Domestic property (non-life) insurers were alleged to have breached Article 14 of the Fair Trade Law through the adoption of insurance premium regulations, concerted coinsurance operations, collusion to fix prices for the new Mandatory Automobile Liability Insurance, and other concerted agreements
Case:
Domestic property (non-life) insurers were alleged to have breached Article 14 of the Fair Trade Law through the adoption of insurance premium regulations, concerted coinsurance operations, collusion to fix prices for the new Mandatory Automobile Liability Insurance, and other concerted agreements
Keywords:
property (non-life) insurance, premium regulations, coinsurance, mandatory automobile insurance, minimum premium
Reference:
Fair Trade Commission Decision of October 19, 2000 (the 467th Commissioners' Meeting); Letter (89) Kung Yi Tzu No. 8815126-008
Industry:
Property (Non-Life) Insurers (6720)
Relevant Laws:
Article 14 of the Fair Trade Law
1. Issues in this case can in principle be separated into four major parts: regulations governing property (non-life) insurance rates; concerted coinsurance operations; concerted action to set premiums for the New Mandatory Automobile Liability Insurance system; and other concerted agreements. (1) Rate Regulations "Rate regulations" refers to the standardized terms and conditions for three types of insurance: (comprehensive) automobile insurance, fire insurance, and mandatory automobile liability insurance. These rate regulations, which include such important trading conditions as the insured periods, basic premiums, premium adjustment coefficients, preferential and discount options and other major policy stipulations, were originally drafted by the Non-Life Insurance Association of the Republic of China and then submitted to the industry's main regulatory body, the Ministry of Finance (and also to the Ministry of Transportation and Communications in the case of mandatory automobile liability insurance) for review and approval. All insurers are bound to adhere to the current rate regulations. The complainant maintained that the existing regulations were equivalent to concerted actions among insurers to fix product standards and price levels through its own association and to sanction insurers who failed to comply. The complainant further maintained that these actions constitute "concerted action" under Article 14 of the Fair Trade Law. (2) Concerted Coinsurance Operations Coinsurance refers to the sharing of compensatory duties and division of premium revenues among two or more insurers for specific types of insurance coverage or business. Coinsurance contracts signed by insurers abiding by the coinsurance arrangements would include provisions stipulating the premiums, percentage of risk assumed by the signatory, terms of compensation, and other related matters. The complainant in this case maintained that property (non-life) insurers colluded to set the terms of coinsurance policies (i.e. fixed products, prices, participation ratios, and penalties for those signatories who failed to comply), thus constituting concerted action and impeding market competition. (3) Allegations for fixing the prices of the New Mandatory Automobile Liability Insurance The Mandatory Automobile Liability Insurance Law was promulgated and took effect in 1998. Articles 40 and 41 of the Mandatory Automobile Liability Insurance Law stipulate that proposed rates should be submitted to a screening committee composed of impartial members of the public for review and approval. The complainant maintained that a resolution of the aforementioned committee merely set a ceiling on adding additional expenses to insurance premiums rather than setting a uniform rate. Currently, however, all insurance companies' premiums for mandatory automobile liability insurance are the same, indicating the existence of concerted actions among insurers. (4) Other Concerted Actions and Agreements (i) The complainant alleged that domestic property (non-life) insurers engaged in other concerted agreements as well, and cited the NT$400 minimum premium on maritime insurance as an example. (ii) The complainant also alleged that the insurers colluded to homogenize their product and universalize the price structure, leaving insurance brokers no room to design the most suitable insurance policies for consumers. Taking fire insurance as an example: The complainant maintained that a consumer wishing to purchase independent typhoon/flood insurance or earthquake insurance is forced to purchase unnecessary fire insurance because the former two types of insurance are sold only as additions to fire insurance policies. This leaves no means for insurance brokers to tailor policies to the needs of individual consumers and lessens their room to operate.
2. Findings of the Fair Trade Commission's Investigation (1) Rate Regulations (i) Data provided by each company indicated that the companies' rates for additional expenses were not unified. This is presumably due to the extremely individualistic nature of policies, which presents difficulties in setting the same comparative basic standards for additional expenses. On the matter of consumers directly approaching insurance companies to purchase discounted policies: Maritime insurance premiums are unregulated and set based upon individual appraisal, ruling out any issue of discounts relative to regulated rates. This is in contrast to other forms of insurance subject to regulated rates, such as automobile or fire insurance, in which compensation for brokers or agents can be cut out. For such insurance, most companies reduce rates based upon individual circumstances. In light of the available evidence, it does not appear that the entire property (non-life) insurance sector has engaged in concerted action with regard to the additional expenses attached to regulated-rate insurance policies. (ii) Regarding the role of the Non-Life Insurance Association of the Republic of China in the current rate regulations: The rate regulation system originated several decades ago at a time when the nation's insurance industry was still in its nascent stage and was restricted by government regulatory policies requiring unified insurance policy provisions and rates. In practice, it was usually the association that would compile underwriting and payment data and formulate draft insurance premium standards and regulations, which were then submitted to the Ministry of Finance for review and approval. (2) Concerted Coinsurance Operations (i) Coinsurance refers to the sharing of insurance premiums and dispersing of payment risk among two or more insurers based upon stipulated ratios. Responsibility for underwriting business assumed by any insurance enterprise within the system is rolled over and shared by the other insurance enterprises in the organization, the operations of which are all closely coordinated. An insurance enterprise within a coinsurance organization is considerably limited in its ability to set prices for consumers, and coinsurance organizations generally have formal agreements with regard to the terms of the business transactions for which they share responsibility. (ii) Coinsurance organizations are a necessity because of their functions of pooling and spreading risk, lowering operating costs, and expanding underwriting volume. Legislation in foreign countries also exempts coinsurers from competition laws (e.g. Article 29, Section 2 of Germany's Act Against Restrictions of Competition). Therefore, in this case, it cannot be categorically asserted that the acts violated the Fair Trade Law. (3) Concerted Price-Fixing allegation for the New Mandatory Auto Liability Insurance The rate schedule for Mandatory Automobile Liability Insurance clearly delineates a maximum limit on insurance fees (and added expenses), permitting each insurance company to set its own fee up to the maximum based upon its own operating expenses. The Commission's investigation, however, indicated that most insurers' actual revenues in this area were directly correlated to the (maximum) amount set on the rate schedule, seemingly overlooking the room allowed for competitive pricing. There is, however, no specific evidence or other indications that insurers deliberately conspired to act in concert to fix prices. Thus, based upon available evidence, it cannot be proven that insurers acted in concert to illegally fix prices. (4) Other Concerted Agreements (i) Regarding minimum premiums: The rate regulation for Maritime cargo insurance was liberalized in 1996. However, the Ministry of Finance currently still maintains minimum premium regulations for fire insurance and accident insurance. (ii) Regarding allegations that the insurers acted in concert to systemize their products: The insurance industry relies on actuarial calculations of forecasted losses, risk factors, insurance premium revenues, and other factors. If, in the insurers' calculations, special insurance products requested by consumers would require excessively high premiums or the policies would not be in wide enough demand, the insurers may find it difficult to create such customized products. This is a result caused by the self-adjustment of market supply and demand, and does not violate the Fair Trade Law.
3. In summary, there is insufficient evidence to support the finding that domestic insurers have illegally acted in concert. On the matter of rate regulations and the minimum premium requirements by the Ministry of Finance, which are a considerable impediment to competitive efficiency, the Commission has forwarded a formal written request to the ministry that these regulations be abolished. On the matter of accusations that domestic property (non-life) insurers acted in concert to fix premiums for the Mandatory Automobile Liability Insurance, the available evidence is insufficient to prove unlawful activities. In the spirit of upholding free market competition, however, the Commission has recommended that the Ministry of Finance stress more vocally that the expense cap in the rate schedule is an upper limit (rather than a fixed amount) and to ask insurers not to use the maximum amount as their benchmark. Finally, the Commission has requested that the Ministry of Finance clearly define the operations of coinsurers in the Insurance Law, considering that the mutual insurance system serves a definite and necessary function and is consistent with foreign legislation allowing coinsurers exemptions from fair trade laws. The Commission will also take coinsurance into consideration in future revisions of the Fair Trade law. Summarized by Liang Ya-Chin; Supervised by Horng Der-Chang