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NZI, State and AMI owner Insurance Australia Group cleared by Commerce Commission to buy Lumley

NZI, State and AMI owner Insurance Australia Group cleared by Commerce Commission to buy Lumley
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The Commerce Commission has approved Insurance Australia Group's takeover of rival Lumley General Insurance.

In New Zealand IAG already owns NZI, AMI and State Insurance. In December it announced a A$1.845 billion deal to buy the underwriting businesses of Australia's Wesfarmers, which includes Lumley in New Zealand.

This deal increases IAG's share of the overall New Zealand insurance market to about 50.5% from 41.5%, lifts its share of the home and contents and vehicle insurance market to 66% from 60%, and gives it 40% of New Zealand's intermediated insurance market. In a December interview with IAG's New Zealand CEO Jacki Johnson said IAG would sell assets to gain Commerce Commission approval for the Lumley purchase if it had to, but sees itself as the natural owner of the assets.

The Commerce Commission's initial deadline for its decision was January 24. This was extended until March 28, then April 30 and finally today.

"The Commission is satisfied that the proposed acquisition will not have, or would not be likely to have, the effect of substantially lessening competition, for personal and commercial insurance products," Commerce Commission chairman Mark Berry said.

"Lumley has a small presence in personal home, contents and motor vehicle insurance, where three main insurance providers (IAG, Vero, Tower) will continue to operate in New Zealand in addition to a number of other companies providing general insurance products. While Lumley’s presence is larger in commercial insurance, as with personal insurance, a number of providers will continue to operate in New Zealand including Vero, QBE, Zurich, Allianz, AIG, ACE and others."

Labour's Cosgrove reiterates plans for 'Kiwibank of insurance'

Berry said IAG will also still need to compete with other insurers on price and quality.

“By their nature all mergers create a larger company with a greater market share. However, that does not mean that a substantial lessening of competition in the market naturally follows. In this case the Commission is satisfied competition remains," Berry said.

“We have considered submissions from a number of interested parties and we are confident that IAG’s purchase of Lumley will not materially change the provision of services or the ability of customers to shop around as other companies will be able to expand to replace Lumley’s position."

Opponents of the deal including rival insurers, the Insurance Brokers Association of New Zealand, the Collision Repair Association, the Motor Trade Association, the Bus and Coach Association, and the Rental Vehicle Association told the Commerce Commission of their concerns in submissions. Suncorp, which owns Vero and 68% of AA Insurance, warned IAG buying Lumley would represent "a tipping point" towards an anti-competitive structure in New Zealand's insurance markets.

Being allowed to swallow Lumley will give IAG control of insurance relationships with three of the big four banks in ASB, BNZ and Westpac. ANZ works with Vero and Tower.

Labour Party commerce spokesman Clayton Cosgrove said the Commerce Commission's approval of the IAG-Lumley deal emphasises the need for Labour's promised Kiwibank-style insurance company.

“Many in the insurance industry warned about the threats involved in the merger. Tower chairman Michael Stiassny said the level of market dominance created a ‘significant risk'," Cosgrove said.

“It’s been clear from the three-year delays in Christchurch that the industry is simply not performing. It needs a shake-up."

“A Kiwibank-style insurance company that acts in Kiwis’ interest is essential to boost competition and raise standards for the industry. Labour’s KiwiAssure will offer New Zealand families an innovative and nimble option that they will have a stake in,” Cosgrove added.

'Tremendous opportunity'

In a statement from IAG New Zealand Johnson said both Lumley and IAG's "own intermediated business," NZI, have well-established competitors.

"Our view has always been that the increment to IAG’s personal and commercial lines business from the transaction will not substantially lessen competition," said Johnson.

“Lumley in New Zealand has complementary strengths to our existing NZI business and I see a tremendous opportunity for us to build on these strengths to broaden our offering to our customers and partners," added Johnson.

In a statement issued to the Australian Securities Exchange (ASX) IAG said the Commerce Commission's decision was a further significant step towards IAG successfully completing the acquisition of Wesfarmers’ insurance underwriting businesses.

"The Australian Competition and Consumer Commission announced on 26 March 2014 that it would not oppose IAG’s acquisition of Wesfarmers’ Australian insurance underwriting business. In New Zealand, the acquisition remains subject to approval by the Reserve Bank of New Zealand. The Overseas Investment Office issued its consent on 6 March 2014. In Australia, approvals are pending from the Australian Prudential Regulation Authority and the Federal Treasurer," IAG's managing director and CEO Mike Wilkins SAID.

"IAG announced on 16 December 2013 that it had agreed to purchase the insurance underwriting businesses of Wesfarmers Limited for a$1.845 billion. It remains the Group’s expectation that the transaction will be completed by 30 June 2014."

Wesfarmers also issued a statement to the ASX in which managing director Richard Goyder said the Commerce Commission's decision is an important step in completing the sale, "which we believe is in the best interests of our shareholders while offering the customers of our underwriting businesses the opportunity to become part of an established leading insurance organisation.”

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The favourite phrase "too big to fail" springs to mind.


I can not see this being in the best interest of the consumer and wonder how much government pressure was put on the Commerce Commission?


Given that catastrophic insured events will occur on timescales of centuries rather than decades or years, when these events strike (and they will invariably do so) must the government bail out companies that have for years taken enormous corporate profits?  Because if the market becomes a one company monopoly, then the government may as well be that monopoly and retain what would otherwise have been profits to shareholders within that state monopoly system, hence reducing the future cost of those inevitable bail outs...


I think Chris J is mistaken - if this increases the risk of bail-out, why would the government lean on Comm Com to approve? There are over 70 insurers registered to operate in NZ so where's the monopoly?


Its in this very profitable segment


 lifts its share of the home and contents and vehicle insurance market to 66% from 60%


Increasing from under half to about two thirds of the home, car and contents market is certainly looking like a virtual monopoly.


It's now a case of whatever IAG says goes.  The Government probably favoured the takeover because they couldn't afford to get offside with IAG...



Any body considering insuring with them would be well advised not to.  Their share of the market is so large that a major disaster such as Christchurch would place such a financial impost on them that they will look for any little excuse to minimise their payments.  They were/are one of the worst performers and at the time of the earthquake their market share was much lower.  In the same situation now they will be far worse. 

With similar thinking it is not good to live in very large cities from an insurance perspective.

If Auckland were wiped out from a disaster, the insurance companies (particularly IAG) would strugle to honour their obligations : New Plymouth, Palmeston North etc - no where near the problem.


Woolworths and WestFarmers are making headway on their general insurance business over the ditch.   It's only matter of time before they will head over our way.Plus Youi already there in Auckland


Wesfarmers are selling Lumley to IAG.


With respect I do not think Chris J quite understands how insurance works.  In fact you can easily argue a large company is more able to cope with a large event than a small company and not just because they might have ability to more easily raise extra capital.  All the insurance companies nevertheless have to meet the same solvency requirements which is free capital reserves and reinsurance protection to cope with a damaging event 50 kilometers from the Beehive of a size measured by a frequency e.g a one in 500 or one in 1000 year event.  Then the point for the consumer is that no matter how big IAG or any other company is are there still alternative markets to provide competition and the Commerce Commission release this morning mentioned half a dozen.  Just the same the comment about Auckland is quite relevant as an earthquake in Queen St would indeed if the same size cost more dollars than one in Wellington.  But the possibility of an event in Queen St the same size as one on Lambton Quay is very much lower.  Does Chris J want all insurers to protect themselves against a 2011 Christchurch probability say one in 2500 years everywhere, as it can be done.  It just means every insurer has to have the capital and purchase enough reinsurance.  There are costs to this which have to be passed on in [higher] premiums.  


Bruce, I do understand.


How is competition better served by having one company with 70% or 80% market share?  At even the current 66% they are in a position to control the market.


If for instance IAG decided that they will not offer earthquake insurance unless there is an additional excess, then customers can not just up and transfer to another company as the other insurers would be unable to accommodate the new customers in a short timeframe, therefore that change would effectively become universal as there would be no alternative - much like the change to fixed sum policies that has already occurred.


If there are such efficiencies of scale that by IAG growing further provides lower costs (through better value reinsurance premiums etc) then maybe the Government should be the monopoly insurer so that profits are not privatised while the risks of catastrophic events are all socialised.


Any insurer should be able to easily handle a 1 in 2500 year event or even a less frequent event.  Why? Simply because if they are insuring in even just 25 locations, the chances of such an event occurring in any one is likely within a century - which of course shareholders would hope would be of little impact on the company.  Hospitals are built for 1 in 2500 year events, insurance companies should be able to handle far rarer events than that...




Lots of theory saying that big is better etc.

ChCh reality is that small and mutual is wayyyyy better in every way.

ComCom deserves a bullet on this one, not looking after our interests at all.


Further reply to Chris J.

I do go along with some of your thoughts, but only some.  Competition means are there still other insurers and enough of them and percentage shares are not entirely relevant in my view but I do accept your scenario example of a withdrawl of earthquake insurance on current policy terms.  But that would not happen overnight - surely only as policies expire and renew so it would be a gradual process and the other (smaller) insurers would be taking up the covers from the disgruntled IAG policy-holders gradually and they might then have to increase their capital and/or reinsurance but that might not be much of a problem as allegedly from the media there is excess reinsurance capital looking for a home.  That might mean it takes an insurer only a few weeks to buy more reinsurance?  Not the same as fixed sums insured which all but three or four insurance companies, including the one I insure with to my regret, have changed to.  That is a seperate disaster waiting to happen.  But not for insurance companies; for house owners.

The government being the monopoly insurer for catstrophe sounds like a great idea, it is where your comments started, and it works with ACC, but the partial monopoly hasn't quite worked with EQC. 

Of course a one in 2500 year event can be handled by insurance companies if they have to. So can a meteor hit of the type that killed the dinosaurs.  It just costs money, money from you and me. But insurance companies are now having to go now from one in 250 or 500 year probabilities to one in 1000 years and I accept the low annual probabilities but when it happened in ChCh it scared some smaller insurance companies.  Low risk does not mean no risk.  A similar scenario is some scientists saying don't strengthen all the vulnerable buildings in Auckland because in so many thousands of years it might only save a few lives and the costs outweigh that.  Whether Lumleys gets swallowed up or remains seperate really makes no difference to that.  




It's clear the Commerce Commission has not got the interests of New Zealanders in it's job description.

The percentage of control is almost off the scale.

Even 15 or 20 % of the market is too high.  IMHO.

And I agree with other commentators that Insurance is a special case.  Given the need to spread risk, the acceptable number of companies should be even greater than usual.