REPRESENTATION BY

REPRESENTATION BY

THE ASSOCIATION OF TRINIDAD & TOBAGO INSURANCE COMPANIES (ATTIC) ON THE FAIR TRADING BILL

1.0 Introduction

It is the view of the Association of Trinidad & Tobago Insurance Companies (ATTIC) that Competition Law is a key component in protecting the interests of consumers in a liberalized trading environment. It is worth noting that the Green Paper was published for public comment in early 1998 when the timetable for enactment into law was later that year. Clearly, legislation is now well overdue. However, the country would have had the benefit of the experiences over the past three (3) years, since much has happened in the further opening-up of the domestic market both in terms of goods and services. Further, we can now take into consideration the implications for the draft bill of implementing Protocol VIII of the Treaty of Chaguaramas which provides for a Caricom Competition Law.

In keeping with the Government's eagerness to receive views on the proposed Fair Trading Bill, the insurance industry through its representative body - ATTIC - wishes to put forward some suggestions and recommendations for the consideration of Government.

Our submission deals with the following issues:

The need for regulation in the insurance industry
The threshold for triggering the merger control regulation

procedure

Confidentiality of information
Agreements that merit exemption
Powers of the Minister

2.0 ISSUES FOR CONSIDERATION

2.1 The need for Regulation of the Insurance Industry in Trinidad & Tobago

The insurance industry in Trinidad & Tobago, like other jurisdictions worldwide, is subject to a licensing regime. All insurance companies are required to be registered by the Supervisor of Insurance and to comply with the provisions of the Insurance Act, 1980. The insurance companies must meet certain capital, solvency and prudential requirements in the conduct of their business so that they can meet the legitimate expectations of policyholders as regards their contractual obligations. The insurance industry falls under the Supervisor of Insurance while the banking industry reports to the Central Bank. At present, the Government is working towards having a Single Regulator under the Central Bank and this will require new legislation for an expanded regulatory framework. This is clearly a sensible direction since banking and insurance have been seen within recent times as part of a wider financial services industry.

Licensing procedures can be seen as a barrier to entry and therefore prohibited by competition rules. However, in the financial services sector - banking and insurance - a licensing regime is a necessity in order to screen would be providers, monitor their continuing viability to meet liabilities incurred, as well as limiting/ controlling the extent of ownership by a single shareholder all in the interest of prudential issues and market stability.

In short, the authorities are concerned about the financial health of the insurance industry and this remains the priority, although consumer issues such as products and consumer protection are now assuming greater focus.

2.2 The threshold for triggering the merger control regulation procedure

The Fair Trading Bill speaks of abuse of monopoly power if the company holds a share of more than 40% of the market. In addition, mergers of companies having assets exceeding TT$50 million will be subject to investigation.

ATTIC envisages some difficulty with these provisions for the following reasons:

Unless assets are defined as only shareholders' assets, it can include policyholders' funds which do not belong to the shareholders- it must be noted that insurance companies must maintain assets to meet liabilities of the policyholders and

the definition of 40 % market share will pose problems as a company can have 40%+ in a particular line of business but overall a significantly smaller market share as it is operating in a niche market.

The insurance industry comprises companies with a General licence, a Life licence or a Composite licence i.e. the company can write both general and life insurance business with a single legal entity. In the case of some life insurance companies, they maintain shareholders' assets within their policyholders' funds so they can under-report their shareholders' net worth. When they transfer from their Policyholders' Funds to the Shareholders' Funds, such transfers attract taxation.

The Insurance Industry Report 1999, published by ATTIC and Ernst & Young, showed sixteen (16) general/composite companies were examined. The insurance industry average in respect of Shareholders' Funds was TT$36.5 million. Four (4) companies exceeded the $50 million threshold by about 2:1. Three (3) others had Shareholders' assets exceeding $30.0 million. Subsequent to the publication of this Report, two (2) mergers have taken place.

The history of the insurance industry worldwide is one of consolidations and concentration and clearly, in Trinidad & Tobago there is every reason for larger insurance entities in order to take advantage of the benefits of the Caribbean Single Market and Economy (CSME). The threshold of TT$50.0 million is much too low. In the United Kingdom, the threshold is 25%+ of the market and total worldwide assets of at least 700 million pounds ( US$1,050 million).

However, of even greater concern is the appropriateness of Merger Control Regulation in the Trinidad and Tobago legislation since the Caricom Competition Policy does not include Merger Control Regulation. Jamaica does not now have Merger Control in its Competition Law. In the case of the proposed Single market, insurance companies in Trinidad & Tobago will be subject to merger control regulation while its competitors in Member States are free to merge. It seems that this is an unnecessary imposition on Trinidad & Tobago insurance companies.

In the final analysis, should insurance companies will not be exempt from Merger Control Regulation, ATTIC suggests that the Industry Regulator should be given the authority to enforce the competition law and to determine whether a merger should take place at least in the early years (possibly the first 5 years).

2.3 Confidentiality of Information

The insurance industry raises a major concern regarding the level of confidentiality in the case of an investigation and compensation when there is breech of confidentiality. Whereas there is provision for fines up to $25,000 and imprisonment for 2 years for breach of confidentiality there is no provision for damages suffered by the firm.

ATTIC is urging the government to seriously re-consider the whole issue of confidentiality in the event of investigations. Further, there is some concern that hearings are to take place in public. We would like clarification as to the procedure by which confidential information could be protected at such hearings.

2.4 Agreements that Merit Exemption

ATTIC proposes exemption be given for certain types of agreements that are essential for the smooth functioning of the insurance industry .The insurance industry by its very nature lends itself to co-operation among the insurance companies through the sharing of information so essential to the functioning of this sector. While such agreements may be the subject of scrutiny because they could lend themselves to collusion and cartel type behaviour, the efficiency benefits outweigh the possibility of anti-competitive conduct.

2.4.1A Examples of Agreements that facilitate the provision of insurance services:

The OECD countries have in fact recognized this reality and have allowed these agreements. For instance, Regulation 3932/92 of the EU provides block exemption for four types of agreements in the insurance industry as follows:

the establishment of common risk premium tariffs based on

ascertained statistics

the establishment of standard policy conditions

the common coverage of certain types of risks

the establishment of common rules on the testing and

acceptance of security devices

Two other types of agreements were considered at the time but were not included because the Commission at that time had not acquired sufficient experience in handling individual cases. Since then, it has dealt with several cases involving such agreements and has accepted the need to grant exemption for:

agreements on the settlement of claims

the establishment of registers and exchange of information on

aggravated risks (e.g poor driving record)

2.4.2B Details of the nature of these six types of agreements
1. Agreements on Common Risk Premium Tariffs

exempts agreements for the common calculation of net

premiums (pure risk premiums) provided that insurers are not obliged to use the statistics

must be limited to an exchange of actual statistical

information on categories of identical or compatible risks (e.g. mortality tables or tables showing the frequency of accidents)

exempts the common carrying-out of studies of the

probable impact of general circumstances external to the insurers to the frequency or scale of claims e.g. catastrophe modeling, evolution of car repair costs, or of medical costs to determine the risk premium.

The following agreements are not exempt:

exchange of data that is more detailed than what is

necessary to calculate net premiums

exchange of information that is aggregated in such a way

that it becomes meaningless from a statistical point and is merely an attempt at harmonizing prices between insurers

exchange of information on administrative or commercial

costs

2. Standard Policy Conditions

With the objective of facilitating easy comparison of terms and conditions offered by each insurer while at the same time allowing for flexibility to meet a client's needs, the Regulation:

exempts standard non-binding policy conditions leaving

the insurer free to depart from agreed terms and conditions should that be considered appropriate

draws a "black list" of clauses which cannot be included

in a standard policy

3. Co-Insurance and Co-Reinsurance Pools

The guiding principle that determines whether such pools are compatible with EC competition rules and that they are not anti-competitive is their necessity to achieve a certain level of collective capacity.

The preamble of the Regulation states that "the establishment of co-insurance and 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, in particular, risks that are difficult to cover because of their scale, rarity or novelty."

The following apply however:

there is a threshold of 10% of the market for co-insurance

pools and 15% for co-reinsurance pools. Pools exceeding these thresholds will have to be individually assessed according to the above criteria

articles 12 and 13 of Regulation 3982/92 allow the

following restrictions to be imposed on members of the pool

- agreement on insurance conditions

- agreement on fixing the premium (commercial premiums in the case of co- insurance pools and pure risk premiums in the case of co-reinsurance)

common purchase of reinsurance is normally allowed

4. Establishment of Common Rules on the Testing and

Acceptance of Security Devices

Insurers are allowed to agree on technical specifications,

and on procedures for assessing and certifying the compliance with such specifications, of security devices, their installation and maintenance

To prevent discrimination against some suppliers of

security devices , insurers are required to adopt objective criteria and to apply them in a non-discriminatory manner

However, when insurers agree on security devices at the

national level, it was found that this has the effect of excluding those from other Member States of the Single market. There is a move to establish mutual recognition of security devices agreed in other Member States or justify why this cannot be done.

5. Settlement of Claims

In several insurance branches, it is common practice for insurers to enter into agreements in order to simplify the settlement of claims between them. This may involve:

agreements that set uniform conditions to reimburse

damages, e.g. methods of sharing the cost of damages arising from disasters in which their clients are involved, e.g. car insurers may agree to pay each 50% of damages without inquiring whose client is guilty rules of direct reimbursement depending on whether each insurer compensates its clients directly

6. Registers of and Exchange of Information on Aggravated Risks

Due to lack of information on the real risk that some of their potential clients bear, insurers are allowed to:

exchange information on aggravated risks (risks that

exceed the norm)

create specific registers for such purpose ( e.g. in car

insurance, where drivers with more than a fixed number of accidents are being listed)

This allows insurers to easily recognize aggravated risks and to charge premiums accordingly and does not pose a threat to competition.

2.5 Powers of the Minister/ Fair Trading Commission

ATTIC has concerns over what it sees as unusual power vested in the Minister. It is ATTIC's belief that the work of the Fair Trade Commission should be transparent and be devoid of political interference. The independence of the Commission is absolutely necessary so that the business sector could have confidence in the fairness and objectivity of the Commission's decisions.

In this regard, the clauses that raise the biggest concern are 13 (6); 40 (b); 41 (3) and 53 of the Fair Trading Bill.

3.0 SUMMARY

Given the above findings on how the insurance industry is treated under competition regimes in OECD countries, it is recommended that: (List the items consistently with how they were presented in the paper.)

There should be close collaboration between the Regulator of the Insurance Industry and the Fair Trading Commission;

Merger Control regulation should be reviewed. If in the final analysis this provision remains, then the Regulatory Authority should be the competent authority to deal with approvals and or enforcement of competition law. In addition, the threshold of TT$50 million is much too low.

There should be further consideration of how confidentiality of information could be protected;

Exemptions from prohibition of agreements that are necessary to facilitate the provision of insurance services should be granted, i.e., for the six types of agreements discussed above. There is sufficient experience from the major jurisdictions to demonstrate that the insurance industry is such that some practices that may seem to be anti-competitive are quite necessary for its orderly conduct.

The powers of the Minister and the independence of the Fair Trading Commission should be re-thought to ensure that the business community has confidence in the fairness and objectivity of the Commission.