REPORT ON MANDATORY NATURAL DISASTER INSURANCE (Advisory opinion)
PRESS RELEASE
PRESS RELEASE
The Antitrust Authority considers that the law introducing mandatory insurance against natural disasters should be amended
On 12 April, the Antitrust Authority submitted an opinion, pursuant to Section 22 of the Antitrust Act, on possible distortions of competition that might be created by Clause 38 of the Bill linked to the Finance Bill currently as it presently stands before the Chamber of Deputies making insurance against natural disasters compulsory.
Underlying this provision is the need to redesign government responsibilities in the event of natural disasters by requiring individuals and the insurance industry to pay part of the damages, following the current international practice of gradually introducing joint liability systems.
While the Authority endorses the underlying purpose of the reform, it has pointed out that the new insurance cover against natural disasters will not be possible without cooperation between the insurance companies, which is generally prohibited under competition legislation. The high level of mutuality which is intended in this Bill requires very close collaboration between insurance companies, and this is also, in principle, against the rules of competition. To provide insurance cover for people in high risk-prone areas, higher premiums will have to be paid by those living in lower-risk areas than would be the case in a completely free market. Applying this principle of mutuality presupposes that premiums would be paid to one and the same insurance company, to provide it with adequate resources to be able to guarantee the service as a whole.
In this connection it should be recalled that, generally speaking, these systems based on a high degree of mutuality tend to be run by companies occupying a monopoly, or by resourcing specific funds which are the only way of ensuring the necessary cross-subsidization. Without solutions of this kind, even though they may restrict competition, companies would tend to be selective about the hazards they are prepared to insure, and only compete to provide insurance cover to low-risk-prone individuals, leaving those for whom the legislation is intended without insurance cover.
These circumstances therefore suggest that general natural disaster insurance cover inevitably involves substantial restrictions on the rules of competition. Under the Treaty and according to established Community case law any national rules that place restrictions on competition must respond to the demands of necessity and proportionality in respect of the end they pursue.
For this reason, the Authority has expressed its concern regarding two particular aspects in the draft legislation: 1) the linking of natural disaster insurance with fire insurance, and 2) the regulation of premiums.
As to the first of these, the decision to introduce statutory natural disaster insurance by extending fire insurance cover creates an unnecessary linkage between two types of insurance cover against quite distinct and technically unrelated hazards. This linkage creates a high risk that the restrictions that need to be imposed competition to ensure that natural disaster insurance cover is able to function properly might interfere unduly with the fire insurance market which is presently unregulated.
This could also thwart the whole purpose of the proposed legislation because those who are under a mandatory obligation to take out the insurance are selected on the basis of a criterion that has nothing whatsoever to do with actual exposure to the hazard: for it would only be those who have voluntarily chosen, or who intend to take out a fire insurance policy who would be required to be insured against natural disasters. This means that the only certain effect of this legislation would be to impose an additional insurance obligation on the mutually insured individuals, who alone would be required to take out fire insurance. The rule would also make it mandatory to insure a large proportion of 'condominium' apartment blocks which generally take out "comprehensive building cover". In both instances, the apartment blocks subject to this new insurance obligation are mostly in the metropolitan areas, which are generally less prone to natural disasters.
With reference to the second point, the Authority considers that the premiums established by the Bill in its present form imposes restrictions that are not strictly necessary for competition, and are evidently in contrast with community legislation on the liberalization of the insurance markets.
It should also be borne in mind that the present wording of Clause 38 of this Bill sets the maximum premium for natural disaster insurance at 50% of the fire insurance policy premium. Because of this rule it is possible that the commercial coordination between companies that will provide natural disaster insurance cover might have a negative effect on the fire insurance branch. This is because with this kind of system there is no way of ensuring that the insurance companies will not decide to raise fire insurance premiums regardless of any variations in the fire hazard, to ease the premium constraint. This might actually discourage owners of buildings from taking out fire insurance and could consequently lead to a further reduction in the number of persons insured against natural disasters, which could thwart the objectives of the reform.
Rome, 14 April 1999