June 2014

NZILA President's message
Craig Langstone

IAG’s Lumley takeover creates angst in New Zealand

On May 7, the New Zealand Commerce Commission granted clearance to IAG (NZ) Holdings Ltd to buy Lumley General Insurance (NZ) Ltd.

The proposed acquisition was part of a wider acquisition by Insurance Australia Group Ltd of the Australian and NZ underwriting businesses of Wesfarmers Ltd, Lumley’s parent.

The NZ Commerce Commission’s (NZCC) decision concerned many in the NZ insurance industry. This may surprise people in Australia because of the different types of companies IAG and Lumley are in the Australian market. Effectively, the number one NZ insurer has taken over the number three company.

In NZ, IAG is the largest insurer of domestic and commercial/corporate classes. IAG, through its State, NZI and AMI brands (among others), has about 50% of the domestic and commercial market in NZ. The next largest player, Vero, has about 25% of the market - hence the significance of IAG’s acquisition of Lumley in NZ.

Several parties in the NZ insurance market opposed IAG’s acquisition. Perhaps most significant was opposition from the Insurance Brokers Association of New Zealand Inc. IBANZ members saw significant issues around loss of competition and capacity to handle major risks in the NZ market, if the acquisition was approved by the NZCC.

IBANZ was concerned that having a single company responsible for protecting more than half of NZ’s insured assets was not desirable.

No one doubts IAG’s importance to the NZ insurance market. Its contribution to the economy, and its insureds, has been substantial, as the Canterbury earthquakes illustrate only too well. The concern is not with IAG as such, but rather insureds’ ability to secure alternative options may be materially affected in the future. This is particularly so in the property market when many other insurers have limited capacity following the Canterbury earthquakes.

IBANZ CEO Gary Young said: “Our issue is that there will be a lack of competition and therefore capacity. Essentially there are too many eggs in one basket. The avoidance of such a concentration of risk is a fundamental principle of insurance. In the NZ market, the risks are high and the premium pool small, which makes it vulnerable.” It is hard to argue with his comments.

NZCC says it is “confident 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”.

Of course, every merger creating a larger company results in a greater market share for the merging entity. The question is whether a substantial lessening of competition in the market naturally follows.

NZCC says competition remains, but those actually involved in the industry are less certain. But NZCC has made its decision and the insurance market must move on. It will be interesting over the next 12 to 24 months to talk to brokers and other intermediaries to see what is in fact happening in the market.

Will there be a substantial lessening of competition? Time will tell. Let’s hope other insurers in the market will take up Lumley’s position, as NZCC’s Dr Mark Berry hopes.

But at least those in the Australian market may now understand why the acquisition has been of such concern in New Zealand.