Opinion of the Advocate-General
++++
Mr President,
Members of the Court,
1 . Every contract of insurance is based on the promise made by the insurer that he will indemnify the person insured should the event occur against which he has insured himself by payment in advance of a premium . Consequently, for the insured person the contract is a means of providing against a possible future loss .
That risk factor, which is peculiar to contracts of insurance, has its effect on the business of insurance undertakings . This peculiarity, as is shown in the present case, lies in the uncertainty affecting the determination of the precise cost of the claims covered by the insurance . The insurer has to rely on forecasts on the basis of the probability of the materialization of the insured risk and the foreseeable extent of the loss .
In those circumstances it is easy to imagine not only the importance, but also the difficulty, especially in regard to the coverage of large claims, of the calculation of the premiums which will make it possible to set aside the "technical reserves" intended to enable companies to meet in full their obligations to insured persons if the risk materializes . That is what is meant by the principle of the proportionality of the premium to the risk .
The aim of that type of contract and the socio-economic role of insurance in society require that the performance of every contract must at all times be guaranteed and, consequently, that every insurance company must be solvent . By virtue of those two leading principles all legislation on the subject comes within the field of public policy . Those principles cannot fail to have an impact on the Community competition rules applicable to the undertakings concerned and, moreover, form the basis of the coordination directives adopted by the Council, in particular Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance ( Official Journal 1973, L*228, p.*3 ).
2 . The aforementioned characteristics are even more marked where, as in this case, the insurance relates to the risk of industrial fire and the consequences thereof, namely interruption of business ( hereinafter referred to generally as "insurance against industrial fire risks "). Those characteristics are revealed by the documents before the Court .
For the insurer this class of insurance often acts as an introduction since it generally determines the choice of company to effect insurance against other risks . The special nature of this type of insurance has to do with various factors which account in particular for the fact that the contracts are generally concluded for a short period . Such insurance provides indemnification against a major loss and the fact that it is extremely uncertain whether or not the risk will materialize and the particularly high cost of such indemnification mean that the insurer must establish substantial technical reserves providing him with an appropriate safety margin . In addition, each contract must be tailored to the circumstances of each undertaking or industry insured . Finally, it is subject to constant adjustments which are connected with the rapid alterations in the pattern of risks, that is to say with their frequency and gravity, due to technological changes .
Consequently, the calculation of premiums is affected by additional factors of uncertainty in this field . The fact is that a single insurer alone is not in a position, on the basis solely of his own experience, to calculate adequately the appropriate premium . It is therefore necessary to reconcile the workings of competition with the necessary pooling of factors material to the making of forecasts . The latter information will be decisive in determining the policy pursued by the individual insurer as to the technique and terms of coverage of the risk . It is that information which will lead the individual insurer to have recourse, where necessary, to techniques for sharing the burden of the risk, especially in order to cover substantial claims . The system of co-insurance enables several insurers, of whom the leading insurer determines the insurance conditions and premium rates, to opt to cover the same risk for the same term under a single contract for a gross premium, without joint and several liability . It is pointed out in the Report for the Hearing that in the Federal Republic of Germany more than 50% of policies and 75% of premiums relate to co-insurance business . Even more widespread in the Federal Republic is re-insurance which enables the direct insurer to protect himself by ceding a proportion of the risk covered by him to a re-insurer .
3 . That is the context in which the case before the Court belongs . In the Federal Republic the insurance sector concerned with industrial fire risks undergoes periods of chronic imbalance during which income from premiums no longer covers the sums paid out on claims .
The period between 1973 and 1979 was thus marked by a fall in average premium rates of 44% for industrial fire risks and approximately 50% for interruption of business activities . The premiums received in respect of such insurance would not, of themselves, have been sufficient to finance the total cost of indemnifying insured persons and the operating costs of the companies .
It was that sectorial deficit with which the Verband der Sachversicherer eV ( hereinafter referred to as "the VdS "), an association representing all property insurers established in the Federal Republic of Germany, sought to deal when, in 1980, it adopted a "non-binding recommendation to re-establish stable and viable conditions" in the class of insurance in question . The recommendation, which was addressed to all its members, proposed an increase in premium rates in stages between 1 August 1980 and 31 December 1982 under the conditions described in the Report for the Hearing .
In addition, German re-insurers decided, in a general manner, to include in all contracts concluded after 1 January 1981 a "premium calculation clause" according to which failure to comply with the aforementioned recommendation would be treated as underrating and would lead to a proportionate reduction in the coverage provided by the re-insurer .
In accordance with paragraph 102 of the Gesetz gegen Wettbewerbsbeschraenkungen (( Law against Restraints on Competition )) which, in the field of insurance, prohibits only measures amounting to an abuse, the recommendation was first notified to the Bundesaufsichtsamt fuer das Versicherungswesen (( Federal Supervisory Office for the Insurance Industry )) and the Bundeskartellamt (( Federal Cartel Office )) and subsequently published in the Bundesanzeiger (( Official Gazette )). The Bundeskartellamt did not raise any objections with regard to the recommendation' s conformity with paragraph 102 of the Law against Restraints on Competition .
4 . By its decision of 5 December 1984, which is the subject of these proceedings, the Commission, however, considered that the VdS' s recommendation constituted an infringement of Article 85 ( 1 ) of the EEC Treaty and refused its application for exemption under Article 85 ( 3 ).
The application lodged by the VdS and supported by the Gesamtverband der Versicherungswirtschaft eV (( General Association for the German Insurance Industry, hereinafter referred to as "the intervener ")) points out the conflict to which I have already referred between the general requirements relating to the principle of free competition and the specific requirements of the insurance industry . The Commission considers that the conflict must be resolved within the framework of the Community rules governing competition . The applicant and the intervener deny, in the first place, that the rules on competition apply to the insurance industry and, secondly that, even if they do so apply, the recommendation may be regarded as an agreement, decision or concerted practice within the meaning of Article 85 ( 1 ); finally and in the alternative, they contend that, if it is so regarded, it may not be refused the benefit of an exemption under Article 85 ( 3 ).
I - Does Article 85 of the EEC Treaty apply to the insurance industry?
5 . In the case of insurance against industrial fire risks, the arguments submitted by the applicant and the intervener are based on the risk which unlimited competition in regard to premiums entails for insured persons, third parties and the public in general . In my view, those arguments, looked at in isolation from the inferences which are drawn from them, cannot be disputed in any essential respect .
As I have pointed out, the desirable level of premiums is the result of statistical estimates which are subject to a large degree of uncertainty . Consequently, the possibility of a rupture in the necessary correspondence between income from premiums and the cost of claims cannot be excluded, especially in the branch of insurance at issue .
In the calculation of the necessary premiums no insurer is secure against errors of assessment . The case before the Court shows that to some extent under-assessment may be deliberate as the insurer is tempted to fix the premiums at an attractive level in order to wrest, improve or preserve a competitive position on the market . In such a case the undertaking is, in a way, "gambling" not only on the unlikelihood of claims but also on the possibility of concluding new policies and of using the interest on its capital investments . That situation is, moreover, reinforced by the special nature of industrial risks insurance which is a class of insurance by means of which insurance undertakings try to attract clients and secure their loyalty .
Consequently, there is the danger, as this case shows, that undertakings may knowingly maintain an imbalance between income and expenditure in the sector in question if they are guided solely by the rules of competition with regard to premiums . It is true that the solvency of each undertaking as a whole is subject to verification . That is precisely the aim of Directive 73/239 and the German legislation implementing and expanding on it, in particular with regard to the security of capital investments ( paragraph 54 of the Versicherungsaufsichtsgesetz (( Insurance Supervision Law ))*).
Nevertheless, the materialization, even exceptionally, of a major risk which cannot be covered by adequate reserves available immediately could affect the general equilibrium of an undertaking so far as to bring about its insolvency . In that connection the autonomy of the various classes of insurance appears to be the best guarantee that contracts of insurance will be fulfilled . That would appear to be the concept on which Directive 73/239 is based ( sixth recital in the preamble thereto and Articles 7 ( 2 ) and 14 ).
For all the foregoing reasons the problem posed by this case relates in particular to the determination of the appropriate means of avoiding an under-assessment of the necessary premium rate, which supplement the supervisory measures already provided for by the national legislation in conformity with the same directive .
Nevertheless, whilst the premise on which the arguments of the two associations are based may be accepted, I am unable to agree with the inferences they draw from it with regard to the inapplicability of Article 85 of the EEC Treaty, since the interpretation which they propose should be given to Article 87 ( 2 ) ( c ) in that connection is not supported by either the wording, the scheme or the spirit of the rules laid down in the Treaty in the field of competition .
6 . Article 87 ( 1 ) provides that the Council, acting on a proposal from the Commission, is to
"1 . ... adopt any appropriate regulations or directives to give effect to the principles set out in Articles 85 and 86",
in order,
"2 . ... in particular :
( c ) to define, if need be, in the various branches of the economy, the scope of the provisions of Articles 85 and 86 ".
The meaning and scope of Article 87 must be determined in the context of the whole body of the Treaty provisions on competition .
The position of Article 85 in the EEC Treaty is significant . It forms part of Part Three of the Treaty, entitled "Policy of the Community", and of Title I thereof, which sets out the "common rules ". Together with Article 86 it lays down the competition rules applicable to undertakings .
As we know, Community competition policy is based on the principle of the prohibition of all cartels and the prevention of any abuse of a dominant position . Article 85 ( 3 ) authorizes the Commission, which is entrusted with the task of ensuring compliance with the rules in the matter, to modify the application of that principle where this appears necessary in order to attain certain objectives which are exhaustively laid down in that provision and does not entail the elimination of competition in all essential respects .
Article 85 therefore meets two requirements : on the one hand the need
"to eliminate ... the obstacles to the free movement of goods within the common market and to confirm and safeguard the unity of that market",
and on the other hand the need to permit
"the Community authorities to carry out certain positive, though indirect, action with a view to promoting a harmonious development of economic activity within the whole Community, in accordance with Article 2 of the Treaty" ( Case 14/68 Wilhelm (( 1969 )) ECR 1, paragraph 5 of the judgment ).
In the light of the essential role of the Community competition rules in the establishment and development of the common market, it is obvious that any exception to the set of fundamental rules so established can exist only by virtue of an express provision of the EEC Treaty which will necessarily fall to be interpreted narrowly .
Thus in its recent judgment of 30 April 1986 ( Joined Cases 209 to 213/84 Asjes and Others (( 1986 )) ECR 1425, paragraph 40 of the judgment ) the Court pointed out that :
"where the Treaty intended to remove certain activities from the ambit of the competition rules, it made an express derogation to that effect ".
Article 42 is an instance of this . Acccording to that article the competition rules apply to agricultural undertakings only "to the extent determined by the Council ..., account being taken of the objectives set out in Article 39 ".
Since the Treaty does not provide for any express derogation of this kind for the insurance sector the Community competition rules must, in principle, apply to undertakings operating in that economic sector in the terms laid down by Article 85 et seq . of the EEC Treaty . That, moreover, was the solution adopted by the Court in its judgment of 9 June 1977 ( Case 90/76 Van Ameyde (( 1977 )) ECR 1091 ) where the Court considered whether or not the business of national motor vehicle insurance bureaux was compatible with Articles 85 and 86 .
Consequently, it is now necessary to consider the scope of Article 87 ( 2 ) ( c ) and, in particular, to determine whether, as is claimed by the applicant and the intervener, that provision is in the nature of a preliminary requirement .
7 . Is it necessary, in the light of the scheme of the provisions for the implementation of Articles 85 and 86, to take the view that the system of transitional rules laid down in Article 88 in conjunction with the provisions of Article 89 has been maintained in force, in relation to insurance business, by Article 88 "until the entry into force of the provisions adopted in pursuance of Article 87"?
As is clear beyond all doubt from the Court' s judgment of 6 April 1962 ( Case 13/61 Bosch (( 1962 )) ECR 45 ), the transitional period came to an end on the entry into force of Regulation No 17 of the Council of 6 February 1962, which was the first regulation implementing Articles 85 and 86 of the Treaty ( Official Journal, English Special Edition 1959-62 p.*87 ). It is true that the adoption of that regulation has not prevented the continued application of the system of transitional rules to the transport sector . However, it is not possible to draw from this any conclusions for the insurance sector . For the effect of Regulation No 17 to be neutralized in relation to the transport sector it was necessary for an express provision to be adopted, namely Regulation No 141 of the Council of 26 November 1962 ( Official Journal, English Special Edition 1959-62, p.*291 ), which was adopted under Article 87 . The system of transitional rules laid down in Articles 88 and 89 of the EEC Treaty now applies only to transport by sea and air, in respect of which definitive competition rules, such as those adopted for transport by rail, by road and by inland waterway in Regulation ( EEC ) No 1017/68 of the Council of 19 July 1968 ( Official Journal, English Special Edition 1968 ( I ), p.*302 ), which was itself adopted pursuant to Article 87 ( see paragraph 51 of the judgment in Asjes, cited above ), have not been adopted .
Since no rules of that type have been adopted in relation to insurance, the insurance sector and the transport sector are not really analogous .
8 . Is it possible to conclude from the content of Article 87 that the Council is obliged to adopt a regulation or directive every time that an adjustment of the competition rules is necessary?
Article 87 must be interpreted in conjunction with Articles 85 and 86, the application of which it is intended to facilitate, since it provides that the Council is to "adopt" any "appropriate" measures to that end .
Despite the mandatory nature of the enabling power granted by Article 87 ( 1 ), it is necessary to note in the first place the flexible nature of the period prescribed, the only effect of its expiry being on the method of voting, and, in the second place, the margin of discretion given to the institution with the power of decision and to the institution with the power to submit proposals, that is to say the Commission, in the matter of the appropriateness of the measures to be adopted . The same element of uncertainty is to be found in Article 87 ( 2 ) ( c ) since the scope of the provisions of Articles 85 and 86 in the various branches of the economy is to be defined only "if need be ".
Whether or not special competition rules are necessary in a particular branch of the economy therefore depends upon the discretionary assessment of those institutions . It is solely for the Commission, which has the power to submit proposals, and for the Council, which enacts legislation, to judge whether it is appropriate to adopt special provisions giving effect to Articles 85 and 86 in relation to a particular branch of the economy, taking account of the special characteristics of that branch .
Even if the need for special rules adopted pursuant to Article 87 ( 2 ) ( a ) is accepted in principle by the institutions, Articles 85 and 86 continue to apply as long as the special competition rules to be adopted have not entered into force . The enabling power granted by Article 87 ( 2 ) ( c ) cannot determine the applicability of the principles set out in Articles 85 and 86 which the Court has consistently held to be of immediate and direct effect ( see Case 13/61, cited above, at p.*103 and the Opinion of Mr Advocate General Lagrange, at p.*64 ). In fact, Article 85 contains all the machinery necessary for encompassing, by means of Article 85 ( 3 ), the particular characteristics of cooperation in a specific economic sector in accordance with the objective of Article 2 of the EEC Treaty .
Thus in a well-established body of case-law the Court has repeatedly affirmed the principle that the effectiveness of Treaty rules which have direct effect cannot be impaired by delay on the part of the institutions or the Member States in adopting implementing measures which are solely intended to make it easier to give effect to the rules and not to be the condition on which implementation depends ( see, for example, Case 2/74 Reyners (( 1974 )) ECR 631, paragraphs 26 and 27 of the judgment, Case 33/74 van Binsbergen (( 1974 )) ECR 1299, paragraph 26 of the judgment, and Case 43/75 Defrenne (( 1976 )) ECR 455, paragraphs 32 to 34 of the judgment ).
Nor is it conceivable that the prospect of the eventual approximation of national laws relating to competition between insurance companies can have the effect of deferring the implementation of the principle of prohibition ( subject to exemption ) laid down in Article 85 and thereby jeopardize the realization of the objectives of a unified market and the free movement of goods pursued by that provision . In that connection the Court has stated as follows :
"The fundamental principle of a unified market and its corollary, the free movement of goods, may not under any circumstances be made subject to the condition that there should first be an approximation of national laws for if that condition had to be fulfilled the principle would be reduced to a mere cipher" ( Case 193/80 Commission v Italy (( 1981 )) ECR 3019, paragraph 17 of the judgment ).
It seems to me that that statement of the law, which was made in connection with the relationship between Articles 30 and 100 of the EEC Treaty, can be transposed to the field with which the present case is concerned .
9 . As Community law now stands, the insurance sector is therefore governed by the general rules contained in Articles 85 and 86, as implemented by Regulation No 17 . The argument that the Commission might, by means of individual decisions adopted on the basis of Article 85 ( 3 ), jeopardize the future harmonization of the rules relating to competition and the insurance industry under German law, and thus the economic policy choice underlying it and the legal certainty guaranteed by it, cannot be accepted, even on the assumption that such a fear is well-founded, for two reasons which are inherent in the Community legal order .
The first reason concerns respect for the powers of the Community legislature . In the absence of any express provision in the Treaty the Community legislature alone has the power to adopt exceptional provisions within the framework of the enabling power granted by Article 87 . If the Court were to accept the aforementioned argument by setting aside temporarily the application of the provisions of Article 85 to the insurance sector it would be substituting itself for the legislature .
The second reason concerns the primacy of Community law . As the Court pointed out in its leading judgment in Wilhelm,
"the EEC Treaty has established its own system of law, integrated into the legal systems of the Member States, and which must be applied by their courts"
so that
"it would be contrary to the nature of such a system to allow Member States to introduce or to retain measures capable of prejudicing the practical effectiveness of the Treaty ".
This is because
"the binding force of the Treaty and of measures taken in application of it must not differ from one State to another as a result of internal measures, lest the functioning of the Community system should be impeded and the achievement of the aims of the Treaty placed in peril ".
Consequently,
"conflicts between the rules of the Community and national rules in the matter of the law on cartels must be resolved by applying the principle that Community law takes precedence" ( Case 14/68, cited above, paragraph 6 of the judgment ).
For the rest, there is no evidence to show that the fears of the applicant and the intervener are well-founded . What is more, individual decisions granting or refusing exemption under Article 85 ( 3 ) may reveal the need for and give impetus to the drawing-up of special provisions, the main themes of which they would have made it possible to bring to light .
In addition, the adoption for a branch of the economy of rules adapting the principle of prohibition set out in Article 85 ( 1 ) presupposes, in the interests of consistency, that due regard is had for the framework established by Article 85 ( 3 ). Article 87 ( 2 ) ( c ), let us remember, only provides that the regulations or directives are "to define, if need be, in the various branches of the economy, the scope of the provisions of Articles 85 and 86" ( emphasis added ). That wording presupposes that the Community competition rules constitute a homogeneous system . In reality, where the free operation of competition alone does not lead to the optimum economic results, Article 87 ( 2 ) ( c ) makes it possible to provide, on the general level, a specific response of the same type as that provided for, on the particular level, by Article 85 ( 3 ). Consequently, it appears that any specific rules applicable to a particular branch must, with certain exceptions, observe the same limits and pursue the same aims as those set out in the latter provision .
Consequently, the first argument submitted by the applicant and the intervener must be rejected . It is now necessary to examine their second submission which is that the requirements set out in Article 85 ( 1 ) are not satisfied in this case .
II - Are the requirements of Article 85 ( 1 ) satisfied?
10 . The application of the prohibition set out in Article 85 ( 1 ) is based on the fulfilment of three conditions : cooperation between undertakings which has as its object the restriction of competition seen as affecting trade between Member States . The fulfilment of those conditions must be verified "by reference to the actual circumstances" of the agreement between undertakings, a decision by associations of undertakings or a concerted practice ( Case 5/69 Voelk v Vervaecke (( 1969 )) ECR 295, paragraph 7 of the judgment ).
In view of its special features, the relevant market for the purposes of the application of Article 85 ( 1 ) in this case must first be analysed .
A - The relevant market
11 . The relevant market is, as we know, the market in insurance against industrial fire risks in the territory of one of the Member States . It is a national market .
As the Commission stated in its Thirteenth Report on Competition Policy,
"the major external factor affecting the industry is close government regulation . Besides seeking to guarantee the solvency of insurers and to prevent bankruptcies and fraud, in most Member States regulation is also prompted by a desire to monitor the nature and terms of insurance policies" ( Commission of the European Communities, 1983, p.*229 ).
Although Council Directives 73/239 and 73/240/EEC of 24 July 1973 ( Official Journal 1973, L*228, p.*20 ), which apply in particular to those risks, respectively coordinated national monitoring provisions relating to the taking-up and pursuit of the business of direct insurance other than life insurance and abolished restrictions on freedom of establishment in that business, insurance undertakings remain governed to a large extent by domestic law .
In that connection two sets of provisions of German law are particularly significant . In the first place, paragraph 106 ( 2 ) of the Insurance Supervision Law imposes a preliminary obligation on insurers established in another Member State to establish a branch office within the territory of the Federal Republic of Germany when they wish to engage in direct insurance business through an intermediary . That requirement effectively prevents all foreign insurers from offering insurance services directly on the German market except in certain limited cases such as insurance by correspondence . The provision is, as we know, the subject of proceedings against the Federal Republic of Germany for failure to fulfil its Treaty obligations, which are pending before the Court ( Case 205/84 Commission v Federal Republic of Germany ). The view expressed by Advocate General Sir Gordon Slynn in his Opinion delivered on 20 March 1986 was that the provision is contrary to the principle of freedom to provide services . I agree with that view .
In the second place, insurance undertakings operating in the Federal Republic do so under a set of rules which derogate from the general competition rules . Paragraph 102 of the Law against Restraints on Competition prohibits only restrictions of competition which amount to an abuse .
For the same reasons the co-insurance of risks situated in the Federal Republic of Germany is carried out within the national framework . During the period when the recommendation at issue was in force insurance undertakings from other Member States wishing to take part in such business were subject to the same requirement of establishment . The derogation with regard to foreign co-insurers, the compatibility of which with Articles 59 and 60 of the EEC Treaty is also contested in Case 205/84, referred to above, since it does not extend to the leading insurer, only came into effect with the adoption of the Fourteenth Law amending the Insurance Supervision Law of 29 March 1983, which implemented Council Directive 78/473/EEC of 30 May 1978 on the coordination of laws, regulations and administrative provisions relating to Community insurance ( Official Journal 1978, L*151, p . 25 ).
Finally, it should be pointed out, in relation to re-insurance, that there is freedom to provide that service in the Federal Republic in accordance with the principle laid down by Article 3 ( a ) of Council Directive 64/225/EEC of 25 February 1964 on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of re-insurance and retrocession ( Official Journal, English Special Edition 1963-64, p.*131 ). Consequently, foreign re-insurers are able to provide their services directly to a German ceding insurer .
The Commission nevertheless considers that there is also a German re-insurance market as a result of the supervision by the German authorities of German ceding insurers, which is concerned in particular with the financial position of the re-insurer, and as a result of the strong position of German re-insurers on that market . I find myself unable to share that view . The administrative supervision referred to by the Commission may be traced in particular to the First Coordination Directive itself and its effect extends to all re-insurers regardless of their nationality . It requires each insurer wishing to establish himself in a Member State to indicate, in a "scheme of operations" submitted to the national supervisory authorities for their approval, "the guiding principles as to re-insurance" ( Articles 8 ( 1 ) ( c ), 9 ( c ) and 11 ( c ) of Directive 73/239 ). With regard to the strong position alleged to be held by German re-insurers on the market, quite apart from the fact that it may appear questionable whether that strong position exists in view of the extent of foreign competition with regard to re-insurance, it was not ultimately regarded by the Commission as a "decisive factor" in its appraisal of the recommendation at issue . Whatever may in this respect be the repercussions of the provisions at issue on the cost of the service provided, it is not possible to state that there is a national market for re-insurance .
Consequently, the market to be taken into consideration is the market in direct insurance and co-insurance business carried out in the Federal Republic of Germany by both German insurance undertakings and foreign insurers acting as direct insurer, ordinary co-insurer or leading insurer and to whom the recommendation of the VdS was addressed .
The Commission has stated, without being contradicted, that the VdS includes in its membership nearly all the 126 insurance undertakings which cover industrial fire risks and that the registered offices of 17 of them are situated in another Member State . It has also stated that the latter operate in the Federal Republic through a branch office and conduct most of their business by means of co-insurance under the direction of a German insurance undertaking . In addition, it has stated that their share of the market is less than 3% of annual gross premium income . Finally, it has emphasized that three-quarters of annual gross premium income for industrial risks accrues to the 10 largest German insurance undertakings and more than half to the five largest of them .
I should add that the insurance market is characterized from the point of view of competition by a structural imbalance between supply and demand, as supply is virtually unlimited as regards quantity and value, whereas demand is much more stable . Competition on prices is therefore particularly keen .
It is in the economic and legal context of that oligopolistic market that the following three questions arise :
( i ) Does the VdS' s recommendation constitute a decision by an association of undertakings? ( B )
( ii ) If so, does it have as its object or effect the restriction of competition within the common market? ( C )
( iii ) If it does, is it capable of affecting trade between Member States? ( D )
B - Does the Verband' s "non-binding recommendation" constitute a decision by an association of undertakings?
12 . Article 85 is intended to encompass every concordance of wills and every type of concertation between undertakings designed to produce the consequences which it seeks to prohibit, whether in the form of an agreement between undertakings or a decision by associations of undertakings or a concerted practice .
As Mr Advocate General Mayras expressed it,
"decisions by associations of undertakings differ from simple agreements in that, by belonging to the association, traders, whether natural or legal persons, accept its constitution and its discipline and are bound by majority decisions adopted by the advisory or executive organs of the association" ( Case 8/72 Vereniging Cementhandelaren (( 1972 )) ECR 977, at p.*999 ).
In other words, although the binding nature of an agreement results from the direct exchange of consents by the parties, it is the consent expressed by membership of an association, on which the undertakings which are members thereof have conferred through its statutes a power to adopt binding decisions, which is indicative of the decision of an association of undertakings . Consequently, what is decisive for the application of that concept is that the cooperation between the undertakings results from membership of the association under which they are grouped and which defends their interests and that the statutes of the association imply their consent to the measures adopted by the association .
That leads me to make two observations . The designation given to the measure is, in itself, of just as little decisive importance as the statement that it is non-binding in nature . The various designations depend upon the rules of each Member State, and indeed of each association . The uniform application of the Community competition rules in all the Member States cannot depend on them . That interpretation is also dictated by the concern to ensure workable competition in accordance with the objective of Article 85 regardless of vagaries of terminology .
It is, moreover, known that by virtue of paragraph 102 of the Law against Restraints on Competition, the recommendations of associations of insurance undertakings, where they seek to restrain competition, must contain a proper statement of the reasons on which they are based and must first be notified to the Bundeskartellamt before being published in the Bundesanzeiger in order to enable the undertakings concerned and insured persons to raise objections within a period of three months ( Report of the Bundeskartellamt for the years 1979-80, p.*106 ). It is also known that the derogation provided for by paragraph 102 applies only if the restriction does not constitute an abuse, that is to say, in particular, if it does not trigger "an automatic process leading to concerted and uniform conduct on the part of insurers" ( Report of the Bundeskartellamt, cited above ).
It is difficult to believe that such requirements would be imposed in respect of a recommendation if it were not binding .
This brings me to my second observation . The existence of a decision by an association of undertakings within the meaning of Article 85 ( 1 ) cannot depend on the fact that its members do in fact apply its provisions . It is necessary to take account of the actual conduct of the undertakings solely where the measure adopted by the association is not, as such, in the nature of a decision because the association' s statutes, the means by which the measure was adopted and its contents leave complete freedom to the undertakings concerned . In such a case Article 85 would not be applicable unless the measure adopted by the association were to serve as the basis for a concertation which had the effect of making something binding in fact when it was not so in law . There would then be a concerted practice .
It is consequently necessary to regard as a decision of an association of undertakings both the measure adopted by such an association and binding on its members by virtue of its statutes and any other measure having a like effect, the undertakings moulding their conduct so as to conform with it and thereby supplying it with the final elements needed to confer on it the character of a decision .
It is therefore necessary to look in the first place at the statutes to see if the measure in question was binding in nature . If it was not, it will be necessary to determine whether or not the measure was binding in fact .
13 . According to paragraph 2 ( 3 ) of its statutes the VdS may not
"exercise any powers of a public-law nature in regard to its members or exercise any control, of whatever nature, over their business activity ".
In fact such powers would not be necessary . The undertakings which are members of the VdS are bound to comply with its statutes which confer on various organs a genuine decision-making power . Paragraph 5 of the statutes provides as follows :
"( 1 ) Members are under an obligation to support the Association in the discharge of its duties .
( 2 ) Members shall comply with the statutes of the Association ."
In addition, paragraph 3 ( 5 ) ( b ) provides for the expulsion of a member for "serious or repeated failure to comply with the statutes" or "conduct which is grossly contrary to the interests of the Association ".
An analysis of the VdS' s statutes also gives rise to the following observations . The association is empowered to coordinate the activities of its members, especially in relation to competition ( paragraph 8 ( 6 ) and ( 7 )*). More particularly, the specialist committee on insurance against industrial fire risks, the committee on industrial fire and consequential loss insurance", is empowered by the statutes to coordinate the policy of the association' s members with regard to premium rates since it includes a standing committee on rates ( paragraph 10 ( 2 ) ( a )). Members are represented on the specialist committees by representatives elected by them ( paragraph 10 ( 3 )*). The committee' s "decisions" or "recommendations" are regarded as definitive unless they are referred to the bureau for approval at the request of one of the organs so empowered by the statutes ( paragraph 10 ( 5 )*).
All this makes it sufficiently clear that these measures can be imputed to the insurance undertakings concerned which belong to the VdS and can be made binding on those undertakings, as an expression of their common will through their representatives on the committee and as the consequence of their acceptance of the statutes of the VdS which involves subjection to the coordination set up by the VdS .
In other words, regardless of the designation given to them within the association, such measures, duly adopted within the framework of the technical studies which are entrusted to the specialist committee, are not of a preparatory and purely internal nature but are definitive and mandatory : they therefore amount to decisions by an association of undertakings .
That is precisely the procedure which led to the adoption of the measure at issue . Formulated and drafted by the specialist committee after consultation with the circles concerned, the "non-binding recommendation" was notified in its definitive version "to the boards of directors of those members providing fire insurance services ". The letter dated 13 June 1980 from the director of the association, to which the recommendation was annexed, stated that, in view of the approval of the national supervisory authorities, the recommendation could be put into effect immediately . That letter closes in the following terms : "We hereby issue the non-binding recommendation to proceed with Sections I, IV and V of the Annex hereto forthwith ".
The mandatory nature of the "recommendation" emerges plainly from the provisions relating to the upward adjustment of premium rates, the wording of which leaves the recipient no choice . But that is not all . If one places the recommendation in its economic context, one cannot imagine, given the state of crisis that existed in the fire insurance sector, that such a measure was not formulated and adopted with a view to its application by all members of the VdS . It is, frankly speaking, necessary to look beyond the formal legal status of the recommendation and take into consideration the economic factors which determine its nature and scope . Since the market in question is an oligopolistic market, the adoption of such a measure in the aforementioned circumstances necessarily amounts to exercising economic coercion even if, in law, the measure is merely exhortatory in nature . The association represents the common will of the principal undertakings in the sector in question . Membership of the association obliges them to comply with its statutes . The statutes provide that measures are to be adopted by the association by majority decision . Finally, the association is intended, at the very least, to coordinate the commercial activity of its members with regard to competition and premium rates .
Consequently, there emerges from the statutes of the association, the procedure under which the recommendation was formulated, the contents of the recommendation and the context in which it was adopted a coherent body of evidence which warrants the conclusion that the recommendation constitutes a decision by an association of undertakings within the meaning of Article 85 ( 1 ). The recommendation falls to be construed as the expression, through the statutes of the VdS, of the common will of the undertakings in the sector in question to which it was addressed for the purpose of assisting towards the stabilization of that sector .
It is therefore unnecessary to consider whether the formal link created between the insurers by means of a unilateral measure adopted by the association established by them has been reflected in reality by conduct in conformity with the provisions set out in the recommendation .
C - Does the recommendation have as its object or effect the restriction of competition?
14 . Under Article 85 ( 1 ) it is necessary to consider whether or not the decision of the VdS had as its "object or effect the prevention, restriction or distortion of competition ". That condition lays down requirements which
"are not cumulative but alternative requirements, indicated by the conjunction 'or' , (( which fact )) leads first to the need to consider the precise purpose of the agreement, in the economic context in which it is to be applied" ( Case 56/65 Société technique minière (( 1966 )) ECR 235, at p.*249 ).
In other words,
"there is no need to take account of the concrete effects of an agreement once it appears that it has as its object the prevention, restriction or distortion of competition" ( Joined Cases 56 and 58/64 Consten and Grundig (( 1966 )) ECR 299, at p.*342; see also Case 123/83 Bureau national interprofessionnel du Cognac (( 1985 )) ECR 391, paragraph 22 of the judgment ).
It follows both from its content and the economic and legal context in which it was adopted that the object of the "non-binding recommendation" of the VdS was to restrict competition between insurance companies in the branch of insurance against industrial fire risks .
The documents before the Court, especially the expert reports produced by the applicant and the report of the Bundeskartellamt for the years 1979-80, show that the recommendation was intended to set limits to competition on premiums in the sector in question . It must be remembered that the requirements of paragraph 102 of the Law against Restraints on Competition, which were satisfied by the recommendation at issue, are imposed on insurance companies "where they propose to adopt measures restricting competition" ( aforementioned report of the Bundeskartellamt, p.*106 ). To be precise, the purpose of the recommendation of the VdS was to put on a sound footing the financial position of the undertakings which had been affected by the insufficiency of premium income with regard to the foreseeable cost of claims .
To that end, the recommendation tackled the cause of that imbalance, namely competition by means of ever lower premiums,
( a ) by increasing the rates appreciably, since the normal rate of increase of 10% in the first two years was to be raised to 20% in 1982, and
( b ) by increasing them on a selective basis, since the normal rate of increase was to be 20% or 30% where there was a particularly great imbalance in the contract ( points 1 and 2 of Section II of the recommendation ).
It should be pointed out that those increases were minimum increases, applicable not only to policies approaching expiry but also to all multiannual contracts in respect of which a claim could have given rise to a deficit on payment ( Section III ).
The recommendation, the binding nature of which I have emphasized, was a measure which, to take up one of the examples given in Article 85 ( 1 ),
"( a ) directly or indirectly fix((es )) purchase or selling prices or any other trading conditions",
in order to direct competition towards aspects other than premium rates, for example the quality of the service provided . As was pointed out by the Commission, the extent of the restriction envisaged in the recommendation resulted from the scope ratione personae and ratione materiae and also from the territorial scope of the measure, since it was addressed to all insurance undertakings in the sector in question and applied to all contracts of insurance and co-insurance concluded on German territory, that is to say a substantial part of the common market . Finally, its effect on competition could be further strengthened by the operation of the "premium calculation clause" whenever recourse was had to a German re-insurer .
There is therefore no need to consider whether the recommendation, coupled with that clause, in fact produced the intended result . In the light of all the foregoing considerations, it is sufficient to state that such an effect was sought by the association as an expression of a need accepted by its members and formalized in accordance with the rules laid down in the statutes . The recommendation therefore did indeed have as its object the restriction of competition on premiums on a market, namely the insurance market, where supply already exceeded demand, as I have already pointed out .
It therefore remains to determine whether or not the recommendation affects trade between Member States .
D - Does the recommendation affect trade between Member States?
15 . The Court' s case-law has clarified the meaning and scope to be attributed to this requirement .
It is a criterion which delimits the respective fields of application of Community and national competition rules ( Case 56/65, cited above ). The agreements, decisions and concerted practices covered by Article 85 are those which are "incompatible with the common market ". That requirement must be regarded as satisfied whenever there is a risk of incompatibility between the proposed agreement, decision or concerted practice and the economic objectives pursued by the Community .
Thus it was that the Court stated in its judgment in Hugin that
"Community law covers any agreement or any practice which is capable of constituting a threat to freedom of trade between Member States in a manner which might harm the attainment of the objectives of a single market between the Member States, in particular by partitioning national markets or by affecting the structure of competition within the Common Market" ( Case 22/78 Hugin, (( 1979 )) ECR 1869, paragraph 17 of the judgment ).
For that purpose it is necessary, but also sufficient, that it is possible
"to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or of fact that (( the agreement, decision or concerted practice )) may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States ".
It should be considered whether, in that sense, the agreement, decision or concerted practice
"is capable of bringing about a partitioning of the market in certain products between Member States and thus rendering more difficult the interpenetration of trade which the Treaty is intended to create" ( Case 56/65, cited above, at p.*249 ) ( emphasis added ).
The guidelines provided by the firmly established case-law of the Court lead me to the view that the recommendation satisfies the third requirement laid down by Article 85*(1 ).
16 . Let us recall to mind the substance of the arguments developed by the two associations in order to show that the recommendation has no extra-territorial effect, in particular on the competitive position of insurance companies from other Member States whose branches are members of the VdS .
In the first place they maintain that as regards insurance against industrial fire risks there is no "trade between Member States" because foreign insurers are not in a position to provide their insurance services directly on German territory .
Secondly, they dispute the significance of the various factors put forward by the Commission as evidence demonstrating the "foreignness" of the branches, to which its decision is confined, in order to bring out the fact that, unlike subsidiaries, they are legally and economically dependent upon their parent companies . In that respect, the associations allege that the two forms of secondary establishment are similar both in fact and in law .
17 . It is necessary, at the outset, to remove any ambiguity with regard to the scope of the preliminary requirement which is laid down by paragraph 106 ( 2 ) of the Insurance Superivision Law and which, moreover, has been the subject of criticism . It in no way precludes the existence of trade between Member States with regard to insurance services .
Like the Commission, I think that the arguments put forward in that connection by the applicant and the intervener are based on an unduly narrow view of the concept of trade, seen as confined to the case of services offered directly from its principal establishment by an insurance company from another Member State .
But let us not deceive ourselves about this . The preliminary requirement concerning the setting-up of an establishment is merely the legal projection of a competition which none the less remains foreign . Thus the fact that insurance companies from other Member States, if they wish to offer a more competitive service on the German market, are required to set up secondary establishments there is shown in the last analysis to be a demonstration of the very existence of an intra-Community trade, the formal procedures of which are regulated by that requirement .
So far as the alleged similarity between subsidiaries and branches is concerned, it cannot have the effect the applicant and the intervener are counting on . Both types of establishment are merely the legal guise, necessitated by the requirement of a secondary establishment, in which foreign insurance companies compete . In view of the expense entailed by such an establishment, the economic dependence of a subsidiary and of a branch will be such that, in all probability, its legal independence will appear artificial from the point of view of competition .
The upshot of the examination of the scope of paragraph 106 ( 2 ) of the Insurance Supervision Law is thus, one the one hand, that the creation in the Federal Republic of a secondary establishment by a foreign insurer is to be regarded as the manifestation of trade between Member States with regard to insurance and, on the other, that the form of such an establishment should be accorded less importance by pointing, in the case of the subsidiary, to its probable dependence on the foreign company . So far as branches are concerned, the matter of dependence is not one of mere probability but of absolute certainty .
18 . But let us go further . Even in the absence of such a provision - and this is the essential point - the recommendation would still have affected intra-Community trade . Although the German legislation approximated the legal statuses of branches and subsidiaries, it did not render them indistinguishable .
Although they are unable to confer legal personality on branches, the obligations imposed by the German legislation, in accordance in this respect with Directive 73/239, are intended to localize the guarantee in the place where the risk materializes . In fact the administrative, accounting, financial and procedural obligations which the legislation imposes on the undertakings of the other Member States are essentially intended to force them, when they establish branches, to centre the activities concerned on the German market so that, in case of need, insured persons do not have to turn to the foreign company itself in order to press claims . Far from demonstrating the autonomy of branches, the requirements show, on the contrary, that branches are, as the Commission has pointed out, merely the "extended arm" of the foreign company .
Thus the Hauptbevollmaechtigte (( principal agent )) acts on behalf of the foreign company which is bound by the rights and obligations contained in the contracts of insurance concluded by him . Such legal dependence in principle assumes concrete form specifically when the company issues instructions, in particular to its branches, concerning the commercial policy to be applied on the German market . With regard to the latter point Circular No 1/62 issued on 22 February 1962 by the Bundesaufsichtsamt states that :
"the principal agent is responsible for all business and investment policy ..., albeit that the issue of internal directives by the general management would seem to be permissible ".
In the same connection it has not been disputed that both the profits and the losses of the branch may be transferred to the company . With regard to the latter' s reputation, that is bound to reflect on the branch .
One therefore arrives at the view that the activities of the German branches of foreign insurance companies are to be regarded as constituting the expression of trade between Member States .
19 . Consequently, there can be no doubt that the recommendation was apt to have an influence, direct or indirect, actual or potential, on the trade which has been described .
Such a measure obliged the branches to negotiate contracts of insurance or co-insurance on the basis of prescribed increases in premiums and in that way had an impact on the competitive position of those foreign insurers who were in a position to offer a more competitive service . In that respect, the localization of the risk in the Federal Republic does not exclude the possibility of there being intra-Community trade, since the undertaking on which, from the economic point of view, the liability to indemnify actually lies may be established in another Member State . It was therefore contrary to the rules laid down in Article 85 ( 1 ) to impose on that undertaking, by means of a recommendation binding on its branch, an increase in premiums . With regard to the fact, referred to by the Commission, that as regards co-insurance the leading insurer is generally a German insurer, this confirms the recommendation' s impact on trade, since foreign insurers thus find themselves required, through the recommendation, to apply the increases for which it provides . In addition there is, finally, the danger that this trend will be further consolidated as the result of the operation of the "premium calculation clause" in view of the well-established commercial relations which probably exist between such leading insurers and German re-insurers .
As was pointed out by the Commission, the extent of any effect on trade as thus defined is proportionate to the volume of trade between the Federal Republic of Germany and the other Member States . The recommendation covered all contracts concluded by the branches of foreign insurers in the branch of insurance in question, which amounted in fact to virtually the whole of the volume of that trade at the time . That proportion means that trade is affected to a significant extent .
Finally, it appears that, in the present state of German law, the recommendation of the VdS, together with the preliminary requirement of a secondary establishment, had
"by its very nature the effect of reinforcing the compartmentalization of markets on a national basis, thereby holding up the economic interpenetration which the Treaty is intended to bring about" ( judgment of 11 July 1985 in Case 42/85 Remia, (( 1985 )) ECR 2545, paragraph 22 of the judgment ).
However, even if that legislative provision did not exist, the effect on trade would still be undeniable . The Court has emphasized that :
"even where there is no partitioning of markets an agreement on prices concluded between undertakings established in a Member State and covering only the market of that State affects trade between Member States, within the meaning of Article 85 of the Treaty, if it concerns, even partly, a product imported from another Member State, even where the parties to the agreement obtain the product from a company belonging to their own group" ( judgment of 10 December 1985 in Joined Cases 240 to 242, 261, 262, 268 and 269/82 Stichting Sigarettenindustrie (( 1985 )) ECR 3831, paragraph 49 of the judgment, emphasis added ).
That conclusion is equally valid for a recommendation of the type at issue in this case which is applicable not to products but to services provided by undertakings ( Case 22/79 Greenwich Film Production (( 1979 )) ECR 3275, paragraph 11 of the judgment ).
The recommendation of the VdS therefore constituted a decision of an association of undertakings which affected trade between Member States and had as its object the restraint of competition, contrary to Article 85 ( 1 ).
It remains to consider whether the recommendation could qualify for exemption under Article 85 ( 3 ).
III - Are the requirements for exemption under Article 85*(3 ) satisfied?
20 . As a preliminary point, I would like to recall that by virtue of Article 4 of Regulation No 17 the question of any exemption under Article 85 ( 3 ) arises only in respect of the period after the notification of the recommendation on 23 September 1982 .
Under Article 85 ( 3 ) a declaration of the inapplicability of the prohibition set out in Article 85 ( 1 ) is subject to the concurrent fulfilment of four conditions . The Commission must be accorded a wide discretion in applying that provision . Judicial review is limited to "an examination of the relevance of the facts and of the legal consequences which the Commission deduces therefrom" ( Consten and Grundig, cited above, at p.*501 ). Consequently, it is necessary to verify, in this case, whether, in deciding that the recommendation of the VdS did not meet the conditions for the grant of an exemption, the Commission manifestly exceeded the discretion vested in it .
21 . In view of the special characteristics of the insurance industry, the degree of uncertainty affecting the assessment of the frequency and extent of claims and therefore of the sums which an insurer must have in reserve in order to meet them when they arise necessarily implies access to meaningful statistics which are sufficiently general to enable average values to be obtained from them .
Of itself that necessity does not arise from the pure logic of free competition, the effect of which would be in extreme cases that undertakings which were unprofitable, in particular on account of bad management, would go out of business . Without excluding that possibility, it is necessary, whilst having due regard for the principle of competition, to endeavour to prevent it . The interests of persons who have suffered loss and who have insured against it and, more generally, those of the public which would have to intervene in the event of the insurer' s insolvency, require this . Only compliance with the contractual guarantee ensures that the social cost of a claim is not passed on to the public . A balance must therefore be found between the requirements of the normal operation of competition and those of the public interest which demand that a contract of insurance must always be honoured .
In that respect the national supervisory provisions, as partially coordinated by the First Council Directive, No 73/239, of 24 July 1973, are intended to ensure the solvency of insurance undertakings . To that end the directive imposes the following obligations on insurers :
( i ) To establish "sufficient" technical reserves matching the underwriting liabilities ( Article 15 );
( ii ) To establish a supplementary "solvency margin" intended to provide against "business fluctuations" ( ninth recital in the preamble and Article 16 );
( iii ) To establish a "minimum guarantee fund" related to the size of the risk present in the classes undertaken ( tenth recital in the preamble and Article 17 ).
The directive therefore imposes an obligation to establish reserves to provide cover, which is subject to verification by the Member States . It does not, however, bring to an end the uncertainty with regard to the basis for the calculation of the premiums, in proportion to which the technical reserves are assessed . For the reasons given above the reliability of the calculations in such a field is decisive .
22 . Nevertheless, all these considerations cannot provide justification, on the basis of Article 85 ( 3 ), for every stabilizing measure adopted by undertakings with a view to regulating competition in a given sector .
It is, admittedly, hardly open to doubt that the recommendation of the VdS is intended, for reasons of the public interest, to put on an economic footing a class of insurance in which, as a whole, the necessary balance between the cost of claims and premium income was no longer being achieved . However, the method used to achieve that aim - a flat-rate and across-the-board increase in insurance premiums - does not seem to me to be justified by the objective pursued .
The increases laid down relate to premiums actually agreed in contracts of insurance expiring during the period in which the recommendation is in force . As with all prices, an insurance premium may be broken down logically into three parts : the income intended to guarantee that the subject-matter of the insurance is covered, operating costs and, finally, the insurer' s profit . Only the first two parts are affected by a planned stabilization . However, the rates of increase prescribed by the recommendation applied to the gross premium, that is to say to all three parts without distinction . In that connection the table of average operating costs for 1980 produced by the VdS at the Commission' s request clearly shows the existence of considerable differences between companies amounting in some cases to more than 100 %.
Thus, applied to gross premiums, the increases prescribed could find no justification in the sense of being strictly necessary for the realization of the objective of stabilization . Those undertakings whose operating costs were low could find in the increases a source of additional profit . Those whose financial position was characterized by heavy expenses might lose any incentive to put their operations on a more economic footing . In either case, since part of the income obtained from the premium increases was not automatically assigned to the technical reserves for the purpose of meeting claims, the recommendation could, to that extent, entail no appreciable objective advantage to those whom it was supposed to benefit, namely insured persons and third parties .
Since the increase in gross premiums was general and undifferentiated it could not be regarded as intended exclusively for the improvement of insurance services . I agree with the Commission that, on the contrary, in order to avoid under-assessment of the proportion of premiums necessary to cover the costs arising at any given time from the materialization of insured risks, it would have been sufficient to take steps with regard to net premiums, that is to say after deduction of operating costs and profits . In that connection the Commission stated in its decision and confirmed at the hearing that it could accept that an association of insurance undertakings should require its members, on the basis of an objective calculation of the level and likely trend of materialized risks and of the needs for cover, "to apply net premium tariffs or minimum premium tariffs ".
The problem should have been resolved by the fixing of net reference tariffs . Such a solution would have limited the regulation of competition to what was strictly necessary . Although the improvement desirable in insurance services in the fire insurance branch cannot be achieved without some degree of regulation, the method used in this case cannot be regarded as showing "appreciable objective advantages of such a character as to compensate for the disadvantages which they cause in the field of competition" ( Joined Cases 56 and 58/64, cited above, p.*502 ).
It is therefore not possible to grant the VdS the benefit of the provisions of Article 85 ( 3 ) in respect of the recommendation at issue which provides for a flat-rate and graduated increase in insurance premiums in the branch in question .
23 . I therefore propose that the application be dismissed and that the applicant be ordered to pay the costs with the exception, however, of the costs incurred by the intervener which must be borne by it .
(*) Translated from the French .
Full & Egal Universal Law Academy