By Gareth Vaughan
Suncorp has hit back at rival IAG's claims, made in a Commerce Commission application for clearance to buy Lumley, that New Zealand banks are likely to start underwriting general insurance themselves.
And the Insurance Brokers Association of New Zealand says an unprecedented level of response it has received on the planned deal highlights worries about negative impacts on consumers.
The seven submissions published by the Commerce Commission on the proposed acquisition of Lumley by Insurance Australia Group, or IAG, all raise concerns about the deal. A Commerce Commission ruling is due by Friday, March 28.
Suncorp's submission, in conjunction with its fully owned subsidiary Vero and AA Insurance in which it owns 68%, argues the deal would substantially lessen competition. Suncorp also suggests Lumley owner Wesfarmers would be "very likely" to sell the insurer as a standalone business if the IAG deal was blocked.
"The proposed transaction represents a 'tipping point' (towards an anti-competitive structure) in insurance markets," says Suncorp.
"It will remove any remaining competitive balance in the market, give IAG substantially increased market power and will substantially lessen competition in relevant insurance markets. The Commission should decline to grant clearance. Properly functioning insurance markets are of fundamental importance to the New Zealand economy, as demonstrated by the experiences following the Canterbury earthquakes. The very high level of concentration in New Zealand that would result from the proposed transaction would well exceed those seen in other insurance markets around the world (see chart at the bottom of this story)."
NZI, State, AMI & Lumley
IAG already owns NZI, AMI and State Insurance. Just before Christmas it announced an A$1.845 billion deal to buy the underwriting businesses of Australia's Wesfarmers, which includes Lumley General Insurance in New Zealand. The deal requires approval from the Reserve Bank, Commerce Commission and Overseas Investment Office.
The deal would increase IAG's share of the overall insurance market to about 50.5% from 41.5%, lift its share of the home and contents and vehicle insurance market to 66% from 60%, and give it 40% of New Zealand's intermediated insurance market. In a December interview with interest.co.nz IAG's New Zealand CEO Jacki Johnson said IAG would sell assets to gain Commerce Commission approval if it had to, but IAG sees itself as the natural owner of the assets.
In its full application to the Commerce Commission IAG says the Lumley acquisition wouldn't result in a substantial lessening of competition in any insurance market. Its application paints a picture of a fiercely competitive insurance market with rivals potentially expanding or entering the market, and banks poised to embark on an insurance push.
Lumley deal would give IAG control of insurance relationships with 3 of big 4 banks
However, Suncorp says IAG overstates the effect of banks' countervailing power in competitively constraining IAG post it swallowing Lumley, both in terms of the likelihood of banks entering the market and their pricing incentives. It also points out taking over Lumley would give IAG control of insurance relationships with three of the big four banks in ASB, BNZ and Westpac, with ANZ having relationships with Vero and Tower.
"Gaining the insurance relationship across BNZ, ASB and Westpac will allow IAG to push prices up for bank customers without the banks being disadvantaged comparatively," Suncorp suggests.
"This will allow IAG to gain greater margins on those customers who remain, while IAG can use its other brands (State or AMI) to capture as many of the switching customers as possible and avoid leaking margin. Accordingly, these anti-competitive effects will be a direct result of the Proposed Transaction. There are significant infrastructure (as well as contractual) barriers to banks switching providers."
"Banks and insurers’ IT systems have become increasingly integrated as banks offer improved online services to customers, while the difficulties surrounding ownership of the customer base is still fraught. Banks have not entered the domestic lines markets to date in an underwriting capacity and, for similar reasons as other potential entrants, are unlikely to do so," Suncorp says.
It points out banks effectively resell a “white label” product developed by the underwriter with input from the bank.
"In such circumstances the insurer effectively controls an insurance product that is sold under the bank’s brand. And post-acquisition IAG will control the products sold under three of the four main banks’ brands."
"This is in no way akin to products sold through brokers where the brokers compare a range of products from a range of insurers in order to meet specific needs. The banks have a comparatively limited offering from just one insurer. Given this the Commission needs to assess the competition law issues from reviewing all of the brands of personal lines insurance products that IAG will control post acquisition regardless of whether those brands are sold directly or via a bank," says Suncorp.
"While IAG already has a significant market share, the proposed transaction represents a 'tipping point' in personal lines insurance markets, partly because it will control the insurance relationships with three of the four main banks."
Further Suncorp suggests because the New Zealand market is much smaller than Australia's market, you can't justify the significant investment in claims handling, systems, pricing and risk data, and re-insurance needed for banks to enter the underwriting market.
"Indeed in Suncorp’s view, the cost of reinsurance in particular is likely to be a major deterrent to banks entering the underwriting market. Thus, new entry by banks into personal lines insurance is simply not as likely as the applicants suggest. The underwriting products offered by Australian banks (as referred to in IAG’s submission) actually have a very small share of the market and do not appear to act as a significant competitive constraint," adds Suncorp.
"Only two of the four major banks in the much larger Australian market underwrite (being) CBA and Westpac and that is mainly done in home and contents. These banks have not moved into underwriting insurance in New Zealand and it seems even less likely that if ANZ and NAB do not underwrite in Australia they would start to do so in New Zealand where there is a much smaller market, a higher catastrophe risk profile and specific reinsurance issues to overcome."
'Negative outcomes for consumers'
In its submission the Insurance Brokers Association of New Zealand, or IBANZ, says it has received an unprecedented level of response to the issue of the proposed IAG takeover of Lumley.
"There is a clear, common message from members - this proposal will adversely affect the operation of the market and have significant negative outcomes for consumers," IBANZ, which is the professional body representing general insurance brokers, says.
IBANZ says two key concerns its members have are the effect the IAG-Lumley deal would have on competition, and the lack of capacity in the New Zealand market.
"It is our submission that the acquisition of Lumley by IAG will adversely affect the New Zealand insurance market. The concentration of market share in one insurer together with that of the second largest insurer creates an unhealthy duopoly situation. The remaining insurers in the market are unable or unwilling to participate across all risks and/or geographic locations. They tend to be small niche players operating in specific markets. Thus the number of insurers in New Zealand is not the key factor, rather it is what each will or can do that determines the level of competition," says IBANZ.
IBANZ goes on to say there's little incentive for new entities to enter the market when the risk of large scale natural disaster losses are high and financial returns are limited due to a small premium pool. It says the Reserve Bank's prudential regulatory requirements have set a high hurdle for both new entrants and current participants to develop an insurance underwriting business of any size.
"Insurance brokers ability to exercise countervailing power will be significantly curtailed by the reduced market size as well as limited capacity and risk appetite," says IBANZ.
With around 51% of the overall insurance market and 66% of home and contents and motor vehicle insurance "they will have the financial and market strength to drive through change."
"This is a concern not only for brokers and their consumer clients but also suppliers involved with the insurance market e.g. loss adjusters and panel beaters," IBANZ adds.
Furthermore IAG's suggestion numerous alternative players could enter the New Zealand market or increase their current marketshare, whilst possible in theory is in reality extremely unlikely.
"Following the proposed merger the overall New Zealand insurance market will have two players, IAG and Vero, controlling around 77%; this will create significant competition issues. The remaining players have very small market shares by comparison. It is also interesting to note a recent report from the Insurance Council that highlighted the fact that switching insurers is not common practice in NZ. This we believe is directly related to the limited options available," says IBANZ.
IBANZ also suggests there's no appetite among banks to carry the risk as an underwriter despite banks doing so in some larger countries.
"The fact that this has not happened here is hardly surprising given our high exposure to significant natural disaster risk but only a small premium pool from which to build reserves or fund reinsurance. Equally it seems retailers would have little incentive to move beyond same approach of branding products underwritten by the insurance market," says IBANZ.
It also notes Reserve Bank solvency standards require a change from the commonly accepted requirement to have capital available to meet a 1 in 250 year event to the much higher level of a 1 in 1,000 year event.
"As a result insurers are facing significant cost increases in the next two years to meet the prudential capital levels or buy additional catastrophe re-insurance. The New Zealand market will therefore be distinctly less attractive for any new entrant or for an existing insurer to grow their presence. Given the global nature of insurance this is not factor that should be dismissed lightly," IBANZ adds.
Market power concerns
In another submission the Motor Trade Association (MTA), representing about 4,000 businesses in the automotive industry and allied services with some 40,000 combined staff, also raises concerns about the market power of a combined IAG-Lumley.
"There is a general perception throughout the overall collision repair industry that should this merger occur, IAG NZ, with its substantial market share, will have the ability to keep and hold the cost of collision repairs to a minimum. Current rates and associated costs have not increased substantially over the past 10 years and it has been recognised that these are well below those required to run a successful panel shop," MTA says.
"If this does not change the size of the collision repair industry will continue to dwindle as more repairers close their businesses resulting in trained staff moving into other forms of employment."
"IAG NZ will continue to place greater demands on their network of 'approve repairers' to purchase expensive equipment and expand staff training levels. Should there be no substantial increase in allowances to allow for this happen, this will be another undue financial burden on the business," MTA adds.
"MTA submits that the IAG NZ acquisition of Lumley Insurance has the potential for an increased level of co-ordinated behaviour, particular were a collision repairer is not an IAG 'approved repairer'. It is estimated that IAG NZ holds approximately 60% of the New Zealand motoring insurance market. Should this acquisition take place, MTA submit this will rise substantially creating an anti-competitive and unsustainable collision repair industry."
The chart below was taken from Suncorp's submission
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