Competition will restrain IAG, says commission

ROB STOCK
Last updated 05:00 07/06/2014

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Tough competition in the insurance market would restrain giant insurer IAG from increasing prices or reducing quality after buying Lumley Insurance, the Commerce Commission says.

The commission has published its justifications for allowing Australian-owned insurer IAG to buy Lumley Insurance in New Zealand.

The purchase, which was opposed by rival insurer Suncorp, will see IAG's share of the insurance market jump to about 50 per cent from 41.5 per cent, and its share of the home and contents and vehicle insurance market will rise from 60 to 66 per cent.

The commission assessed whether the merger was "likely to substantially lessen competition" and found "IAG is unlikely to be able to profitably increase prices for personal insurance products above or reduce quality below the levels that would prevail without the acquisition" of Lumley.

This was because Lumley had only a minor involvement in direct sales of personal insurance products and because banks exerted a lot of power and could find alternative insurance supplies if IAG drove up prices, or reduced cover levels, after taking over Lumley.

Vero and Tower provided alternatives for banks unhappy with IAG after the merger, the commission said.

Lumley underwrites the house and contents insurance of Westpac, HSBC and SBS, while IAG underwrites the insurance of ASB, Bank of New Zealand and the Co-operative Bank.

Some banks had switched underwriters in recent years, indicating the barriers to switching were not hindering competition.

The banks told the commission that the pricing, quality and service of the insurance products that they re-sold was crucial, as customers identified the product with the bank's brand.

"Raising prices or lowering quality to banking customers would be a high-risk strategy for IAG, particularly given the size of the contracts being awarded by those banks," the commission said.

That was especially so as the banks had problems in retaining insurance customers. Customers were more likely to switch from bank-supplied insurance products than from an insurance company that sold policies directly, the commission found.

As a result, banks were constrained by competition, making it unlikely that they could pass on price increases to their insurance customers.

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