TRADE PRACTICES ISSUES FOR THE INSURANCE INDUSTRY

ALLENS ARTHUR ROBINSON INSURANCE AND REINSURANCE FORUM: 4 APRIL 2007 SPEAKERS: CAROLYN ODDIE, PARTNER AND EMMA MARSH, SENIOR ASSOCIATE

Quoting, pricing and commissions

A number of trade practices issues can arise in relation to quoting, pricing and commissions. These include:

• ;

• exclusionary provisions; and

• misleading and deceptive conduct. 1. Price fixing Price fixing is absolutely prohibited by the Trade Practices Act 1974 (Cth) (TPA). Price fixing is a contract, arrangement or understanding (including a 'nod and a wink') which involves 'fixing, controlling or maintaining' of price by competitors. This can include the giving of a special deal such as a 'discount, allowance, credit or rebate'. There need be no agreement on a specific price. Issues that could arise in the context of quoting, pricing and commissions that could amount to price fixing include:

• discussing or agreeing prices for insurance or reinsurance with a competing insurer or reinsurer;

• discussing or agreeing fees or commissions with a competing broker;

• discussing or agreeing discounts, allowances, bonuses, rebates or credits in relation to insurance with a competing insurer;

• discussing or agreeing agent's or broker's fees or commissions with a competing insurer; or

• rate setting through discussions at a trade association meeting or other 'industry' venue. It is possible that a broker could be involved in price fixing as a 'go between' or liaison person, in effect the hub of a price fixing arrangement between insurers. 2. Exclusionary provisions Exclusionary provisions are also absolutely prohibited by the TPA. An exclusionary provision is a provision of a contract between persons, at least two of whom compete with each other, where the purpose of the provision is to prevent, restrict or limit the supply of goods or services to particular persons or classes of persons, or in particular circumstances or on particular conditions. Issues that could arise in the context of quoting, prices and commissions that could amount to an exclusionary provision include:

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• discussing or agreeing to 'divide' or 'allocate' tenders, submitting cover quotes or agreeing the conditions of tenders with a competitor, coming to any arrangement not to put in a tender or to limit a tender in some way with a competing bidder, or engaging in any other form of bid-rigging;

• a system of 'dummy' or artificially inflated quotes to ensure the 'preferred provider' wins the contract;

• discussing or agreeing with a competitor to limit or in any way restrict the terms and conditions of insurance contracts such as agreeing not to include cover for particular conditions;

• discussing or agreeing with a competitor to 'divide' or 'allocate' territories or classes of insurance or products; and

• discussing or agreeing with a competitor not to deal with a particular person or company. 3. Misleading and deceptive conduct Misleading or deceptive conduct is prohibited by the TPA and the ASIC Act 2001 (Cth). Circumstances giving rise to misleading or deceptive conduct in the context of quoting, pricing and commissions are many and varied but may be associated with:

• failure to disclose commissions;

• 'dummy' or artificially inflated quotes;

• 'B' quotes – where insureds are misled by their broker, believing that the broker is providing them with the best available coverage at the lowest price when this is incorrect;

• hidden commissions or 'kickbacks'; or

• contingent commissions if not disclosed or misdescribed.

Competition or : arrangements between competitors

A number of trade practices issues can arise in relation to arrangements between competitors. These include price fixing and exclusionary provisions discussed above. There is an exception from the price fixing prohibition in relation to collective acquisitions and there are defences to both the price fixing prohibition and the prohibition on exclusionary provisions, all of which may apply to joint venture and co-insurance arrangements in certain circumstances. In addition, arrangements between competitors need to be assessed as to whether they have the purpose, effect or likely effect of substantially lessening competition in a market. Examples of arrangements between competitors that could have this effect are agreements in relation to standard terms and conditions. In the insurance industry, depending on the circumstances, a market may be defined at its narrowest as the market for the supply of that particular insurance product (rather than, eg, the market for the supply of general insurance). Geographic markets may, depending on the product, be state based rather than national.

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Distribution arrangements

The main trade practices issues that can arise in relation to distribution arrangements are and third line forcing (which is a specific form of exclusive dealing). If distribution arrangements are being entered into between competitors or potential competitors, care also needs to be taken to avoid price fixing and exclusionary provisions, which have been discussed above. 1. Exclusive dealing Exclusive dealing conduct is prohibited by the TPA only if it has the purpose or has or is likely to have the effect of substantially lessening competition in a market. Exclusive dealing may occur if an insurance company places conditions on the supply of products or services to, or the acquisition of products or services from, a broker, agent or customer. For example, if an insurance company:

• insists that it be the sole or exclusive supplier to a particular customer;

• agrees to supply a broker on condition that the broker does not distribute certain products of the insurer’s competitors or does not distribute the insurer’s product to certain types of customer; or

• supplies a product to a customer on condition that the customer also acquires another product from the insurance company; this is exclusive dealing. A substantial lessening of competition is likely to result from exclusive dealing where foreclosure results. For example, if a major buyer (broker or customer) is locked out by the conduct, or other suppliers are locked out by the conduct. 2. Third line forcing Third line forcing involves a supplier linking the supply of another supplier's product to the supply of its product. In Australia, this practice is currently banned regardless of its effect on competition unless clearance is first obtained from the Australian Competition & Consumer Commission (through the process of notification or authorisation), or the two companies involved are related bodies corporate. A company will be third line forcing if it supplies or offers goods or services (or offers a special price or discount) on condition that the person acquiring the goods or services acquires other products or services from a third person. Refusing to supply someone because they refuse to accept such a condition is also third line forcing.

Advertising and marketing

The main potential trade practices risk arising from advertising and marketing of insurance products is misleading or deceptive conduct. This is prohibited by both the TPA and the ASIC Act. The ASIC Act also prohibits the making of false or misleading representations in connection with the supply or possible supply of financial services, such as making representations about the need for a particular form of insurance.

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Further, the ASIC Act prohibits engaging in other types of unfair conduct, including engaging in harassment or coercion, for example, in relation to the sale of insurance products to individuals.

Penalties

The maximum fines able to be imposed by the Court for breaches of the competition provisions of the TPA are:

• for corporations - the greater of:

• $10 million;

• three times the gain from the contravention; or

• where the gain can not be calculated, 10% of the turnover of the corporate group.

• for individuals - personal fines of up to $500,000 for each breach. Amendments have also recently been made to the TPA so that individuals involved may be banned from being a director or manager of a corporation. In addition, as a result of recent amendments to the TPA, if an action is brought against an individual personally for breach of the competition provisions of the TPA then their employer will not be permitted to indemnify them for any fine or legal costs. Jail terms for serious conduct such as price fixing and market sharing also proposed and may become law by the end of the year. Some breaches of the consumer protection provisions of the TPA and ASIC Act are also criminal offences, for which financial penalties can be imposed of up to $1.1 million for corporations and $220,000 for individuals.

Disclaimer This note does not purport to contain an exhaustive description of the trade practices issues that may arise in the insurance industry and is not legal advice. Rather, it sets out a high level overview of some risk areas that may arise in relation to each of the topics covered during the presentation at the forum.

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