Irish Competition Authority Decisions

1. The Irish Insurance Federation notified its Agreement on Maximum Rates of Remuneration for Life Business to the Competition Authority on 9 July 1993. The notification requested a certificate or, in the event of a refusal by the Authority to issue a certificate, a licence. A Statement of Objections was issued on the 17 February 1997 to the notifying party indicating the Authority’s intention to refuse to issue a certificate or grant a licence in respect of the notified agreement and a summary of the facts in the case were made available to interested parties in mid-March 1997. An oral hearing was held on 4 June 1997.

2. The notification concerns an agreement which first came into force on 1 August 1987 between insurance companies carrying on life assurance business in the Republic of Ireland, and was modified on a number of occasions, most recently in September 1993, to limit the maximum amount of commission paid to insurance intermediaries.

3. The Irish Insurance Federation (IIF) is a trade body which was established in 1986 to represent the majority of life assurance and non-life insurance companies operating in the State. It was set up following the merger of three associations which had previously represented the interests of life and non-life insurers. The objectives of the IIF are to represent the Irish insurance industry nationally and internationally.

4. The Federation requires members to be licensed or authorised to carry on insurance business under the Insurance Act, 1936 and to operate for at least one complete year directly through a head office or a branch in the Republic of Ireland . (The term ‘life business’ is used throughout to refer to both pensions and life assurance). According to the Irish Insurance Federation Fact File for 1996, the membership of the Federation as of July 1997 was as follows: 21 life members (representing 100% of the domestic life market), 25 non-life members (which included three new members, and between all of them they controlled 94% of the non-life premiums) and 11 IFSC members.

5. The markets affected by this agreement are (i) that for the sale of life assurance products in Ireland and (ii) that for the services of insurance intermediaries for life assurance. The insurance products covered by the Agreement are: whole life and endowment assurances; temporary assurances; purchased life annuities; personal pensions for self employed persons; employers’ pension schemes for employees; group and individual permanent health schemes. These may constitute one product market or several separate product markets. The Authority considers that it is not necessary to determine which products form separate markets since the Agreement applies to all the products and applies to the companies carrying on 99 % of the business in those products in the State.

6. In 1995 [1], the total premium income received by all life offices selling life products in was IR£1,622bn. Total claims were £1.3 bn. The Report of the IIF/Department of Enterprise and Employment Joint Working Group on the Growth and Development of the Insurance Industry, published in July 1995 recorded that 1.3m people in the State are ‘covered by a life assurance policy of some type’. The total gross premium income for the IIF members at the end of 1996 was ´just under £2,010.4 million, which was an increase of 21% on the year before’, i.e. 1995. The total value of life assurance protection in 1996 was £77.93 billion, compared with £70.88 billion for 1995. At the end of 1996, the market value of assets held by IIF life members was £15.2 billion. The IIF Fact File stated that ´Ireland has traditionally had one of Europe’s highest per capita expenditures on life assurance and pensions - £555 per head in 1996 - it is estimated that 50% of the Irish adult population does not have any form of life assurance or pension. In addition, many of those with life policies may not have adequate levels of cover.’ (page 7.)

7. In Ireland, life products are sold in four ways:-

(a) directly by the insurer’s office to the consumer;

(b) through tied agents who are contractually committed to selling the life products of one particular office;

(c) through agents, who sell the life products of more than one company;

(d) through brokers, who sell the life products of five or more companies.

The terms ‘broker’, ‘agent’ and ‘tied agent’ are defined in the Insurance Act 1989.

8. Insurance products are complex in nature. Most customers are not able to evaluate products accurately at the time of buying, since only after some years have passed does it become possible to know whether the investment was good or poor. Customers typically cannot make buying decisions as between insurance products without either significant search costs or specialist advice.

9. The notified agreement limits the remuneration paid to intermediaries on the sale of life products. "Intermediaries" as used in the Agreement is an umbrella term for brokers, agents and tied agents. The service provided by an insurance intermediary, not unlike that provided by a travel agent is a combination of services to the insurance company and to the retail customer. They are not clearly, or exclusively, or continuously the agent of either the insurer or the customer. To the retail customer, brokers, and agents, offer a service of information about a number of insurance products, which a customer would otherwise have to collate from different insurance companies. These intermediaries may also offer the customer the service of advice as between the different products. Tied agents and company employees can offer only the service of explaining one or more products of one insurance company. Intermediaries are not paid directly by the customer for their services but by the insurer whose product he ultimately sells. To the insurer, the intermediary is selling the service of promoting and distributing its product.

10. Customers of insurance products have the option of seeking independent financial advice from other advisers, such as, for example, accountants, who do not have a financial interest in selling an insurance product. However, if they do so, the premium for the insurance product they buy will automatically have a fixed sum deducted by the insurance company for commission, to be passed on to an intermediary or retained. This sum, in respect of any given product from any given company is the same whether the customer has dealt through a broker, an agent, a tied agent or has approached the company directly. Perhaps as a result, customers do not tend to seek independent advice in relation to insurance products and independent financial advisers do not appear to be perceived as directly in competition with insurance intermediaries.

11. According to the parties there are approximately 1,450 life brokers operating in Ireland in 1997. There are approximately 1,075 agents and 1,600 tied agents selling life products.

12. The insurance services market in Ireland is regulated by the Insurance Acts 1909-1991 and various regulations. Under the European Communities (Life Assurance) Regulations 1984 (S.I. 57 of 1984), life insurers wishing to carry on business in Ireland must obtain authorisation from the Minister for Industry & Commerce (now Minister for Enterprise, Trade and Employment). Since 1 July 1994 foreign life assurers have been able to sell business into Ireland by informing the Irish authorities of their intention to carry out business here and the class of business involved. In 1995 there were forty one insurers authorised to carry on life business in Ireland, and sixty six insurers which had notified the Department of Enterprise, Trade and Employment of their intention to carry on life insurance business into Ireland on a freedom to provide services basis.

13. According to the IIF most life products are sold through agent or broker intermediaries; approximately 53% for new Annual Premium business and 59% for new Single Premium business (1995 data), 23% of Annual Premiums and 28% of Single Premiums of new business was sold through employees and 21% Annual Premiums and 8% Single Premiums were sold through tied agents. The remaining 3% Annual Premiums and 5% Single Premiums were sold through “over the counter sales” or some through telephone sales.

14. There are few limits on entry to the market for life insurance intermediary services. The Insurance Act 1989 requires all intermediaries (brokers and agents) to establish a bond for £25,000 or 25% of turnover, whichever is greater, in respect of their life business. They may not act as intermediaries if, inter alia , they have a criminal conviction relating to their performance of their functions as an intermediary; or if they have been bankrupt, or have a conviction for an offence of fraud or dishonesty, or fail to meet financial obligations to their clients. Beyond that the only limitation on any person describing themselves as either an agent or broker is that they must be able to offer policies for up to four insurers (for an agent), or five or more insurers (for a broker). An intermediary must have appointments in writing from those insurers whose policies s/he offers.

15. Part IV of the 1989 Insurance Act containing the provisions on the regulation of insurance intermediaries, became operative on 1st October, 1990. Section 56 of the Act empowers the Minister to prescribe codes of conduct for intermediaries, but provides no sanction for failure to make or abide by codes. There is a Code of Conduct for Insurance Intermediaries, drawn up by the Advisory Committee on the Regulation of Insurance Brokers (ACRIB) which consists of representatives of the Department of Enterprise, Trade and Employment, the Irish Brokers’ Association and the Insurance Intermediary Compliance Bureau (IICB) and the Code was formally approved by the Department. Under the Act, insurers are required to establish, by means of reasonable inquiry, that their appointed intermediaries are complying with the Act. The IICB was set up under the auspices of the Irish Insurance Federation to carry out certain compliance checks on insurance intermediaries (excluding tied agents) who were not members of the Irish Brokers Association. In April 1997, there were 3,625 intermediaries on the IICB register comprised of 1,106 agents, 919 brokers and 1,600 tied agents.

16. The notified Agreement which came into force on 1 August 1987 is a voluntary agreement between life companies who are members of the IIF, to limit the maximum amount of commission paid to insurance intermediaries. It also lists the terms and conditions which all members will apply in paying insurance intermediaries. The stated objects of the agreement are:

'(i) to provide regulation by life offices of the remuneration payable on the business covered by this Agreement so that policyholders' interests are not adversely affected by this remuneration; and

(ii) to prevent the level of remuneration paid to insurance brokers, insurance agents and tied agents becoming an influencing factor in the selling of business covered by this Agreement, both in regard to the nature of the contract recommended and the life office with which it is placed.'

17. The agreement which is for an indefinite period can be terminated at any stage by the members of the Federation. An individual party to the agreement may withdraw by giving six months' notice in writing to the Chief Executive of the Federation. The agreement covers all types of life assurance (with the exception of industrial assurance), permanent health insurance and pension schemes carried on through insurance brokers, insurance agents and tied insurance agents.

18. There are a number of provisions of the Agreement which specify terms to be applied by all members in their dealings with intermediaries. These are:

(i) an initial commission will be paid only where the insurer is satisfied that it is intended to pay premiums on a regular basis and at least at the level of the first annual premium [part II clause 6].

(ii) There will be a provision in agreements with intermediaries reserving the right to alter remuneration terms in the future. A model clause is given by which an insurer would reserve that right in order to conform with the I.I.F. Agreement [clause 8].

(iii) Commutation of commission [i.e. ceasing to pay commission in respect of a policy still in existence] is agreed to be permissible in specified circumstances, i.e. where the agent or broker has died or retired, but not otherwise [clause 9].

(iv) The insurer will not permit the intermediary to retain premiums for any period before passing them on, save where the premiums are remitted in bulk, for administrative convenience, at least once a month [clause 10]. The Committee of the I.I.F. monitors the use of the "administrative convenience" exception.

(v) The insurers will not grant or act as guarantor on a loan to an intermediary (other than to a tied agent, in certain circumstances) [clause 11].

(vi) Commission will not be paid in advance of the receipt of the premium to which it relates, save in the specific case where an employer makes deductions at source from employees for remittal to the insurer in bulk in a regular way.[clause 20]

19. Clause 18 requires the insurers to give the Federation details of their tied agents for the compilation of a register. Part IV provides that insurers will not pay anything by way of commission other than the percentage commission [set out in Annex B] and other than itemised and limited forms of bonus - corporate gifts, education or entertainment which do not exceed "modest business expenditure" and which are not linked to production targets [clause 21]. Appendix A elaborates the limits of modest business expenditure as being:

(i) a training course, related to the insurer's products, taking place in the State;

(ii) social/sporting function, in the State, including spouses;

((i) and (ii) including travel and accommodation within the State up to a maximum of two nights a year);

(iii) computer software relating to the insurer's products;

(iv) gifts up to a value of £100 per broker per year.

20. The major purpose of the Agreement is expressed in clause 19. It provides that all member insurers will pay their intermediaries no more than the maximum rates of commission, in respect of whole life and endowment assurances, temporary assurances, purchased life annuities, personal pension contracts for the self-employed, guaranteed income and guaranteed growth bonds, than those set out in part VI of the agreement. The Agreement assumes a structure for payment of commission as already common between the member insurers, by which the intermediary is paid a large commission ("initial commission") when a policy is made, and a continuing payment on each premium thereafter ("renewal commission"). The maxima are set out hereafter in Annex B. Clause 12 provides that initial commission and renewal commission may be paid in different proportions to those set out below, but still within the total maxima. This will be under the control of the I.I.F. which will set notional interest rates for the calculation of the effect of spreading the initial commission over a longer time period.

21. If insurers breach the Agreement the sanction is that they are required to disclose the names of the intermediaries to whom they paid commission exceeding the level agreed; they must recover the excess; and they may be fined by the Federation. For continued breach the sanction is expulsion, not from the Federation but from the Agreement [clause 14]. Insurers must give six months notice of withdrawal [clause 15].

22. The I.I.F. will certify to the Minister each year the compliance or otherwise of its members with the provisions of the agreement [clause 13]. The Insurance Act 1989 section 43 provides that the Minister may by notice require an insurer to furnish information about the payment of commissions. No such notice has issued under the Act.

Applicable EC law .

23. Agreements on Commissions. An earlier version of the IIF Agreement on maximum commission rates for life insurance was notified to the EU Commission (Case No. IV/32.738) on 26th May 1988. No indication of the Commission’s view has yet been made. The Commission in Case IV/34.773, which concerns the notification by the Dutch insurance companies of an agreement for maximum commissions for non-life insurance have not proceeded to a decision but have indicated by letter that the agreement is offensive and not exemptable. The Commission did not proceed to a view on the notification by the IIF of its Agreement on maximum commissions for non-life insurance after maximum commissions for non-life insurance had been fixed by the Minister by notice of 28th June 1989 under section 37 of the Insurance Act.

24. Agreements to co-operate on statistical research and risk calculation. Regulation 1534/91 is an enabling Regulation which permits the Commission to make further regulations providing for co-operation between insurance companies in specified areas. The specified areas do not include dealings with intermediaries. It states that co-operation between undertakings in the insurance sector is to a certain extent desirable to ensure proper functioning of the sector, particularly agreements, decisions and concerted practices relating to the establishment of common risk premium tariffs based on collectively ascertained statistics or numbers of claims and the establishment of standard policy conditions. It states that the Commission will take account of the benefit to policy holders but also the risk to policy holders from a proliferation of restrictive clauses. Regulation 3932/92, made under 1534/91, provides that it is useful for insurance companies to compare statistics on numbers of claims, numbers of individual risks insured, total amount paid and the amount of capital insured; but that concerted practices on commercial premiums, i.e. the premiums as actually charged with their loading to cover administrative costs and profit margins are not exempted. Comparison is to be made on the basis of pure (net) premiums only.

25. Agreements on non-risk elements of insurance company costs. In Verband der Sachversicherer both the Commission [5.12.84 OJ L35/21 of 7.2.85] and the Court of Justice [27.2.87 C45/85 [1987] ECR p.405] found an agreement by the German association of property insurers to recommend to members a percentage increase in gross premiums to be per se illegal under Article 85(1) (a). The type of insurance involved was risk insurance, where the gross premium is made up of the net cost of the insurance product, overheads such as distribution, and profit. While the Commission considers exemptable the sharing and collating of statistical information, both about past claims and assessments of future risks, which may well result in individual insurance companies setting their net premia on the basis of the same information, both the Commission and the Court in this case considered that the industry-wide blanket increase in gross premiums encompassed the operating costs of the insurance companies and was likely to result in a restriction of competition going beyond what was necessary to achieve the intended objective.

26. Disclosure of commission. Directives 79/267/EEC of 5.3.79 (the ´Establishment Directive’), 90/619/EEC of 8.11.90 (the ´Services Directive’)and 92/96EEC of 10.11.92 , (´the Life Framework Directive’) set out the minimum requirements which a Member State must require of an insurance company established in or providing services in its territory. The requirements relate largely to minimum assets, and obligations to furnish accounts to the regulatory authority of the Member State. They also however specify a minimum level of disclosure of information to customers. Member States must require the minimum level of disclosure, and are free to require a higher level of disclosure. The Directives are implemented in Ireland by the European Community (Life Assurance) Framework Regulations, SI 360 of 1994. These require only the minimum level of disclosure provided for in the Directives. Insurance companies carrying on life business are required to disclose an ‘...indication of surrender and paid up values...’ of policies before the customer enters a contract. This does not require disclosure explicitly to customers of the level of commission paid to intermediaries, nor the in-house charges of the company itself.

(i) Arguments in support of a certificate.

27. The IIF submitted that the agreement did not have as its object or effect the prevention, restriction or distortion of competition in the State. The sole object of the agreement was to prevent the level of remuneration paid to intermediaries becoming an influencing factor in the selling of life assurance. The agreement was entered into for the benefit of consumers.

28. The submission also argued: "The life offices were in effect forced into the Agreement in that the Government made it clear that unless the life offices voluntarily regulated the payment of commission to intermediaries, the Government would impose statutory controls." It cites statements made by the then Minister, to the effect that commissions were too high, and that he would invoke his powers under the Insurance Act if insurance companies did not voluntarily cut commissions. Statutory maxima were, in fact, imposed on non-life commissions in 1989 by notice under section 37 of the Insurance Act.

29. The IIF argued that the life offices actively competed in the market place in relation to all aspects of life assurance business and in particular in relation to premium rates and terms. In the case of savings and investment products, life offices also compete in the area of returns and also standard terms available to consumers particularly in relation to the settlement of claims and general efficiency of the life office. In addition, the agreement does not affect the range of products offered by the insurers concerned.

30. The IIF submitted that the agreement enhanced competition between life offices in the interests of the consumer by removing the circumstances in which intermediaries would be wrongly influenced by the level of commission payable by a particular life office in recommending the product of that office to the consumer. The agreement helps to ensure that a consumer obtains life assurance on the basis of quality and suitability to his particular needs

(ii) Arguments in support of a licence

31. It was argued that the Agreement improves the distribution system for insurance and benefits the consumer in terms of the service given and lower premiums. According to the IIF, in the absence of the Agreement, commission rates would be pushed upwards by life offices wishing to obtain business by paying excessive rates of commission to intermediaries. This increase would ultimately be borne by consumers in the form of higher premiums or lower investment gains. In the UK where similar maximum commission regulations were abolished some years ago, market forces have increased average commission rates from 90% of the first year's premium to between 130% and 150%.

32. It was submitted that the Agreement ensures that the consumer obtains independent and professional advice from an intermediary which is vital to his interests. Such advice would not be available if the intermediary were unduly influenced by the level of commission paid by a particular life office. In addition, the Agreement will help to develop and maintain an independent professional insurance intermediary network. The existence of a strong and independent intermediary service is important to the distribution of life assurance products in Ireland. The IIF stated that the inclusion of tied agents in the agreement network further ensures that a strong and independent intermediary service is developed and maintained. The fact that intermediaries are not engaged by particular life offices means that the consumer can be confident that he is getting the most competitive life assurance available and that the information he is being given is relevant and accurate.

33. It was submitted that the agreement promotes economic growth by ensuring that intermediaries remain independent from life offices and provide a competitive service. The agreement also ensures that life offices concentrate on the quality of their product rather than the inducements offered to intermediaries to distribute these products. Economic progress is further promoted by the fact that premiums are kept as low as possible thus ensuring that consumers obtain the product suitable to their needs at reasonable premium levels. In addition lower premiums are important insofar as they guarantee that life assurance is available to as wide a range of consumers as possible. Lower premiums also encourage consumers to purchase life assurance in the knowledge that the advice they are receiving is independent and impartial.

34. The IIF stated that the Agreement is for the public good and that this was clear from the fact that it has government approval as well as the support of the IBA. It was also significant that DG- IV indicated in 1987 that it was prepared to exempt a similar agreement for certain classes of non-life insurance.

35. According to the IIF the Agreement does not contain restrictions which are not indispensable to the attainment of an improvement in the distribution of insurance products and of economic progress. The Agreement does not afford the life offices the possibility of eliminating competition in respect of a substantial part of the product or service which they offer. Competition between life offices lies in the premiums charged, the product terms offered and the service and returns which they provide. Competition in this regard is enhanced by the Agreement.

36. The Consumer Association of Ireland (CAI) made a submission arguing against the grant of a licence or certificate to the notified agreement. They said that the introduction of the IIF Agreement in 1987 was a response by incumbent insurance firms, to new entrants who competed by way of paying higher commissions to intermediaries, and was intended to fix the cost of distribution across all member firms.

37. They argued that a certificate should not be granted because the Agreement created a maximum commission which in practice was also a minimum commission, amounting to fixing the cost of an input across all member firms. They provided statements of commission payable to intermediaries by a number of member firms, to indicate that the percentage levels of commission were the same across each of the firms.

38. They argued that the Agreement on commission contributed to part of a wider culture of agreement on marketing by member firms. They argued that there was a culture of inhibition of aggressive innovation or marketing by any one firm which would temporarily disadvantage other members.

39. The CAI argued that agreeing maximum commissions inhibited competition between insurers who might otherwise pay higher commissions to sell their policies, competing on the basis of low unit cost. Insurance companies did not in fact disclose or compete on their true unit cost. Compliance with the Third Life Directive required them to disclose charges, but did not require charges to be broken down into commission to intermediaries and the in-house charges of the insurer, and in fact insurance companies did not disclose their own charges. They were thus not competing directly with each other on the price of their product.

40. The CAI argued that the Agreement prevents competition between intermediaries, since it fixed a standard payment to all intermediaries, no matter what the quality of advice or service given by them. One measure of the quality of advice given by intermediaries was persistency rate, i.e. the percentage of buyers of long term policies who did not let their policy lapse in the first few years. However, the Agreement prevented member firms from paying higher commission to better intermediaries and thus it sustained inefficient intermediaries at the expense of those providing a good quality service.

41. The CAI argued that the Agreement fixed maximum commission in the form of a high front end payment on first year premiums. It thus removed any incentive for the development of efficient large firms of intermediaries who received a return over the life of a policy for advice and service, since the reward to the intermediary was essentially for the sale of the policy.

42. The CAI argued that the Agreement prevented the payment of indemnity commissions, i.e. payment by the life office to the intermediary of the full commission at the time of sale, while spreading the cost of that payment over the life of the policy. They argued that this restricted competition between intermediaries on the basis of their credit worthiness, since insurers therefore did not need to assess the credit risk in any intermediary.

43. They stated that ‘ The Department of Enterprise and Employment had already made it clear that new entrants to the Irish market will need to abide by marketing and consequently commission payments of the IIF. Consequently, this greatly discourages European competitors with lower costs bases as a consequence of higher economies of scale from entering the Irish market.’

44. The CAI submission aired a number of other criticisms of this agreement, and other agreements in the insurance industry. These have been omitted where they were not relevant to the Competition Acts issues in this notified agreement. The CAI believed that while the refusal of a certificate or licence would ‘initially ... create an element of ‘chaos’ within the industry, the ultimate effect will be to create true competition...’.

45. The Authority issued a Statement of Objections to the notifying party on 17 February 1997 indicating its intention to refuse to issue a certificate or grant a licence in respect of the notified agreement. A Summary of the Facts in the case were published in March 1997 and made available to all interested parties. The IIF responded to the Statement of Objections and an oral hearing was held on 4 June 1997.

46. The IIF contended that disclosure of commission per se was not a substitute for commission controls. Disclosure would not be a sufficient counter-balance to the competitive pressure on insurers to increase commission rates if the Agreement was withdrawn. They pointed out that this was the experience in the UK and elsewhere and there was no reason to assume that the market would react any differently in Ireland. They stated that discussions were in train with the Department of Enterprise and Employment in relation to the preparation of Regulations under the Consumer Credit Act and/or the Sale of Goods and Supply of Services Act to introduce obligations to disclose policy charges (i.e. life office charges plus commission) which protected the legitimate interests of customers and did not impose unnecessary costs or bureaucracy on the life assurance industry and its customers. The members of the IIF supported statutory disclosure of information which would be of assistance to the consumer. This did not alter their view that the continued existence of the Life Remuneration Agreement was of benefit to the consumer and was independently necessary. They did not believe that any form of disclosure would have the same effect in controlling costs as the Agreement. The IIF did not consider that issues to do with disclosure of commission were relevant to consideration of the notification.

47. The Federation rejected the contention that the arrangements concerning commissions offended against section 4(1), were restrictive of competition or that the Agreement operated as a barrier to entry to non-participating insurers seeking to enter the market. They maintained that the removal of the Agreement would encourage intermediaries to favour the highest-paying insurer, in practice behaving like tied agents of that office, reducing availability of truly independent consumer advice and consequently, that such a vertical relationship between insurer and intermediary would create a barrier to entry to the market. They stated that the Agreement did not ´require’ sharing by competitors of information about any elements of their costs, there was no bilateral or multilateral sharing of information about actual commission rates amongst life companies which subscribed to the Agreement. They maintained that because of the nature of the market this information would be known through interaction between intermediaries and insurers and that this would be the case regardless of the existence of the Agreement. The IIF stated that the cost of commission payments was only a small part of the overall commercial cost of insurance products and they estimated that on average commission accounted for 4%-5% of premiums on a 20 year savings policy; 8.5% of premiums on a 20 year personal pension plan; just over 7% of a 10 year pension plan; 15% of premium on a 10 year term insurance and 11% on a 20 year term assurance. They maintained that the Agreement did not and could not attempt to fix retail prices to consumers, which were determined in the first instance by the level of cover provided and then by total distribution costs and the internal efficiency and investment expertise of the individual life office. They considered that standard commission rates would not remove any significant element of uncertainty as to competitors’ prices for insurance products. The IIF did not accept that the Agreement had the effect of removing any incentive for competition between intermediaries. They pointed out that there was no minimum commission specified in the Agreement nor was there anything to prevent intermediaries from adding some or all of the commission earned on a sale to the net amount invested on behalf of the client or from charging supplementary fees. The Federation was of the view that the fee-based system did not suit all consumers, i.e. those with cash flow limitations, and that the remuneration of the intermediary by way of commission could be a more convenient and cheaper way than the payment of the premium and an upfront fee to their adviser. They maintained that to the extent that the maximum rates set by the Agreement have been regarded as standard/minimum rates, that of itself was evidence of the upward pressure on commissions within the range set by the Agreement and they submitted that it was also evidence of the likelihood of further upward movement, should the agreement be ruled invalid.

48. In support of their claim that there was keen competition in the life assurance market, they cited surveys done by the CAI and the European Consumers’ Association (BEUC) which found that term assurance rates in Ireland were extremely competitive on a European-wide comparative basis. They maintained that because term assurance rates in Ireland were the lowest in Europe, it was very unlikely that an element of price fixing was involved in setting those rates. Consumers were affected primarily by the scope of the cover, by total distribution costs and the efficiency of the individual insurer. They further maintained that the Agreement had led to the removal of the threat of distorted advice to customers by intermediaries based on differential commission rates. They claimed that this was an even more important consumer benefit than the simple limitation of commission costs which had helped to contain premiums. The IIF considered that while the Code of Conduct for insurance intermediaries enjoined intermediaries to act in the best interest of the client at all times, it was inevitable that differential levels of remuneration would create an incentive to intermediaries to recommend unsuitable products on the basis of the commission earnings to be derived from the sale.

49. The IIF disputed the CAI’s claim that the introduction of the Agreement was intended to fix the cost of distribution in the market, rather the principal motivation for it was to comply with the insurance supervisory authority’s requirement that commissions be reduced. The Federation maintained that the Agreement was the only voluntary method of achieving this end. Participation in the Agreement was voluntary for all existing members of the IIF and membership of the Federation itself was open to all established insurers. They pointed out that no applicant who met the criteria had ever been refused membership irrespective of whether it subscribed to the Agreement.

50. They also denied the CAI’s assertion that the maximum commission rates set by the Agreement were universally observed as standard/minimum commission rates. The IIF stated that in protection business (basic life assurance products such as term assurance, mortgage protection, etc.) payment of commission at the maximum rates was common, but the commission on savings products and the majority of new annual premium pensions business were well below the maximum rate in the Agreement. They also pointed out that many individual intermediaries were actively marketing their services to clients on the basis of investing in products which did not pay them commission or a lower commission than the market standard or agreement maximum. The IIF denied that there was a “culture of agreement on marketing” among the members of the IIF or that innovation or marketing was inhibited by the agreement. They argued that the opposite was true, i.e. that there was aggressive competition on premiums as evidenced by the degree of advertising and marketing promotion by individual insurers.

51. The Federation was not in favour of insurers inducing intermediaries to sell their products on the basis of commissions higher than those offered by their competitors as it was not in the interests of consumers who were entitled to expect unbiased independent advice from independent intermediaries not influenced by potential earnings but based solely on the suitability of a particular product for the consumer. The IIF pointed out that the Life Framework Directive and the Regulations of 1994 required precontractual disclosure of a considerable amount of information about life assurance products, including projection of future policy values, but they did not specifically require the disclosure of charges.

52. The IIF stated that the Agreement provided for payment of renewal as well as initial commission and intermediaries did benefit from renewal commission earned on policies for as long as they remained in force. They maintained that successive amendments to the Agreement had shifted the focus away from initial commission to renewal commission and consequently lower initial commission and higher renewal commission promoted persistency and penalised intermediaries in the event of early lapses of policies (through the loss of renewal commission). They also pointed out that in practice some products such as pensions annual premium business paid a flatter commission structure which further emphasised the drift away from high initial commissions. With regard to indemnity commissions, the Federation stated that these were only relevant to the first year of a policy where the commission was paid on day one instead of spread over the first year of the policy. They contended that this practice had been found to be extremely destructive as it over emphasised the importance of the sale rather than persistency and where these had been allowed, there had not been any increase in the stringency of checks on creditworthiness prior to appointment of new intermediaries or agreement to pay indemnity commissions.

53. The IIF did not accept the allegation that the Agreement had discouraged European life assurance companies from entering the Irish market and they maintained that the increase in the number of life assurers from 43 to 66, between September 1995 and October 1996, authorised to write Irish business on a services basis, contradicted this claim. The IIF believed that the refusal of a certificate or licence would create not only initial chaos in the market, but would lead to increases in a significant part of the cost of underwriting life assurance which would be to the detriment of the consumer. They did not consider that the parallel or early subsequent introduction of disclosure rules would effectively counteract the inflationary pressure on intermediary commission which would result from abandonment of the agreement.

54. The Federation accepted that the Agreement did have an effect on the market in Ireland. They stated that they did not impose financial penalties on companies which breached the agreement and no sanctions had been applied under Clause 14 (iii). The IIF stated that they would be prepared to delete Clause 14 (iii) if it was regarded as an unacceptable term. The IIF were of the opinion that the abolition of the Agreement would penalise consumers by leading to rises in commissions and consequently premiums. They maintained that the agreement did not operate in restraint of trade or constitute a barrier to entry to the market or to price competition between insurers. The ability of any individual life insurer to impose a new distribution and/or remuneration structure would be restricted by the approach taken by its competitors in the market and the need for individual negotiations with its existing appointed intermediaries. They contended that it was false to assume that new remuneration or distribution structures would arise if the agreement fell or that such structures were being prevented at present by the presence of the Agreement.

55. The Federation maintained that the UK experience illustrated the damaging effect of removal of a maximum commissions agreement and that the “buying” of business which resulted in the UK had not been in the interests of either the customer or the industry. They also considered that wasteful and expensive non-commission benefits to intermediaries such as foreign holidays - which were used as inducements to intermediaries prior to the coming into force of the Agreement - would be re-introduced, uncontrolled, if the Agreement were to end and, consequently, these would further disadvantage clients and reduce the independence of advice. The IIF further maintained that the abandonment of the Agreement would inevitably lead to immediate increases in commission levels. Even if accompanied by disclosure, as in the UK, any subsequent re-adjustment would have only a marginal effect on the inflated post-LRA commission levels and would not bring commission levels back to or below the levels stipulated in the Agreement.

56. The IIF maintained that the Agreement satisfied the conditions for a licence because they considered that:

“(i) the fixing of maximum rates of remuneration for intermediaries in the Agreement improves the distribution of insurance services and promotes economic progress by helping to guarantee the independence of intermediaries from being unduly influenced by the rate of remuneration they are to receive. In an unrestricted commission market, commission rates would tend to rise, and commission overriders for placement of volume business with individual life insurers would become a feature of the market. This would distort the distribution market. The existence of the Agreement has stopped this very trend in the 10 years since 1987;

(ii) with a cap on commissions, the average cost of commission per policy is less. Irish assurance products are therefore cheaper than similar products in other EU countries, as demonstrated by independent surveys. Cheaper assurances contribute to economic progress through their deflationary influence on the funding of pensions, mortgages and other loans;

(iii) the Agreement has contributed to improving the production of insurance services, because it has allowed new producers to enter a market in which they have immediate access to a readily available network of independent intermediaries. The Agreement has helped to create and sustain a healthy independent distribution sector. Contrast other EU countries where distribution of insurance products is heavily concentrated in the hands of tied agency networks. The dominance of tied agents in other markets had constituted a significant barrier to market entry, particularly evident since the legislative measures necessary to realise the single EU market in insurance have been implemented;

(iv) the Agreement had avoided (through the imposition of comprehensive remuneration rules in all sectors of the distribution market - brokers, agents and tied agents) any artificial polarisation of insurance distributors as between non-commission remunerated independent intermediaries and tied agents. If there were no LRA, companies would be more inclined to distribute their products via tied agents and direct sales employees, because of the unsustainability of the higher commissions they would be forced to pay to independent intermediaries. This would lead to an undue proliferation of tied agents, and a diminution of consumer access to independent financial advice;

(v) in responding to paragraph 63 of the Statement of Objections, we believe that we have also demonstrated that, whilst it is true that the existing market structure has not been imposed on insurers by any one cause, insurers are not free in practice individually to organise distribution in other ways, whether or not the Life Remuneration Agreement remains in force.”

57. The IIF maintained that the Agreement had achieved the result of making brokers independent financial advisers and it had help to create and sustain a healthy independent distribution sector. They stated that the absence of such an arrangement on commissions in other EC countries had resulted in the distribution market there being dominated by tied agents who were not independent advisers. The Federation pointed out that commissions were also paid on the sale of unit trusts or bank investments to clients of investment intermediaries who also held insurance agencies. They stated that the commission paid by financial institutions who were in competition with life assurance offices was greater than the commission paid by the life office in relation to its competing product. The Federation considered that the improvements in the distribution process were of themselves of benefit to the consumer and the LRA had been largely responsible for a healthy independent insurance intermediary sector were also of clear benefit to the consumer. They further believed that the existence of the Agreement had curbed the cost of commission which was reflected in the overall cost of the insurance product paid by the consumer. Consequently consumers obtained better value for money in relation to both protection and investment/pensions products than would be the case if the Agreement did not control part of the costs of manufacture and distribution of the insurance product. They also stated that substantial reductions in the maximum rates set by the Agreement had taken place in the last five years.

58. The IIF maintained that the only way to ensure that consumers had the benefit of a healthy, stable independent intermediary market was for the Agreement to underpin the commission remuneration structure, without eliminating competition for clients as between intermediaries. The Federation was of the view that as life assurers competed principally on scope of cover, retail premium and investment expertise, all of which they considered to be more important components in the value for money provided to customers than the price impact of commissions, the Agreement did not afford insurers the possibility of substantially eliminating competition. They contended that competition between insurers on these issues was not incompatible with the argument that the level of commission affected the level of premiums. The total premium was made up of commission and other charges which were deducted from the gross premium prior to investment of the net amount on the consumer’s behalf and in order to achieve the same net investment input in a higher commission environment, the total premium would have to be greater or a smaller net investment would be made from the same gross premium. They pointed out that the same would happen in relation to protection products, where the risk charge was fixed by reference to mortality, the management and commission charges formed “add-ons” to the basic risk charge in order to define the total premium. The IIF maintained that the Agreement did not eliminate or restrict competition between intermediaries to attract clients, as demonstrated by the level of advertising of their services by intermediaries, the variety of commission options available to and used by them and the availability of a significant number of fee-based and mixed commission/fee intermediaries. Neither did the Agreement eliminate competition between life insurers for intermediary services, which was based on the quality and suitability of the life companies’ products for the intermediary’s clients and the administrative support services offered by the life companies, and not on commission level or other “in kind” inducements to the intermediary.

59. In further written and oral submissions, the IIF contended that the Authority was wrong to view commissions as a rent to be divided between insurers and brokers rather than as a cost and also wrong to reject the argument that a ceiling on commissions was necessary in order to eliminate the incentive for opportunistic behaviour by brokers. They stated that recent research in the economic risks of insurance market failure suggested that commissions should be treated as a cost and that a ceiling on commissions, even when the result of collusion between insurers, was likely to be globally welfare improving and consumer welfare improving. The Federation maintained that this was because of the way in which the prevalent market failure affected the behaviour of agents in an unregulated insurance market. The research also suggested that full disclosure was not expected to be sufficient to eliminate the incentive for opportunistic behaviour and that a commission ceiling was welfare improving even in the presence of full disclosure.

60. The Federation argued for the retention of a cap on insurance premiums as a means to ensure lower prices for insurance products. The Federation also maintained that full disclosure was not expected to be sufficient to eliminate the incentive for opportunistic behaviour and under the circumstances, a commission ceiling was welfare improving as well. They were of the view that most consumers had defective information as to their own requirements, i.e. they did not know what they needed and there was a lack of information as to the suitability of a policy for their particular needs.

61. The IIF considered that the Authority’s view was that the insurance companies offered their products in the market at prices designed to maximise profits and the Authority’s solution of full disclosure was assumed to resolve the problems of information asymmetry and opportunism. The brokers and agents offered a service to consumers, namely advice on policy selection and they were remunerated for this by means of a commission from the insurance firms. They stated that there was no technical reason why the brokers could not be paid by other means but this practice could give rise to opportunism. They maintained that the level of commissions paid to the brokers was an indication of competition between the brokers and the insurance firms. Part of the commission paid had to represent the supply price of brokers involvement and it was therefore a cost, while the balance was a division of rent between the brokers and the insurance firms which was extracted from the consumers. They commented that the Authority did not decide what proportion of the commission represented the actual cost of it, but instead it focused on the alleged collusion between the brokers and the insurers to obtain income and resulting redivision of the rents. The Federation maintained that the Authority’s view was that a change in the commission would have no effect on prices, but it would reduce the payment per policy to the brokers and by definition, increase the income of the insurers and from this perspective, the agreement had the effect of a price fixing arrangement. Since the prices for the final product were profit maximising prices, a redivision of the rents between the brokers and the insurers would have no effect on the prices to the consumers, therefore, on that basis, the Authority had concluded that the agreement could not be licensed because it fixed the price for commissions.

62. The Federation based their arguments on a model [2] of a market for insurance products and this model also provided for the existence of a secondary sector, i.e. direct sales or sales through agents, which enhanced the conclusions of the model for brokers only. Consumers were considered to be passive and in possession of extremely defective information, i.e. they did not search out information themselves from the different brokers since it was costly to acquire and process, and the brokers as actively seeking potential customers. The portrayal of consumers as being passive was a realistic assumption for a very large number of consumers. There was free entry to broking, which was subject to rising marginal costs or even to a congestion cost. (They used the analogy of a fixed stock of fish being fished by an increasing number of fishermen to describe the market for insurance in Ireland, where the costs were increasing but the returns were reduced. [3]) The assumption was that the insurers faced a constant cost of production for their policies. The products or policies were considered to be homogeneous even though there were different but flexible packages offered by different insurers. The firms were explicitly specified as Bertrand competitors and the number of firms and entry conditions were assumed to be such, in general, to eliminate price cost margins. They maintained that the Authority’s view of the market and the institutional arrangements therein made sense only if one took a short term view of the problem. The Gravelle model was a long run, equilibrium one, which identified market power as being between brokers and consumers, not between a few insurers and many consumers. The passive consumer did not shop around because of the high cost, of the time involved and the problem of evaluating the advice given due to a lack of information. As a result, the brokers were in a position to exploit this situation in relation to consumers. The insurers had to offer brokers a competitive package including commission to sell their policies. According to Gravelles model, the competition between the various insurance companies for the services of the brokers meant that all insurance companies had to offer maximum commissions to the brokers in order to sell their products, which meant zero rents to the insurers.

63. They compared other models such as the one where there was competition by insurers and brokers and no regulations on entry or exit to the market and no regulations which placed a ceiling on commissions, either by the players or by a regulatory authority, with a second sector where consumers were informed, but it did not undermine what happened where there were ill-informed consumers, and it reduced the capacity of people to vary prices. They agreed that there was a problem in the market, namely that brokers were in a position of having superior information to the people who came to them for advice, but not all consumers were in that position. They also maintained that the existence of a well intentioned agent or broker could be consumer welfare enhancing where consumers wanted to shop around but it was expensive and time consuming to do so.

64. The alternative model involved an unregulated competitive equilibrium, namely an unrestricted, unregulated market in terms of prices and sales where brokers and insurers each sought to maximise profits. It was not considered to be first - best efficient, primarily because of the market power of the brokers in relation to consumers, and the conclusion was that commissions were too high. The effect of a regulator on the market in terms of restricting entry to broking and replacing commissions and also in terms of placing a ceiling on commissions was examined too and the conclusion was that controls on commissions would be globally welfare enhancing and it was considered to be the second best efficient outcome. This was cited in support of the Federation’s argument that a ceiling on commissions resulted in lower prices to consumers in contrast to the situation in Britain where there was no ceiling and higher commissions.

65. The effect of a reduction in commissions on consumers and on brokers, with the emphasis on passive consumers was examined, but this situation changed when there were more well-informed consumers and they maintained that the bigger the informed sector was the smaller the broker sector and the greater was the total increase in consumer welfare. The existence of a large non-passive consumer sector enhanced the welfare effect of a ceiling on commissions. They concluded that the IIF Agreement was welfare enhancing. They did not know what proportion of Irish insurance policies were sold direct to consumers. The Federation considered that restrictions on commissions rather than full disclosure reduced the incentive to deceive (by brokers) and it also enhanced price competition. They saw the role of the broker as fitting customers to policies, by offering advice on how to avoid mis-match between the customers needs and the products on offer. They maintained that the customer should be indifferent as to whether they paid a fee for advice concerning insurance products or whether they paid a commission for it, since the final product was the same to the customer. The only difference was that customers who opted for advice had to pay for it whether or not they purchased the policy. They questioned whether full disclosure would eliminate the incentive for brokers to take advantage of information asymmetry. While the incentive to provide bad advice was higher under a commission system, it still existed under a fee for advice system. They maintained that it was costly to improve the quality of advice.

66. The IIF said that the cost of commissions was only a small part of the overall cost of an insurance product. They maintained that the impact on the commercial premium was limited even if it was taken as given that there was no competition on the commission element.

67. The IIF said that the intermediaries were in the peculiar position in the market of representing both the insurers and the consumers, but once the remuneration was fixed, it freed them to act as the customers eyes and ears to make comparisons. They stated that there were only three countries in Europe - Ireland, U.K. and Denmark - that had brokers and furthermore, Ireland had the lowest costs for term insurance in Europe. They maintained that if brokers were eliminated, then the insurance companies would have direct access to the consumers and this would increase their power and ability to set prices much higher. In the independent broking market, while the price was fixed, the brokers could drive the price from the insurance companies down and this aspect would be lost if the brokers were eliminated. They concluded that the solution to market failure was vertical integration, if the consequence of the problem among consumers was too much broking and too high a cost for the broking, then it could be reduced by means of tied agents or the insurers own employees. The brokers offered advice to consumers and a form of competition too.

68. They considered that the logic in the U.K. had been that commissions would fall, but the opposite happened and commissions were being consistently driven up as life offices competed for brokers. In the U.K. commissions were now 7% of the single premium while the equivalent commission rate in Ireland was 3.5%. The difficulty was in trying to stop the commissions from increasing. There were four models which could be used - (i) full disclosure, (ii) statutory control, (iii) no commissions and (iv) market forces. Some of the products covered by the IIF Agreement were in competition with products in other sectors (investment products) and in the absence of the regulation on maximum commissions, the commissions would go up, as those earned by competing products which were not covered by the Agreement, would drive them up. In some sectors the maximum rates for commissions were not observed and in the pensions market, about two-thirds were sold at the maximum commission rate for pension products. They admitted that commissions were higher in the corporate sector. The single premium had risen in the U.K. where the products were in competition with non-life insurance products, which would suggest that the natural equilibrium was actually higher than the maximum commissions for those particular products. Commission levels in Ireland were 30% lower than in the U.K. In the UK the whole apparatus of life assurance selling, especially tied agency, had been decimated.

69. They stated that the legislation on the supervision of intermediaries was specific - any person who had an agency with a product producer was either an agent, a tied-agent or an insurance broker. Some brokers chose not to be paid a commission, but charged for it later or if they did not have the agency to sell a particular product, they merely charged for the advice on the products. The Federation said that if the insurance companies increased the commissions on a policy, more people would go into broking, but the insurance companies did not sell more policies as the price of the policies had gone up and their costs were covered by the insurance premiums. If insurance firms wanted to increase their sales, they offered higher commissions to the brokers in order to sell more products. This led to an increase in the output of broking. The price of term insurance in Ireland had dropped between 30% and 40% over the past five years. In this environment, the Federation considered that the independent brokers were forcing the life offices to compete on price because they were free to operate 100% on the consumers behalf.

70. The Federation considered that in the absence of the Agreement, commissions would vary and they predicted that there would be an increase in commission rates for protection products, but they did not think that the ceiling would be breached for savings and pension products. They stated that the reason why the Agreement was introduced in the first place was due to a threat by the then government to regulate commissions as they were seen to be too high. A maximum initial rate of 90% was then introduced for the protection product, previously the rates had been higher than 110% or more. They considered that the insurance companies collectively needed an independent broking sector which acted independently as some companies were beginning to reward brokers for more volume, which was distorting the independent behaviour of the broking market. They stated that this would happen again if the Agreement was removed and they were aware that preparations were being made for this in individual offices. There was one countervailing force in the U.K. in that brokers were statutorily regulated and teams of auditors visited brokers to check if they were giving independent advice or not and there were controls on what the brokers could do and how they were paid, etc. In Ireland there was no regulation of brokers. The IIF maintained that the numbers in broking had remained stable or had declined since 1991.

71. In subsequent correspondence the IIF stated that the figure originally submitted by them for the number of brokers in 1993 of 887 included 153 IBA members who were specialist life assurance brokers instead of those IBA members who transacted both life and non-life business. In April 1997 there were 589 IBA members and out of that total 529 transacted life business either as specialists or in combination with non-life business with 136 as specialist life assurance brokers. They maintained that this latter figure was comparable with the figure of 153 for 1993. The numbers of insurance intermediaries according to the Insurance Intermediary Compliance Bureau records for May 1993 were 734 brokers, 761 agents and 1,516 tied agents and the numbers for April 1997 were 919 brokers, 1,106 agents and 1,600 tied agents.

72. The IIF stated that prior to 1 August 1987 (commencement of the Agreement) there was considerable variation in the rates of commission paid and in the form of monetary rewards offered to intermediaries. Some initial commissions were as high as 120% of the first year’s premium while some companies offered indemnity commissions (payment of full initial commission at point of sale irrespective of the frequency of payment of the premiums), and non-monetary incentives such as holidays. “Overrider” commissions based on volumes of business produced were also common. The IIF stated that the availability of these additional commissions and incentives became a key feature in attracting business. Apart from the value for money issue there was major concern about the advice bias inherent in such arrangements.

73. The Federation also submitted information showing comparisons between the percentage initial commission rate for the first year’s premium for Ireland and the UK as follows:

Source: IIF.

1. Maximum commission rate as per the IIF agreement.

2. I.F.A.( Independent Financial Adviser ) = insurance broker in Ireland.

3. A.R. (Appointed Representative) = tied insurance agent in Ireland.

4. C.R. (Company Representative) = employee.

The Federation concluded from this that consumers in Ireland were better off than those in the UK because:

(a) commission in the UK was higher than in Ireland;

(b) the cost of advice was higher which proceeded directly from (a);

(c) customers were now receiving significantly less in reduced investment yields on savings policies and lower levels of cover on protection policies in the UK, due to the extra cost of advice. They stated, in practice, that there was a typical reduction in yield of 1.1% more in UK savings policies and 0.75% more on UK pension policies than on the Irish equivalents. In protection (whole of life) products, Irish policyholders typically obtained a 27% greater sum assured for the same premium.

Two other tables showed comparisons between Ireland and the UK for the total cost of advice for a £60 per month premium over the first five years and the impact of charges - reduction in yield/sum assured - on a premium of £60 per month.

74. The Consumers Association of Ireland (CAI), in written and oral submissions, maintained that there should be full disclosure on all charges concerning insurance. They recommended the introduction of an internal rate of return, similar to the A.P.R. for mortgages. They said that the impact of the removal of the commissions agreement had already started. There was a much more sophisticated system of commissions in existence outside of Ireland which included the option of a replacement of the 'upfront' commissions by a commission's ´spread’ with indemnity structure, i.e. the charge would be spread over the life of the product. Insurance companies could still pay commissions, but in the form of an indemnity. They could also reduce the ´upfront' commissions on life products, but there was also a possibility that the commissions for pure risk products, such as life, health, etc., could go up. Competition in that end of the market would increase and keep the commissions from doing so.

75. The CAI maintained that the insurance brokers had to demonstrate the link between the price of the product and its value. In the present market, it was very hard to do this. Brokers would have to do more to earn their fees, by having more diversity of services for consumers. At present, if a consumer invested in a policy for £10,000 and ceased to pay after two or three years, there would be no return for the consumer because the initial premiums covered only the commission and other charges. The consumer should be able to see in advance how much of the premium went on charges. In Norway, the Government introduced a requirement for the life insurance industry to show all charges in a bank type statement and fines were introduced as well. The MCA was removed in the UK in 1991, but total transparency was delayed until 1995. The UK market continued to grow very well and the brokers had increased their share of the market from 50% to 58%. The Association maintained that there was no evidence to back up the criticisms of the UK decision.

76. The Association said that there were significant barriers to entry into the insurance market and the IIF agreement was a huge barrier. New entrants were not forced to join the IIF, but in order to get a licence from the Department, they had to abide by the IIF agreement. The disclosure of commission rates was only required if the rates were above the IIF level. This made the market uncompetitive. The CAI considered that if there was a move from fixed commission rates as at present, then there would be a different cost base and different types of services and fees. Firms would seek competitive advantage by offering better services and the removal of fixed rates would enhance transparency. This would revolutionise the way information was provided by financial advisers. They maintained that most brokers/advisers did not or could not understand the products that they were selling. In the future, if they sold products that were uncompetitive, they would lose customers. They said that the IIF agreement had impeded the development of the market for the past ten years. Market shares had remained unchanged for the past ten years too.

77. The CAI stated that there was distinct lack of fee based advisers in the Irish market and there were no discount brokers either. Discount brokers were a very important part of both the US and the UK markets. There was no innovation in the methods of payment in the Irish market and there was no indemnity and no "persistency bonus" for continued business. There were no volume payments in the market, volume was needed to drive down costs, and these were outlawed in the present market. If the IIF agreement was removed, there would be lower upfront commissions and more spread of commissions (over the life of the policy). At present if a customer took out a policy and then discontinued it after a few years, the customer lost out since the cost was taken out of the customer's account, not the insurance company's or the broker's. The introduction of an indemnity system would ensure that there were early surrender values for customers. They said that override commissions would be paid, but it did not mean higher charges for the consumer, since competition would sort it out. If customers became aware that brokers were selling a package at higher commissions, then the brokers would lose customers. The Association also considered that because of the size of the market in Ireland, information would circulate much more quickly than in larger markets.

78. The Association maintained that a balance had to be sought between the current situation where the manufacturers and the brokers had all the control and the consumer had none. Data on the lapse rates of insurance policies was not gathered or published by the insurance industry. Some companies had lapse rates of between 60% and 70% while other companies had lapse rates of 1% to 2% and all products were sold the same way. The solution was to empower consumers by introducing product transparency so that the consumers could decide for themselves and if they were not satisfied, they could take their business elsewhere. It would mean that the brokers would have to work hard to get business and keep it.

79. Under the IIF agreement, maximum rates were fixed, but lower commissions could be paid but the product would not be distributed by the brokers. The Association said that one company charged no commissions, but they received no business from the brokers. All the other companies paid the going rate and 90% of the first year's premium was commission. Market power was concentrated in the hands of the manufacturers and the brokers in a non-transparent market at present.

80. The CAI argued that the IIF Agreement was not a maximum commissions agreement, but a commission agreement. They stated that there was no competition on commission and they said that life offices were all paying the exact same rate for the exact same product type in most categories. The Association maintained that commissions were set as a cost of distribution. Any charges deducted by the life offices were hidden from the consumer and therefore not open to competition. They stated that the agreement on maximum commissions prohibited competition from insurers who might otherwise pay higher commissions to sell their policies by competing on the basis of their lower unit cost.

81. They maintained that competition from European competitors was discouraged by the fact that the Department of Enterprise, Trade and Employment had made it clear to new entrants to the market that they had to abide by the marketing, and consequently, the commission rates of the IIF. They also pointed out that since 1995 43 EU life offices had notified their intention to enter under the freedom of services but none had yet done so. The Association stated that the IIF which was made up of various committees, operated on the basis of consensus and the agreement was part of a wider culture of agreement on marketing by member firms. The Association maintained that this inhibited aggressive innovation and marketing by any one firm which would temporarily disadvantage other members It also prevented competition between intermediaries since it fixed a standard payment to all regardless of quality of advice or service.

82. The CAI stated that there was no recognition for higher persistency business and persistency payments were not available. They contended that better intermediaries were sustaining inefficient intermediaries. They further maintained that intermediaries were being kept fragmented thereby keeping the power to control the industry with manufacturers. They Association was of the view that the banning of indemnity commissions under the agreement restricted competition between intermediaries on the basis of their credit worthiness since insurers did not have to assess the risk of carrying their business through various intermediaries. The focus of the commission payment system was sales to the detriment of long-term service and this balance in the payments systems was detrimental to consumers. The agreement had slowed the pace of evolution including the movement to (a) transparent advice, (b) larger more organised and efficient intermediaries, and (c) better industry leadership and innovation from Life Offices forging ahead.

83. The Irish Brokers Association’s members comprised 30% of the total number of brokers and they controlled 60%-70% of the Life and Pensions market. The Association’s members were solely distributors of the product, not manufacturers and, consequently, they had a different position to that of the insurance companies. The IBA, in written and oral submissions, stated that they were in favour of the granting of an exemption to the IIF Agreement for the following reasons:

(i) The existence of the Commissions Agreement protected the independence of independent intermediaries by not providing them with any financial incentive to place business with one insurer rather than another on the basis of the level of remuneration.

(ii) The Agreement was a maximum agreement and this had not prevented intermediaries from charging fees rather than accepting commissions. Nor did it mean that intermediaries were guaranteed that level of commission, as many negotiated commission payments with clients. Equally, there were many products in the market which attracted levels of commission which are much lower than the maximum allowed under the Agreement.

(iii) By controlling the level of commissions paid to insurance intermediaries, the Agreement focused competition on those areas of greater relevance to consumers, i.e. on pricing, the product, and the return on investment.

(iv) The Agreement did not inhibit competition in any way in the Irish market which was one of the most sophisticated and competitive in Europe.

(v) Removal of the Agreement would not lead to better intermediaries being paid more than bad intermediaries. It was more likely to result in bigger, but not necessarily better, intermediaries being paid more.

(vi) Removal of the Agreement was likely to lead to an increase in the level of commission being paid to intermediaries. They cited the current level of commission paid for similar products in the life assurance market in the UK as evidence.

(vii) Disclosure of commission was not a replacement as a control mechanism on the levels of commission paid to intermediaries as shown by the current levels of commission paid in the market in the UK, which had not been affected by the requirement to disclose commission which was introduced three years ago.

84. The IBA strongly believed that consumers benefited from the Commissions Agreement as it had prevented the worse excesses from occurring in terms of the commissions paid to intermediaries that have occurred in the U.K. market over the last decade. In the U.K. commissions had increased following the removal of the Maximum Commissions Agreement there and the benchmark in the U.K. now was the rate in the previous agreement plus. They maintained that if the agreement was removed here, then the benchmark here would be the Maximum Commissions Agreement rate plus. Furthermore, it had protected the independence of the advice given by independent intermediaries to clients from being tarnished with the accusation that independent intermediaries could be motivated by the level of remuneration they were being paid by one insurer rather than another.

85. They disagreed with the Authority’s assessment of insurance products as being complex in nature and they considered that pure insurance products were easy for the consumer to understand. They considered that consumers were financially literate and were in a position to judge whether an investment had potential or not. The IBA also considered that the assistance of competent brokers greatly facilitated the process of comparing and evaluating products. The maintained that all advisors, whether insurance brokers or accountants, who offered independent financial advice had a financial interest, by means of a commission or a fee, in selling an insurance product.

86. The Association pointed out that the Code of Conduct for Insurance Intermediaries was drawn up by the Advisory Committee on the Regulation of Insurance Brokers (ACRIB) which was comprised of officials of the Department of Industry and Commerce, the IIF and the IBA. The Code was approved by the Department and it is mandatory on all insurance intermediaries. It set out an insurance intermediary’s responsibility to its clients in more detail than section 48 of the Act. The Association also referred to the Life Framework Directive which did not require the disclosure of the level of commissions nor the in-house charges of the insurance company. The Directive required that the surrender and paid up values must be given to the clients and the Association concluded from this that the European Commission had considered the surrender and paid up values provided sufficient information to the clients. The IBA maintained that the absence of a similar agreement in the UK, (to that of the IIF), had resulted in the commissions to intermediaries rising quite rapidly and there was no evidence that the introduction of hard disclosure of commissions had exerted any downward pressure on commissions. They concluded that the disclosure of commissions did not work as a control mechanism for the payment of commissions to intermediaries.

87. The Association disagreed with the CAI’s claim that the IIF agreement was intended to fix the cost of distribution across all member firms. They maintained that the agreement was introduced in 1987 to prevent the bidding up of commissions at the expense of consumers and other practices. The Association considered that the agreement did not inhibit aggressive competition between the various insurers in the market and in fact considered that it was extremely competitive to such an extent that the market would not sustain them all. They also disagreed with the CAI’s claim that agreeing maximum commissions inhibited competition by preventing the insurers from competing on the basis of lower unit cost. The Association denied that the agreement prevented competition between intermediaries and they suggested that such factors as the number of intermediaries in the market, the flow of new entrants into the market and the changing status of intermediaries (from brokers to tied agents and vice versa) belied this.

88. The IBA was not in favour of the payment of indemnity commissions which they maintained only encouraged the development of bad market practices, such as poor quality sales and lapse ratios, highly aggressive sales teams with little competence or dedication to the market which were funded by the indemnity terms. They stated that indemnity commissions were an advanced form of payment as the intermediary was paid the commission before the premium was paid by the client and as such it represented an advanced financing arrangement which was at the expense of consumers. The Association maintained that there was no evidence that European competitors with lower cost basis were deterred from entering the market. They referred to an EC report on term assurance rates which showed Ireland as offering the most competitive rates for term assurance within Europe. The Association maintained that true competition currently existed in the market and the removal of the agreement would lead to an initial period of adjustment or even chaos and that it would lead to higher commissions and to poorer value for customers.

89. The Association maintained that an insurer that was seeking to buy in business would pay higher commissions, but they wondered what effect that would have on the advice that they gave to the clients. The bigger companies would be motivated by the requirement to increase their market share at the cheapest cost, but it might not be done on a cost effective basis. If the difference was between getting a large block of business, e.g. a group scheme with 1,000 people in it, and not getting the business, then they would pay higher commissions to get it. Normally 30% of the initial premium went on commission, but this could be increased to 40% to get a particular block of business. If these were all done on an individual basis, the commissions would be less. Insurers could pay up to 100% of the initial premium as commission in order to buy in business, such as a group life scheme.

90. The Association believed that there was more than sufficient competition in the insurance industry as well as in the area of remuneration. The IBA maintained that if all the competing players moved to a higher level of remuneration, then the focus would be on all the other factors. The risks that consumers faced included the commissions being deducted from the initial premiums, which could affect the ultimate return of the product, especially if it was surrendered early. The Association pointed out that if consumers were unhappy with the products, they were not precluded from switching to other products, including products which were not unique to the insurance industry.

91. The Association said that the maximum commissions were applied to the savings products, there were none on the risk side, except by negotiation. Many pension products operated on a non-commission basis. They maintained that, over time, the payment of commissions would become a factor. They also considered that an actual process of bidding for business would take place and they did not see the advantage in this for consumers. New entrants could come in at a lower rate of commissions at present, since the I.I.F. Agreement referred to maximum rates. Rebating was frequent in the business and there were all sorts of options available. Brokers were also in competition with the Banks for various products and there was competition between the brokers too. They said that there were 3,000 intermediaries in the market, so many of them would be fighting for the same business and they could offer lower commission rates to get the business.

92. The IBA stated that the higher the premiums on a product, the more competition there was in that area and the more rebating took place. At present, brokers could not be paid more than the maximum rate in the IIF Agreement. It had a levelling effect and it did not give preference to the big firms. They agreed that the maximum rate could be viewed as a minimum rate. They agreed that low costs would be an element in the definition of a better broker, but brokers could not work for nothing. They said that offering independent advice and selling were not the same thing, but there was a relationship between both in the Life Insurance business. They pointed out that there were many fee based brokers in the market, they were not restricted in any significant manner and there was competition in terms of products etc. Some brokers did not take commissions, some gave rebates and there was active competition between intermediary institutions and non-intermediary institutions. The IBA maintained that the IIF agreement was a small price to pay for some sort of control in the market, to prevent people being paid significant commissions.

93. The IBA maintained that there was competition in the market even with the large number of competitors in the market and brokers were entering and leaving the business all the time. The figure of 1,400 for agents continually shifted between tied and non-tied agents, as some of them had other occupations too. The overall number of brokers had gone down since the 1990 introduction of regulations for the industry, but this was compensated for by the number of tied agents. European competitors had not been deterred from entering the market, but did not do so because the rates were so competitive in the Irish market. The only deterrence was due to the size of the market. The IBA considered that the IIF agreement was not a factor in this, but the Finance Act was. European competitors were not obliged to join the IIF.

94. One consumer had a pension policy with a particular insurance company, which he entered into through a broker. He said that had been misled concerning the amount of the pension funds available to him for his pension. He alleged that there was a difference between the amount his broker told him was in the fund and the figure according to the insurance company. He sought information from the insurance company concerning this and had not received an adequate response from them. He concluded that the reason that he was having difficulty in receiving the required information was due to the 1987 IIF agreement.

95. An Independent Broker submitted that the Authority should consider the IIF Agreement in the light of EC Article 85(3) Competition Law exceptions where if a fair share of resulting benefit accrued to Consumers, the EC was likely to exempt it. She maintained that competition existed at the moment through the different 'built-in' commissions attached to the various plans; the protection plans and the PIPs and PEPs carried vastly different commissions. She considered that brokers in particular served the consumer well, unlike the big institutions.

96. She said that the Authority should examine the dominant position the banks and building societies held in this market and their abuse of same. She alleged that because the bank manager had to meet certain targets in a particular branch with the bank’s associated insurance company, clients who had wanted to take out another policy with her (and had done so) they had to cancel the policy and take a bank associated insurance company policy instead in order to get their loan.

97. The broker submitted that the consumer was losing out and would do so further and the smaller brokers would be further squeezed out if the Authority did not grant the licence to the present agreement. She maintained that the big institutions wanted and could corner every part of the market. She also said that it was a well known fact that any young person who sought a loan from a bank would have to sign up for a policy for about £50 p.m. while a broker could have given him an adequate policy for £60 a year but when he realised this, it was too late do anything about it.

98. A mortgage broker and tied insurance agent, with regard to the IIF monopoly (agreement), stated that as no benefits accrued to either consumers or brokers/agents there was a perception of a ´hidden agenda’ or ´golden circle’. He also referred to a reduction in commission from January 1994 to the brokers and agents of between 33% and 75% which meant that their income was reduced by that amount, but no benefits (reductions) were passed on to the clients. He maintained that the result of the ´dramatic’ reduction in income to the broker/agent would result in a reduced quality of broker/agent and unprofessional financial services.

99. He stated that brokers/agents were producers since intermediaries generated insurance business for the IIF. He said that they were deprived of a free (European) market in which to sell their services. He alleged that the IIF because of its monopoly was enabled to fix the prices (commissions) paid to the producers, i.e. brokers/agents. He said that it could be argued that this was entirely contrary to EU Law. He suggested that the clients would benefit from competition in commissions and other charges between members of the IIF. He maintained that 18,000 brokers and agents and their clients were disadvantaged by the IIF monopoly.

100. Section 4(1) provides:

'Subject to the provisions of this section, all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State are prohibited and void...'

101. This is an agreement between the insurance companies, members of the IIF, who are operating in the life insurance market in the State. The companies are engaged for gain in the provision of life insurance services and are therefore undertakings. It is also a decision of the IIF, which is an association of undertakings. The agreement/decision fixes the maximum commission payable to insurance intermediaries for life business and it also fixes other terms of the contracts made between insurers and insurance intermediaries affecting the mode of payment of the intermediaries.

102. The life insurance market in the State is structured as follows. Insurance companies sell through intermediaries - brokers, agents, tied agents and their own employees - as described in paragraph 6. In each case the insurance company deducts the same fixed percentage amount from the premium paid by the customer, and pays it to the intermediary effectively as a distribution cost. The IIF submission refers to this as a payment for advice and service by the customer, and as noted in paragraph 8, the customer would in fact have their own search costs if they did not deal through an intermediary. However, the value of the advice which can be given differs widely between the four different types of intermediary. Employees of insurance companies, and tied agents of insurance companies, can offer information in relation only to the products of that company, and can advise only as between the products of that company. Agents can offer information and advice limited to up to four insurance companies. Brokers can offer information and advice in relation to five or more companies. They can advise only on the products of companies whose authorisation they have been given. All four types of intermediary are paid by the insurance company whose product they sell and commission is presently paid by all member firms of the IIF with the exception of the Equitable Life. They are paid therefore for the sale of the product, rather than for specific advice throughout the life of the product. A customer who seeks and pays for independent financial advice from any other type of financial adviser, and makes a decision to buy a life insurance product on the basis of that advice will have deducted from their premium the same fixed commission as a customer dealing through a broker or agent.

103. Therefore, virtually all distribution of life products in the State is through intermediaries, and a fixed charge for this form of distribution is paid by virtually all customers. The charge is not disclosed to customers, and it is not related to the actual cost of distribution to the individual customer. It is, in reality, a payment to intermediaries for each insurance product sold. There is, therefore, no incentive for any one insurance company to compete for customers’ business by reducing the level of commission payable by the customer. There is, in fact, a disincentive to doing so, which is that such a company would be at a disadvantage to all others in that its distribution network would have less incentive to sell its products than those of companies offering the higher commission.

104. The Authority considers that this disincentive can only exist in circumstances where commissions are not transparent to customers and are unrelated to specific benefits to customers. The Annual Report of the IIF for 1995 states that the IIF preference is that regulation by the Department of Enterprise and Employment ‘build on existing industry codes of practice’. This refers to a form of disclosure used for a short period in the U.K., where disclosure is required only of commissions which exceed an industry-agreed maximum, such as the notified Agreement - ‘soft’ disclosure. No life member of the IIF in fact discloses to customers the level of commission actually paid out of their premiums, expressed in cash terms. The Report of the IIF/DEE Joint Working Group (cited above) states ‘Life assurers are opposed to the disclosure of commission per se as it would be likely to distort the market and provide misleading information to consumers. They would argue that information regarding the amount of a commission on a policy as a separate item of costs is not necessary in order to make an informed judgement about the value of the policy. Also, where commission rates are subject to a maximum remuneration agreement (as is the case in the domestic market) disclosure of commissions would not assist the consumer in assessing the independence or reliability of advice obtained by intermediaries.’

105. The similar market structure of the life business in the United Kingdom was considered in a Report by the Director General of Fair Trading to the Secretary of State for Trade and Industry in March 1989. The DGFT advised:

‘The ultimate effect of the present commission paying system for remunerating intermediaries is to increase the price paid by the public for advice, to distort both the advice given by intermediaries to their customers and competition between product companies .’ (para 3.20).

106. The Authority considers that it is restrictive of competition for all the purchasers of a service, in this case the service provided by insurance intermediaries, to agree the maximum price they will pay for the service, and/or the forms which payment will take. The agreement facilitates, in fact requires, the sharing by competitors of information about this element of their costs. This removes some of the uncertainty as to competitors’ prices which is an important component of price competition. The views of the Authority on price fixing and the recommendation of prices by a trade association are set out in detail in decision no.335 [4]. The IIF submission states that there is a relationship between the level of commission paid, and the premium charged to the retail customer. If that is the case, an agreement on commission is to that extent an agreement as to a component of the price of the product. The Authority considers that for this reason the agreement on maximum rates of commission offends against Section 4(1).

107. The Authority considers that there is also a danger that the IIF agreement fixes a level of commission which is treated by insurers, either by agreement or de facto as a minimum level and it thus in practice may have the effect that all insurers pay the same level of commission, thereby eliminating competition between them as regards that element of their costs. The CAI supplied to the Authority the commission schedules of Friends Provident (undated), Canada Life (dated 5.7.96), Guardian Life (dated 1.1.94), Scottish Provident Ireland (dated June 1995), Norwich Union (dated January 1994), New Ireland Assurance (dated January 1994) and Hibernian Life (undated). In each schedule the percentage of commission payable is listed under the table heading ‘Commission’. In each schedule, the commission payable on a savings plan is initial commission of 3% x years of plan, up to a maximum of 60%, and renewal commission is 3%. In each schedule, the commission payable on a whole life protection plan is an initial commission of 3% x years of plan, up to a maximum of 90%, and renewal commission is 3%. In each schedule, the commission payable on a personal pension plan is an initial commission of 3% x term of years, to a maximum of 60%, and renewal commission is 3%. All the insurance companies listed are members of the IIF and of the notified Agreement.

108. The commission rates appearing in the schedules of the insurance companies for the three products mentioned above are the same rates listed as maxima in the IIF Agreement. The Authority considers that this is not in itself conclusive that all members of the IIF treat the maxima as minima but it adds to the concern that they may do so.

109. In the market as it is presently structured, each insurance company has a reason to be reluctant to move unilaterally to reduce commission levels for agents or brokers, (i.e. the intermediaries who may sell the products of more than one company) because of the risk that those agents or brokers will not sell their products as zealously as those of other companies. Also, in a market where, as is the case in the State, the level of commission paid to intermediaries is not required to be disclosed in cash terms to consumers there is less incentive to insurance companies to be the first to drop the level of commission below the maximum. The DGFT Report (cited above) states, apropos the effect of the maximum commission agreement on competition:

‘While the present or proposed LAUTRO commission systems remain, it will be in the interest of product companies to compete for intermediaries attention by paying the maximum commission possible. Hence without some other constraining influence the MCA (maximum commission agreement) will in practice act as a price fixing agreement between product companies rather than as a schedule of maxima.’ (para 3.21)

110. The Agreement also has the effect of removing any incentive for competition as between brokers, agents, and tied agents, on price or quality of service. Intermediaries, in their half way position between insurance companies and retail customers are to some extent providing services to both: distribution, sales and marketing services to the insurance companies, and to a limited extent, advice to customers. There is no incentive for competition in relation to the service which such intermediaries are providing for the insurance companies, since the insurance companies have combined to agree a maximum price for that service. This maximum is the same for all types of intermediary, despite the difference in nature between the different types of intermediary. The Authority considers that for this reason also the agreement offends against Section 4(1).

111. There is also no incentive for intermediaries to compete on quality of service or price in the service they sell to the customer. The price for their service is not set by the customer. It is, indirectly, paid by the customer when commission is deducted from the customer’s premia, but the customer does not have the choice of not paying that price, or of negotiating it. The agreement fixes the maximum price to the customer in the same way whether the customer is obtaining service from a broker, an agent, a tied agent, or dealing directly with an insurance company employee, although the service each can offer to a customer is obviously not the same. The Authority considers that for this reason the agreement offends against Section 4(1).

112. As stated above there is no great barrier to entry to the market for intermediary services in the sense of capital requirements, or qualifications. One requirement for entry is acceptance as an intermediary by the appropriate number of insurers. The life insurance companies which are members of the IIF and parties to the Agreement between them hold a market share of the order of 92% in the State [see Annex A]. No person can operate as an insurance broker or agent other than with the agreement of one or more insurers who are party to the Agreement. The Authority therefore considers that the agreement has a significant effect throughout the market.

113. The European Court of Justice has held in Verband der Sachversicherer (cited above) that Article 85(1) applies even to a non-binding recommendation of an association of undertakings, where the majority of its members can be expected to follow its recommendations. In this instance, life companies amounting to 92% of the market for life products in the State are members of the IIF and party to this Agreement. The IIF requires companies party to the Agreement to report to it annually on commissions paid, requires recovery of commission paid in excess of the maximum, and has power to impose financial penalties on companies in breach of the Agreement. All life members of the IIF are covered by the Agreement. In those circumstances also the Authority considers that the Agreement has a significant effect on the market for life products. The Authority notes the IIF statement that it does not penalise firms for exceeding the maximum commission levels set under the agreement. Nevertheless the provision allowing it to impose penalties for such behaviour is designed to ensure compliance with the provisions of the agreement. The IIF has indicated that it would be prepared to withdraw this provision. While removing the formal threat of sanctions might have some positive effect, the Authority believes that the agreements would still have the object of preventing competition and that its effect would be to restrict competition.

114. The Authority has taken into account the Insurance Act 1989, part of the purpose of which is to regulate, in the interests of the consumers of insurance products, the level of commissions to insurance intermediaries, and the forms in which commission is paid. That consumer interest is considered below in the context of the examination of the licence arguments under section 4(2). The submission of the IIF states "The life offices were in effect forced into the Agreement in that the Government made it clear that unless the life offices voluntarily regulated the payment of commission to intermediaries, the Government would impose statutory controls." and it cites statements made by the then Minister, which are to the effect that commissions were too high, and that he would invoke his powers under the Insurance Act if insurance companies did not voluntarily cut commissions.

115. The 1989 Insurance Act, section 37, provides that where the Minister considers that an insurer is paying levels of commission which are too high the Minister may by notice fix a ceiling; and may use such a notice as a general notice to all insurers fixing that ceiling for them also. No such notice has been issued under the Act in respect of life business. The Minister issued a notice in respect of non-life business on 28th June 1989.

116. The Authority does not consider that informal Governmental, Departmental or Ministerial approval for an agreement, decision or concerted practice operates to exclude it from the operation of the Competition Act, particularly where that approval was negotiated prior to the coming into force of the Competition Act. In any sector there may be practices which have evolved over the years by agreement between industries and Departments. Although they might be intended by the industry to operate as a type of sectoral self-regulation, where they take the form of agreements between undertakings they come within the scope of the Competition Act, which applies to all "agreements, decisions and concerted practices" of undertakings. The Authority also does not consider that the existence of a statutory power for a Minister to require all firms in a sector to adopt similar contract terms renders an agreement between competitors to do so exempt from the Competition Act.

117. In the case of insurance commissions the harm intended to be prevented by the legislation is the harm of insurance companies competing by paying very high commissions, resulting in intermediaries pushing sales of insurance products to customers for whom they are not suited. This danger exists, because, as outlined above, insurance companies have a strong incentive not to drop commission payments because of the perceived danger that intermediaries will not sell their products as strongly as those of their competitors. This does and has in the past, in Ireland and the UK demonstrably led to harmful behaviour in the market in the form of high commission payments. However, the Authority does not accept that this is, as the IIF has argued, a justification for the notified agreement. The danger of insurance companies pushing commissions higher and customers being badly advised exists only because of the nature of the method of distribution, which has been chosen by effectively all insurance companies carrying on life business in the State. The market structure is itself artificial and a barrier to competition, but insurance companies acting individually are entirely free to choose other forms of distribution, and other ways of paying for distribution. The Report of the IIF/DEE Joint Working Group (cited above) states, in relation to all forms of insurance, not specifically life products: ‘Until now the use of intermediaries has tended to be the rule, but costs are high as a result of commissions. It is therefore not surprising that less expensive methods of distribution are being explored, among them: tele sales, retail chain stores, including sales desks set up in supermarkets, and sale by correspondence (direct mail and telemarketing).’

118. The IIF argued that the removal of a maximum commission agreement in the UK caused an increase in commission levels paid. The IIF argument does not specify the point in time in the UK regime it refers to. Prior to July 1988 a maximum commissions agreement operated in the UK by agreement of life insurance companies. From 1st July 1988 the self-regulating organisation LAUTRO (Life Assurance and Unit Trust Regulatory Organisation) in the UK itself operated a maximum commission agreement. LAUTRO ceased to require compliance with the MCA on 31st December 1989, as required by the Office of Fair Trading on the basis of the OFT’s view that the MCA was anti-competitive. It then undertook surveys of commission levels in March 1990, November 1991 and August 1993. These do show an increase in the levels of commission paid after the date. The 1993 Survey notes:

‘over 80% of the respondents still use (the LAUTRO MCA) as the basis for calculating commissions ... It should be noted that the last Survey was undertaken soon after a period in which a number of large firms, including building societies, became Appointed Representatives and members have reported a higher proportion of business from these connections. ... Please note that that the results for Independent Intermediaries and Appointed Representative Firms are not comparable because ... (T)he average size of an Appointed Representative Firm is larger than that of Independent Intermediaries and it is likely, therefore to be able to negotiate a higher rate of remuneration.’ [5]

The Authority considers that the rise in UK commission levels does not have a simple causal relationship with the absence of an MCA. It is commonly observable that where a fee scale, statutory price control or any form of industry wide price measure has been in place, after its removal prices tend to cluster around the former measure until price competition begins to operate. In this instance the Authority considers that any delay in the evolution of price competition, or any rise in levels of commission in the UK is attributable to the absence at that time of full disclosure of commissions.

119. On 1st January 1995, the Personal Investment Authority in the UK (the regulatory body which had replaced LAUTRO) introduced ‘hard’ disclosure of commissions, i.e. disclosure of the cash amount of commissions in a form designed to be comprehensible to purchasers. They report

‘In one area, however, it has been possible to draw some tentative conclusions...Overall deductions have gone down by 3.2%...The reduction has been greatest among those companies which had the highest deductions to start with. This may indicate some efficiency gains which have fed through to customers, or increased price competition.’ [6]

120. Clauses 10, 11 and 20. The Authority considers that for the reasons given above in the context of maximum commissions, it restricts competition for the insurers to agree the terms of their contracts with their intermediaries as provided by clauses 10, 11 and 20. The terms themselves are not restrictive of competition; the agreement by the insurers that they will impose the same terms is restrictive in that it removes any competition between insurers as to the terms on which they obtain this service, or to put it another way, the price they pay for this input into their product cost. It also obliges competitors on an ongoing basis to share information about their contract terms.

121. Section 38 of the 1989 Insurance Act provides that the Minister may, where he considers it necessary in the public interest, provide by order that an insurer may not make a loan to an intermediary; and may provide by order that an insurer may not pay commission in respect of a premium until the premium has been received. No order of either kind has been made since the Act came into force. As stated in paragraph 116 the Authority does not consider that the existence of a statutory power for the Minister to require these terms in all contracts with intermediaries renders an agreement between competitors to adopt same exempt from the Competition Act.

122. The Authority considers that some of the arguments advanced by the IIF in its response to the Statement of Objections were inconsistent. It was claimed that commissions only represented a small part of the total cost of the price of insurance products. Yet it was claimed that abolishing the price cap agreement would have substantial adverse effects on costs and prices.

123. The Authority did not accept the IIF’s argument (see para. 64) that a ceiling on commissions resulted in lower prices to consumers, based on a model of the insurance market where there were controls on commissions. While the Authority considered that regulation, i.e. the fixing of maximum prices, could be justified on the basis of a market failure due to information asymmetries [7] between the brokers and the insured, there was no indication of market failure in the Irish insurance market, the correction of which warranted the retention of the MCA.

124. Neither did The Authority accept the IIF model’s implied assumption of the insurance market - which they used to justify the agreement - as being a static market, i.e. a fixed amount of business being chased by more and more brokers, thereby driving up commissions. This claim seemed to be wholly unrealistic given that (i) the number of members in the IIF has increased; (ii) the total gross premium income by IIF members at the end of 1996 had increased by 21% on the previous year and (iii) the total value of life assurance proection in 1996 had increased by 10% on the previous year (see para. 6 above). Financial services/products were converging. New products were emerging. New institutions were selling products in areas formerly reserved to insurance companies. This was a growing and dynamic product market and one which was more difficult for the brokers to capture than the IIF had claimed. The emergence of new products should also increase competition in the market.

125. The Authority was of the opinion that, even if there was market failure, the insurance companies could take measures to address this other than naked collusion. Vertical integration (direct selling, tied agents) or investment in information dissemination would help to correct information asymmetries by allowing the passive customer, for example, to weigh up the value of insurance products on offer. Therefore, the restriction on price was not essential, in the Authority’s view, to correct any market failure and the agreement did not qualify for a licence. Even if one accepted all the assumptions inherent in the model and believed it applied to the Irish insurance market, one insurmountable problem remained - regulation would only produce a first best solution if commissions were set at an efficient level. The level of commissions would have to be monitored continuously to ensure that they continued to be set at an efficient level. The agreement did not satisfy these requirements. It effectively eliminated price competition from the market, but did not resolve any market failure which might exist.

126. The Authority may 'in accordance with section 8 grant a licence for the purposes of this section in the case of -

(a) any agreement or category of agreements,

(b) any decision or category of decisions,

(c) any concerted practice or category of concerted practices,

which in the opinion of the Authority, having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

127. (i) Improvement in distribution of goods or services or technical or economic progress.

The notifying party has offered the argument that the improvement in distribution of services, or economic progress brought about by this agreement is the improvement in the distribution of insurance products. The argument made is that when brokers are subject to a cap on their commissions, they are not unduly influenced to push the product of one insurer over another, but can offer an intending buyer of insurance independent advice. Sales through such an independent intermediary are argued to be an improved mode of distribution in comparison to sales through a broker who might be influenced by high commissions to sell unsuitable products.

128. Firstly, the logic of this argument, appears to be relevant, and indeed to be made by the IIF, only in relation to brokers as independent advisers. The Agreement however fixes the same maximum rate across the board for brokers, agents and tied agents. Tied agents are able to sell the products of only one company so that they clearly cannot be independent advisers. It is not argued by the IIF that agents are independent or can give independent advice. The fixing of maximum commissions payable to agents and tied agents cannot therefore bring about the improvement asserted.

129. The Authority considers secondly that the improvement intended by the Act to be grounds for a licence is a positive improvement of some kind in distribution, not merely an improvement by reference to a potential bad practice of insurers offering excessively high commission to brokers which it is argued would otherwise occur. That is, the insurers cannot for the purposes of Section 4(2) rely on an argument that they would choose to act in a way which made distribution more expensive, if they did not make this agreement. The present market structure may well give insurers an incentive to behave in the way described, but the present market structure is not imposed on insurers by any overwhelming imperative outside their control. The insurers are free individually to organise distribution in a number of other ways.

130. Thirdly, the improvement relied on is asserted but no further proof is offered and it does not appear self evident that the Agreement achieves the result of making brokers independent financial advisers. As noted earlier, brokers are paid by commission, whether capped or not, and the independence of their advice is inevitably limited to the extent that they are paid only when they sell an insurance product. If they advised the purchase of a unit trust, or bank based investment, they would receive no commission. They are not independent financial advisers of the type to whom a client pays a fee for advice, inter alia, as to whether or not they need any insurance product. The improvement in distribution asserted may indeed be an improvement for insurers in the sense that it is a marketing tool which in the present circumstances of the market works well for them but the improvement required by section 4(2) is an improvement of a kind which is capable of being passed on, at least in part, to consumers.

131. Fourthly, as previously noted, the arrangements would only deal with any alleged market failure if the price-cap was set and maintained at an efficient level. It would not result in any improvements in distribution or the provision of services unless this was the case. As there is no evidence to show that the maximum level of commission set is efficient in this sense, the agreement does not satisfy this requirement of Section 4(2).

132. (ii) Benefit transferred to consumer.

The Authority as stated above does not consider that it has been shown that the maximum commission clause produces the improvement or progress of making brokers purveyors of better advice, so that the question of the passing of a benefit to the consumer does not arise. The concern that brokers will not act independently if commissions are too high, to the detriment of consumer, is a concern which can arise only in the present market structure and only where the commissions are not made transparent to consumers. Where the consumer does not know the level of commission associated with each product offered, they cannot assess the advice of the broker. Fixing a maximum level of commission while not making the commission transparent to the consumer seems to be completely ineffective to achieve the benefit argued for. The Authority considers that failing to disclose the commission paid out of premiums in fact produces exactly the opposite effect.

133. It was argued that it was a benefit to consumers that the cap on maximum levels of commission resulted in lower premiums, and that uncapped commission would result directly in higher premiums being paid by buyers of insurance. The Authority considers that to be a non sequitur, since insurance companies would have a free choice as to whether to pass on such an increase in costs to consumers. The Authority also notes that the levels of commission set by the Agreement do not seem to be in any absolute sense low.

134. (iii) Indispensability.

As above, since no improvement or progress is identified as resulting from the offensive clauses, the question of indispensability is academic. If there were an improvement in distribution attributable to distribution being carried out by brokers free to give independent advice, the Authority considers that an industry-wide agreement on maximum commissions to all intermediaries is, apart from not being effective to achieve that end, far from being the only and indispensable method of achieving it. If the improvement asserted is an overall decrease in the price to consumers of the product, then the Authority considers that it is not indispensable for there to be an industry wide agreement on levels of commission to achieve that.

135. (iv) Possibility of eliminating competition.

Price competition between intermediaries in providing services to insurers is certainly curtailed by the agreement. If in fact the agreement operates as a de facto minimum level for commissions then it entirely eliminates competition between intermediaries vis a vis insurers. The effect in the market for insurance services is indirect and does not amount to affording the insurers the possibility of eliminating price competition in the market for insurance products but it does amount to concertation by insurers in eliminating one element of price competition which forms part of the overall price of the product.

136. The IIF argued in its submission that competition between insurers ought to be in relation to the premiums they charged, and the investment returns they provide. Earlier in the submission it had been argued that the level of commission affected the level of premium, and ultimately the level of return on investment. To the extent that that is true, the IIF agreement does eliminate competition between insurance companies in respect of a component of their pricing.

137. The notified arrangements therefore fail to satisfy any of the requirements for a licence.

For the Competition Authority

____________

Patrick Massey

Member

5 February, 1998.

* The commission payments quoted in the Table have no direct percentage relationship with the figures for premiums received since they relate to different premium types, both lump sum and periodic and reflect payment of both initial and renewal commission.

# This total is the net total premiums received for Irish risk business by companies authorised under the EC (Life Assurance) Regulations 1994. It does not include any business carried out by insurance companies which have notified an intention or obtained an administrative authorisation to carry on life assurance business into Ireland, on a freedom to provide services basis. ANNEX B

[Paragraph numbers refer to those in the IIF Agreement.]

Initial Commission

4% of the premium paid in respect of the first year x the number of years of the premium payment term up to 10 years

plus

2½% of the premium paid in respect of the first year x the number of years of the premium payment term in excess of 10 years.

Subject to a total maximum initial commission of 90% of the total premium paid in respect of the first year.

Renewal Commission

2½ % of each renewal premium paid.

Initial Commission

BASIS I

Applicable to all contracts to which Basis II or Basis III does not apply.

3½% of the single premium paid.

BASIS II

Available in lieu of Basis I for all contracts for which Basis III does not apply at the option of the insurance broker or insurance agent with the consent of the life office.

2% of the single premium paid

plus

½% of the current value of the contract at each annual anniversary date after the commencement date.

BASIS III

Applicable to all contracts where the policy term is not more than 5 years.

½% of the single premium paid by policy term to the lower whole number of years.

Subject to a maximum of 2½% of the single premium paid.

10% of the premium paid in respect of the first year x the number of years of the premium payment term.

Subject to a maximum initial commission of 90% of the total premium paid in respect of the first year.

Renewal Commission

BASIS I

Applicable to all contracts to which Basis II does not apply.

2½% of each renewal premium paid.

BASIS II

Available to in lieu of Basis I at the option of insurance broker or insurance agent with the consent of the Life Office.

5¾% of each renewal premium paid in the case of temporary assurance policies providing a fixed annual percentage increase in premiums which has been contractually agreed at the inception of the contract.

20% of the premium paid where the policy term does not exceed one year.

15% of the premium paid where the policy term exceeds one year.

1½% of the purchase money paid.

2½% of the premium paid in respect of each year of the premium payment term.

Subject to a maximum of 60% of the total premium paid in respect of the first year.

1½% of the purchase money paid.

2½% of the premium paid in respect of the first year x the number of years of the premium payment term.

Subject to a maximum initial commission of 60% of the total premium paid in respect of the first year.

2½% of each renewal premium paid.

1½% of the cash value of the annuity excluding any portion commuted for a cash sum.

3% of the single premium paid.

1½% of the cash value of the annuity excluding any portion commuted for a cash sum.

First year of a new Employee Benefit Scheme

15% of the first IR£42,000 of Pensions Business premium paid in respect of the first year

plus

7½% of any balance of the Pensions Business premium paid in respect of the first year.

Subsequent years of the said Employee Benefit Scheme

12½% of the first IR£5,250 of "net increase" in Pensions Business premium paid in respect of the relevant year

plus

5% of the balance of the "net increase" in Pensions Business premium paid in respect of the relevant year.

In addition, where (i) the Employee benefit Scheme commenced on or after 1st October 1986 but before 1st April 1986 and (ii) the third anniversary of the employee benefit Scheme has not been reached and (iii) the Pensions Business premium paid in the first year was less than IR£31,500 and (iv) the "net increase" in Pensions Business premium paid exceeds IR£3,150, a further additional payment may be made of 7.5% of the excess over IR£3,150 provided that the aggregate of such additional payments in the second and third years of the Employee Benefit Scheme does not exceed 7.5% of the difference between IR£31,500 and the Pensions Business premium paid in the first year.

Where the Employee Benefit Scheme commenced on or after 1st April 1986 the same provision shall apply except that the corresponding amounts shall be IR£42,000 (instead of IR£31,500) and IR£5,250 (instead of IR£3,150).

2½% of the total Pensions Business premium paid in respect of the relevant year.

A single payment of a maximum of 1½% of the purchase price of if there is no purchase price 1½% of the value of the pension may be paid on the commencement of a pension.

2½% x n (maximum 60%) of the Pensions Business premium paid in respect of the first year for each employee included in the Employee Benefit Scheme.

2½% of the Pensions Business premium paid in respect of the relevant year for each employee included in the Employee Benefit Scheme.

A single payment of a maximum of 1½% of the purchase price or if there is no purchase price 1½% of the value of the pension may be paid on the commencement of a pension.'

16. In addition the agreement provides that commission up to a maximum of 1½% may be paid in certain circumstances in the case of lump sum payments.

10% of the premium paid in respect of the first year x the number of years of the premium paying term, subject to a maximum initial commission of 90% of the total premium paid in respect of the first year.

2.5% of each renewal premium paid.

[Note: The revised basis for PHI was introduced with effect from 22nd July 1989.]

50% of the first IR£10,500 of Group Permanent Health Insurance premium paid in respect of the first year

plus

30% of any balance of the Group Permanent Health Insurance paid in respect of the first year

25% on any "net increase" in Group Permanent Health Insurance premium paid in respect of the relevant year.

Where the annual premium for Group Permanent Health Insurance in respect of the first year is less than IR£10,500 a further additional payment may be made of 20% of the "net increase" in Group Permanent Health Insurance premiums paid in respect of the relevant year until the attribution premium payable first exceeds IR£10,500 provided that these additional payments shall not be payable on any premium in excess of IR£10,500.

5% of the total Group Permanent Health Insurance premium paid in respect of the relevant year.'

The IIF made announced a number changes to its Life Remuneration Agreement in 1993. The key changes, which came into effect for policies sold from 1st January 1994, are as follows:

[1] Department of Enterprise and Employment Insurance Annual Report 1995.

[2] A series of papers by a British author, Hugh Gravelle, which were published between 1991 and 1994 in the Geneva papers on Risk and Insurance.

[3] Based on an idea by V.P. Goldberg (1986).

[4] The Irish Stock Exchange Rules on Government Gilts, decision no. 335 of 10.6.94.

[5] LAUTRO Commission Survey, August 1993.

[6] Personal Investment Authority report of January 1995, para. 65.

[7] The IIF claimed that these asymmetries operated to the disadvantage of the insurance companies, resulting in higher commissions and less demand for the product.