Montenegrin Agency for Protection of Competition hits hard on co-insurance agreements

The Montenegrin competition authority rendered on 24 July 2015 a decision finding that two insurance companies, Lovćen osiguranje (member of Triglav group) and Sava osiguranje had concluded three illegal restrictive agreements on the market of non-life insurance. The first affected agreement is between the two insurers, and it regulates their joint positioning on the insurance market. The other two insurance agreements that were declared illegal and thus null and void are between the two insurers acting as a consortium, on the one hand, and CGES, the Montenegrin transmission system operator as insured, on the other hand. The Agency did not issue any fines, since it does not have that authority – in Montenegro, the issuance of fines for competition law infringements are within the competence of misdemeanor courts.

The Montenegrin authority unfortunately does not publish the reasoning of its decisions. The legal community is therefore deprived of the opportunity to get to know and comment on the merits of the decisions. In this particular case, however, some light into the merits of the case is shed by an extraordinary correspondence between the infringer Lovćen osiguranje and the Agency in the wake of the infringement decision.

Having learned of the decision, Lovćen osiguranje sent on 27 July 2015 a dramatically intonated letter to the competition authority. It sought guidance “within 24 hours” on whether, in light of the authority’s decision “holding co-insurance agreements illegal”, a co-insurance agreement concluded between Lovćen osiguranje, Sava osiguranje and Delta Generali, on the one hand, and the Ministry of Interior as insured, on the other hand, can be prolonged for two months at the Ministry’s request. The letter ends with alarming warning that the police “anti-fire aircraft and helicopters would not be able to take off starting from 1 August 2015 at 00.00h” unless the existing insurance policy is prolonged.

The Agency angrily responded the day after (within the deadline!), dismissing overt accusations that its decision declaring the three agreements null and void can be in any manner responsible for potential inability of the Ministry of Interior to perform its duties. The Agency further reminded that its decision affects specific three agreements that were subject to the investigation and not all co-insurance agreements. It also rebuked Lovćen osiguranje, stating that this regional insurer should have known to what extent it is permitted to exchange information and contract with competitors.

Following this exchange with Lovćen osiguranje, the Agency issued a press release on the infringement decision. It pointed out that Lovćen osiguranje and Sava together have 55% of the insurance market, on which there are only three more insurers, and that the joint offer of the two insurers was the only one received by CGES. The authority then openly stated that Lovćen osiguranje and Sava “decided not to compete [at the tender launched by CGES] but that it was obviously most profitable for them to submit a joint offer as co-insurers”. It did not stop there but it instructed CGES “as party injured as a result of the cartel agreement” that it is entitled to claim damages. As a coup de grace, the Agency added that a failure of CGES to pursue a damage claim could cause damage to the state treasury, given that the majority of CGES’ capital is in state ownership! Finally, the authority expressed its hope that the misdemeanor court in charge of determining a fine will act conscientiously and timely.

In the more doctrinal part of the press release, the Agency said that “agreements on joint bidding at public tenders, entered into between market participants with significant market share and power, can have no other purpose than division of the market, price fixing and undertaking not to compete”. This is as close to the reasoning of the infringement decision as us who are not privy to the proceedings could obtain.

The Montenegrin Agency has not spelled out in its communication what should be the main criterion when analyzing the restrictive nature of the joint bidding arrangements between competitors in the insurance sector– whether any of the participating insurers would have been able to satisfy the coverage requirements on an individual basis. By referring to “significant market share”, the Agency might have wanted to hint at this criterion.

Although, as a matter of principle, an insurer with “significant market share and power” is more likely to fulfill the coverage requirements alone, this may not always be the case. Unlike in Montenegro, in the E.U., insurance is one of few industries that benefits from a sector specific block exemption. The Insurance Block Exemption Regulation No. 267/2010 (IBER) applies to co-insurance pools regardless of the market shares when the pool is made to cover genuinely new risks. The benefit of the block exemption extends in that case for a maximum period of three years. For other risks, the benefit of the block exemption applies if the combined market share of the co-insurers joined in a pool does not exceed 20% (subject to certain additional conditions). Whereas pools will be normally created to cover specific risks which cannot be covered by pool members on an individual basis, the exemption applies, subject to the market share threshold, even if two or more participants in the pool are able to offer the relevant coverage independently. The rationale behind the exemption in that case is that pooling the risk can provide cheaper and/or more efficient cover to clients. IBER does not apply to ad hoc co-insurance arrangements whereby a certain part of a given risk is covered by a lead insurer and the remaining part of the risk is covered by follow insurers, each participating insurer being responsible for its percentage share only. If such ad hoc co-insurance agreement contains any restriction of competition (such as premium alignment), the restriction has to be subject to self-assessment against the conditions for the individual exemption under Article 101 (3).

The Montenegrin case, from what we know, did not involve insurance of new risks. The Agency’s press release reveals that the combined market share of the co-insurers was 55%. Accordingly, subject to the facts that are not known to me, it appears that the agreements affected by the Agency’s ruling would not have qualified for an exemption under IBER (even if IBER applied in Montenegro, which is does not). Given the forcefulness of the Agency’s critique of the disputed agreements in the press release, it seems unlikely that the agreements would have obtained individual exemptions even if those had been requested (Montenegro still applies the pre-notification system styled after the Regulation 17/62).

In the neighboring Serbia, which also has a pre-notification individual exemption system, the competition authority has granted a number of individual exemptions to the agreements on joint bidding for insurance contracts, on the ground that competition is not adversely affected because none of the insurers would have satisfied the tender conditions on an individual basis.