PROCEDURES FOR THE AWARD OF INSURANCE SERVICE CONTRACTS (Advisory opinion)
PRESS RELEASE
The Italian Competition Authority submitted an advisory opinion to the Prime Minister, the Presidents of the Italian Regions, and the President of ISVAP (the regulatory body which supervises private and public insurance companies), in relation to the procedures applied by Public Authorities - especially Local Authorities - for the award of insurance service contracts.
The advisory opinion originated from a sample of public tenders and corresponding contracts, which was examined by the Authority during the investigation. A number of critical aspects in the conduct and administrative procedures applied by awarding authorities emerged, in such a way as to distort competition and affect the mechanisms creating the overall demand of insurance services.
The Authority found five practices being very relevant to the correct functioning of the market:
a) diffusion of the automatic renewal of insurance contracts and rare recourse to open procedures;
b) use of unjustified rigid pre-selection criteria;
c) lack of information about the course of the insurance relationship;
d) improper diffusion of co-insurance;
e) recourse to pre-emption clauses to certain parties' advantage.
a) Automatic renewal of insurance contracts and rare recourse to open procedures.
The Authority ascertained that the recourse to public tenders was not the ordinary procedure for the award of insurance service contracts, even whereas such services fell within the scope of legislative decree no. 157/95.
By contrast, the automatic renewal of insurance contracts through direct negotiations between the policy-holder and the insurance company holding the expiring contract was widespread. .Furthermore, it was noted that only very few public authorities (lower than 10 per cent of the sample) recoursed to public tenders for the award of contracts.
b) Use of unjustified rigid pre-selection criteria.
The restricted procedures applied by public authorities, in the case of tenders, were accompanied by rigid, sometimes unjustifiably, pre-selection criteria of bidders. Calls for tenders often required for the admission the achievement of determined thresholds of premium sales relating to the all insurance products or only those concerned with contracts. The same criteria were used to select bidders to be invited to tender for a service contract.
Even if it was not always laid down explicitly, in both the cases the thresholds of premium sales were meant as premium sales in the national market. As such a criterion was dealing with the sales thresholds of single companies, it was likely to limit participation in numerous public tenders unjustifiably as well to hamper access to the market. Also, the request for centres for the payment of damages in the territory wherein the service should be provided was a distortion of the market and an unjustified obstacle to the access of competitors to the tenders. However, the Authority found that such a requirement was often imposed by awarding authorities.
c) Lack of information about the course of the insurance relationship.
The Authority ascertained the presence of conditions of information asymmetries. Public authorities in fact often did not possess relevant information about the course of their insurance relationships, or their information were insufficient to establish correct contractual relationships, whereas the insurance companies holding the expiring contracts had such information, which were necessary in order to carry out the activity, especially to estimate risks prior to the arrangement of the insurance proposal.
As such, the company possessing the information above was given an advantage over the other competitors which were uninformed or had limited access to it. It is therefore evident that the availability of complete and exhaustive information in order to arrange calls for tenders, and their accessibility to all bidders at non-discriminatory conditions is necessary, but not always sufficient, to success of the awarding procedures.
d) Improper diffusion of co-insurance.
The Authority found that an appreciable number of contracts between public authorities and insurance companies was signed in co-insurance regime, conducted both prior and subsequently to the awarding procedure. As co-insurance being so widespread, it can prevent from establishing correct competitive relationships during the tender.
In particular, if the stipulation of co-insurance agreements subsequent to the award seems to be critical to the legitimacy of the awarding procedure, the recourse to co-insurance pool of companies prior to the award of contracts needs to be carefully examined, given that it could be likely to distort competition, whether the agreement would involve the main operators.
Contracting authorities should be attentive - when defining their insurance needs and arranging calls for tenders and specific conditions, in order to verify whether co-insurance would be needed to cover the risk subject of the awarding procedure. Further, contracting authorities should provide in their calls for tenders that the stipulation of co-insurance agreements would not lead to unjustified agreements between the major companies.
e) Recourse to pre-emption clauses to certain parties' advantage.
Lastly, the Authority noted that calls for tenders provided considerably pre-emption clauses vesting the companies controlled by INA-Assitalia with the right of awarding insurance contracts even if and when their tenders would not win. Such clauses were grounded on multi-year loan contracts signed between public authorities and INA. The Authority deemed that these terms can no longer permit discriminatory conditions between competitors, given that public interests - as the equality of chances for bidders and the effective competition among companies - must prevail.