participants "would not, having regard to the nature, characteristics and scale of the risks concerned, encounter any significant difficulties in operating individually on the relevant market without organizing themselves in a group". Obviously, under the alternative view explained above, the consequence of such a finding would only be that Art. 85.1 would apply to the pool and that the redeeming virtues of the pool would have to be weighed against its restrictive effects under Art. 85.3.
b) How does one correctly implement the market share test under Art. 85.3 (Art. 11 of the Regulation)?
125. We have already clarified the wording of Art.11 of the Regulation (supra no.111-114). We have also formulated a critical remark about the requirements set forth in Art.11.2 regarding the exemptibility of pools covering aggravated risks. A few additional comments are, however, in order.
126. The first one has to do with the "residual" meaning of Art.11 if one were to consider that pools which allow participants to achieve sufficient capacity to reduce the spread to acceptable limits are not covered by Art. 85.1 at all (supra no.118-122). Under that approach, Art. 11 would become a genuine de minimis provision for the benefit of all those pools which would not be necessary to increase the capacity of its participants. Art. 11 would indicate that the Commission does not wish to bother about co-insurance pools whose participants hold maximum 10% of the market or about co-reinsurance pools whose members hold a market share of no more than 15%.
127. The second comment will come as no surprise. Art. 11 gives market operators little or no legal certainty because it contains no guidance on the definition of the relevant market. It has this weakness in common with similar provisions in other block exemption regulations. In the insurance field, however, the difficulty of defining the relevant markets properly and of determining the shares held by the pool participants on these markets is greatly exacerbated by the fact that the market operators and their supervisory authorities are used to distinguish only between insurance classes and that these classes do not coincide with the antitrust concept of relevant markets. These distinctions constitute a complicating factor because they are reflected in the scope of activities pursued by the pools which the Commission is currently examining. These often cover a wide range of risks which, whether they encompass several classes or just one, belong to different product markets. For example, a so-called aviation risk pool will typically cover risks as diverse as a collision between two airliners above Manhattan and a parachutist's crash in the hills of New Jersey.
It follows that the only sensible method to apply a market share test to a co-insurance or co-reinsurance pool, such as the one set forth in Art. 11, is to identify the entire range of product markets covered by the pool and then determine for each of them their geographic span. It can be expected that the findings will be congruent with those that would be achieved if one made a serious effort to determine whether a pool is necessary to allow the participants to achieve sufficient capacity to reduce the spread to acceptable limits. For the sake of the argument, an oversimplification is made. A pool between national insurers which covers catastrophic risks is likely to satisfy the necessity test (and fall outside Art. 85.1) but is equally likely to satisfy the market share test set forth in Art. 11 because the relevant geographic market is worldwide (and benefit in any event from an automatic exemption). A pool which covers in addition all types of normal risks is unlikely to meet the necessity test and might also easily exceed the market shares featuring in Art. 11 because the relevant geographic market will be national. The result would be that the pool partly falls outside Art. 85.1 altogether but partly needs to be individually notified and scrutinized under Art. 85.3. And then a balancing test will be required: one will have to weigh the alleged justifications (such as cross-subsidization) against the restrictions of competition.
128. A third comment concerns one of the grounds on which the Commission may withdraw the block exemption even if the pool meets the market share criterion set out in Art.11. According to Art.17 sub c, the Commission may do so "where the setting-up or operation of a group may, through the conditions governing admission, the definition of the risks to be covered, the agreements on retrocession or by any other means, result in the sharing of the markets for the insurance products concerned or for neighbouring products". Especially the agreements on retrocession may give reason for concern. Imagine a co-reinsurance pool in which insurers located in one Member State participate for the purpose of co-reinsuring risks for which the geographic market is international. Imagine further that these insurers jointly retrocede part of the risks by concluding a series of re-insurance treaties with pools of insurers located in other Member States. In such cases it should be examined whether the network of re-insurance treaties may lead (or has actually led) to a consolidation of the positions held by the member of each pool on their direct insurance home market.
SUB-SECTION 4 STANDARD TECHNICAL SPECIFICATIONS AND APPROVAL PROCEDURES FOR SECURITY DEVICES
129. Title V of Regulation no. 3932/92 concerns agreements between insurers or decisions of associations of insurers which restrict competition on "secondary", "non-insurance" markets. Art.14, first indent allows insurers to agree on "technical specifications, in particular (those) intended as future European norms, and also procedures for assessing and certifying the compliance with such specifications of security devices and their installation and maintenance". Art.14, second indent allows them in addition to agree on "rules for the evaluation and approval of installation undertakings or maintenance undertakings". Art.15 specifies under which conditions insurers can jointly set the above-mentioned rules.
130. As Art.14 already indicates, these rules are directed at two distinct groups of undertakings: on the one hand, the manufacturers of security equipment and, on the other hand, the undertakings installing and/or servicing such equipment. Of course, many undertakings may be involved in both activities.
Art.15 contains a number of requirements concerning substance, i.e. the quality of the security equipment or of the service consisting in installing or maintaining such equipment. Not surprisingly, Art.15 (in particular sub a and b) requires insurers to adopt objectively justified rules and to apply them in a non-discriminatory manner. There is also a proportionality requirement. Art.15 sub a refers to technical specifications rules concerning the equipment which are "in proportion to the performance to be attained by the security device concerned" while according to Art.15 sub b the rules concerning the quality of the servicing companies must "relate to their technical competence".
Art. 15 further includes a list of requirements concerning procedure. For instance, the substantive rules must be easily available (sub d), include a (transparent) classification based on the level of performance obtained (sub e) and the approval procedures must not be too costly (sub g) or too time-consuming (sub h) and lead to duly motivated decisions that can thus be challenged (sub j and k). As in other titles of this Regulation, the agreed or recommended rules should unequivocally stipulate that each insurer remains free to accept security devices or contract servicing companies not approved jointly.
131. Title V expresses a marked preference for pan-European technical specifications. This follows from Art.14, first indent which refers in particular to technical specifications which are "intended as future European norms" but also from Art.15 sub l which requires that "the specifications and rules are applied by bodies observing the appropriate provisions of norms in the series EN 45.OOO". This preference is entirely in line with the EU Commission's new approach regarding harmonisation of technical norms. This preference would appear to have a flip-side. Technical specifications drawn up by a (private) national association of insurers should mutatis mutandis be subject to the Cassis de Dijon scrutiny applied to (public) measures adopted by national authorities of the Member States whose compatibility with Art.30 EU treaty is tested. This means that it would be for the association of insurers to demonstrate that their rules in no way impede the free movement of goods or services or, if they do, that they pursue legitimate objectives of public interest and constitute a proportionate means to achieve these objectives.
132. The Commission has so far never formally taken a position on an agreement between insurers or a recommendation issued by an association of insurers regarding security devices. There are, however, a number of cases pending and it is the Commission's intention to clarify the meaning of Art.14 and 15 of the Regulation in these cases.
SUB-SECTION 5 SETTLEMENT OF CLAIMS
133. In 1991 the Commission asked and obtained a Council mandate to apply Art. 85.3 by regulation to agreements having as their object the settlement of claims. Due to lack of "sufficient experience in handling individual cases", it finally did not include this type of agreement in the block exemption regulation. Since the adoption of this regulation the Commission has never taken a formal position with regard to these agreements. Its services once examined - and rejected - an informal complaint concerning a settlement of claims arrangement in the French car insurance market. This year they have cleared the few - less than ten notified arrangements by way of comfort letter. There are no pending cases left. Three examples will give a flavour of the sort of arrangements that were notified to the Commission.
134. The settlement arrangements may take a variety of forms. Insurers may agree to allocate between themselves the cost of damages arising out of a claims case in which their clients are involved. Before proceeding to the allocation, they may or may not make enquiries into the question whose client is guilty. Or insurers may agree that the insurer whose client is guiltless will compensate that client directly. An arrangement combining the cost allocation and direct compensation formulas may also occur. Three examples (one for each of the three types of arrangements just mentioned) will give a more concrete flavour of the sort of arrangements that have been notified to the Commission.
135. In a Dutch case regarding the settlement of claims arising out of collisions between inland vessels flying different flags, the insurers have agreed to pay each 50% of the actual damages suffered by the parties without enquiring the guilt question. This cost allocation agreement only applies to small claims (in casu 10.000 Swiss francs). In another Dutch case dealing with car insurance, the agreement stipulates that the insurer of the guiltless party will pay that client directly a lump sum of 1.200 guilders as compensation for the costs incurred by the expert appraising the damage. The paid amount is said to correspond to the average cost. One Spanish case concerning the settlement of claims arising out of car collisions combines the cost allocation and direct compensation formulas. The insurers have agreed that the insurer of the guilty party will pay the insurer of the guiltless party a lump sum corresponding to a yearly fixed average sum of damages paid in previous years (cost allocation). The guiltless party will always get compensation for the actual damages from his insurer, irrespective of whether the "inter-insurers" lump sum covered these or not (direct compensation). The agreement only applies in cases where there is no dispute among insurers over who is guilty. A short time limit for disputes is set in order to lift quickly uncertainty as to the applicability of the claims settlement agreement. In any event, it only applies to claims less than 1 million pesetas.
136. All three agreements avoid time-consuming correspondence and potentially costly litigation over the settlement of the claims. The same holds true for the other agreements that have been notified. Moreover, they all concern "nitty gritty" claims. Those two considerations taken together, i.e. cost savings and de minimis financial stakes, have led the Commission's services not to invest further in the handling of these cases and to close them by an exemption-type of comfort letter. It is the combination of the two considerations that is important. First, cost savings are probably particularly beneficial to the insured when these bring small claims. Second, the elimination of "non-price" competition in the field of claims settlement, would not seem to distort substantially "price" competition on premiums.
137. It follows that the favourable attitude of the Commission's services towards the above-mentioned agreements is not entirely without qualification. For the settlement of larger claims, it is perhaps more likely that the lump sum transactions among insurers would create imbalances in the sense that some insurers would pay substantially more than they receive. This may in turn have a knock-on effect on the level of premiums they charge to their clients. However, no such cases are known to the Commission.
One could of course query why Art. 85.1 applies at all to the above-mentioned claims settlement agreements. Frankly speaking, the services have not made an in-depth market analysis to find out whether the agreements, apart from manifestly restricting the insurers' freedom of action, also restrict competition in an appreciable manner, nor have they investigated whether these agreements affect interstate trade in an appreciable manner. They have, by and large, taken the applicability of Art. 85.1 for granted on the ground that most insurers operating in the Member State concerned participate in them. As to the specific question regarding the effect upon interstate trade, although in most cases the actual effect is either remote or non-existent if one exclusively looks at the demand side of the market (even though the agreements can be expected to cover the large majority of claims in the sector at hand), the services have relied on the "supply-side" approach which they have followed ever since Verband der Sachversicherer (some of the participants in the agreement being branches of foreign insurers). Besides, from a policy point of view, the choice of an exemption-type (rather than a negative clearance-type) of comfort letter presented the advantage of confirming that the notified claims settlement agreements possessed redeeming virtues.
SUB-SECTION 6 REGISTERS OF AND EXCHANGE OF INFORMATION ON AGGRAVATED RISKS
138. The Commission also asked and obtained a Council mandate to apply Art.85.3 by regulation to agreements having as their object the registers of, and the exchange of information on, aggravated risks. One example taken from the car insurance class will clarify the scope of such agreements. A register on aggravated risks will typically list the cars which have given rise to claims against their owner. They may further include references to stolen cars or cars for which the owner has not paid his insurance premium for a some months. Insurers can consult such registers before determining the level of premium they will charge.
139. The existence of a register means that there will be an exchange of information among insurers. This type of exchange of information does not, however, seem to involve a restriction of competition among them. It simply allows them to calculate premiums accurately as risks reveal themselves more easily and more quickly as aggravated and potentially bad.
"Naked" registers of aggravated risks (i.e. not accompanied by supplementary restrictions on the insurers' freedom to set the premiums at a level which they deem appropriate) seem therefore to raise little or no antitrust concern.
140. Of course, it will need to be examined whether the insurers who have set up the register, do not use it as a vehicle for exchanging more sensitive information which would restrict competition among them or - worse -would agree on identical penalizations for certain aggravated risks. For instance, when one insurer increases the insurance premium of a driver who has caused an accident and that driver decides to move to another insurer, the latter should be under no obligation to penalize him to the same extent (or to penalize him at all). One might, of course, expect an insurer to penalize a driver who has a bad record even though he has not committed himself to do so vis-à-vis his competitors. Consequently, the abolition of a clause providing for such a commitment might not result in a substantial gain for competition. However, as already explained with regard to other clauses also prescribing a mode of conduct which parties are likely to follow anyway, their abolition creates at least a potential for competition since it opens up the possibility for insurers to adopt a different mode of conduct.
