The European Commission after a lengthy study has reportedfinding some questionable practices by the insurance industryincluding a lack of disclosure by brokers and an inherent conflictof interest presented by broker business models.

In its final report on the European Union insurance industry,made public Tuesday, the commission said that since brokers act asboth a client advisor and distributor of insurance, the “dual roleis a potential source of conflict of interest” between givingadvice and the broker's business interests as a distributor.

Conflicts can arise from the broker's payments and contingentcommissions, the report said.

The commission went on to say that the lack of disclosure of thecompensation arrangements and “other conflicts on interest” can“create an environment in which business insurance clients, in manycases, are unable to make fully informed choices.”

Full disclosure would solve many of these conflicts, the reportsaid, but currently where disclosure does take place “it does notappear to be complete, clear and understandable to the client.”

Relating to the underwriters, the report focused on layeredinsurance and reinsurance coverage, and was critical of “best termsand conditions” clauses noting that under certain conditions itcould amount to restriction of competition.

While acknowledging that layered insurance programs increasecapacity, it questions the benefit of pricing for the policyholderand that there may be a breech of European Union anti-competitiveagreements.

The commission's report says that there needs to be a greatersmoothing over of earnings noting that small and medium size linesappear to be more profitable than large accounts.

There are suggestions, the commission said, that brokeragecommission plays a part in the profitability of large accountsbecause of the influence brokers with market margin can exert overthe payment of commissions by insurers.

The commission noted that the property-casualty premium marketin Europe amounts to $534 billion and that without insurance manybusinesses could not function, making it an important industry inthe European Union.

The commission said it would not hesitate to use its enforcementpowers if necessary, but it invited market and industryparticipants to come forward to discuss remedies before takingaction.

In a statement, the law firm of Freshfields Bruckhaus Deringernoted that the report is low key compared to other enforcementactions. It said that enforcement actions on competition will takeplace across Europe and that the industry has some “real work todo” in some areas.

“In all, this report is unlikely to mark the end of theengagement between the commission and the insurance industry,” theinternational law firm said.

In the United States, the insurance industry was subjected toyears of investigation and legal actions beginning in late 2004that resulted in the payment of billions of dollars in settlements.The actions were taken over the lack of disclosure and allegationsof kickbacks paid by insurers to brokers to steer certainaccounts.