The Australian Competition and Consumer Commission (ACCC) wants to overhaul merger laws.
At a recent speech to the Law Council of Australia, ACCC chair Rod Sims said, partly thanks to weak merger laws, Australian’s big companies now have a market dominance that is slowing down productivity and promoting the interests of the few over the many. He included the insurance industry in a list of markets, “dominated by a small number of providers.”
In August, Morgan Stanley reported that Australia had notched up its biggest quarter for deals on record: $70.9 billion in mergers and acquisitions. Some recent mergers have involved insurance industry companies including Hollard Group and Allianz.
But are there too many big companies in Australia’s insurance industry and is it feasible to stop them merging?
Fred Hawke (pictured) is a consultant with Clayton Utz and faculty member of the Australian College of Insurance Studies (ACIS). Hawke has more than four decades of experience in insurance law and studied competition law.
“As I understand it, the ACCC’s chairman is complaining that the test for whether a proposed merger is likely to substantially lessen competition in the industry is too high a burden of proof for him to meet and he wants it changed,” said Hawke.
Since 2000, the competition regulator has lost all four merger cases that have ended up in the courts.
One former ACCC chair, Allan Fels, told the Australian Financial Review that a revision of mergers laws is needed to better tackle increasing sector concentration and the market power of technology giants.
Another former boss at the regulator, Graeme Samuel, wasn’t so sure.
“Perhaps it [the ACCC] should first undertake a rigorous review of its merger analysis and litigation management, and determine whether, in fact, its failures in the courts are rather the result of poor case management – or simply picking the wrong cases to litigate,” he told the same publication.
Hawke suggested that while all the results of insurance industry mergers may not be good, more mergers are probably inevitable because risks are becoming more global.
“So, the risks are basically merging and you’re getting overlap,” he explained. “Take weather risks amplified by climate change and political risks amplified by resource nationalism and political disruption, and sometimes violent terrorism.”
He said the management of these risks by insurance requires wider premium pooling and far more coordinated and extensive management than in times past.
Hawke said a small insurance company operating in a geographically confined jurisdiction doesn’t have the knowledge resources or the financial resources to deal with these issues.
“There’s just not enough policyholders in its book to manage and tackle those risks to underwrite them effectively,” he said. “So, if the risks go global, I guess the industry has to go global to accommodate them because the fundamental principle of insurance, on which everything rests, is that the premiums of the many go to pay the claims of the few.”
He said the federal government’s reinsurance pool for north Queensland is a classic example.
“If you confine the risks of the policyholders just in north Queensland, or even just in Queensland, there’s not enough of them to generate the premiums necessary to cover the frequency and magnitude of the losses that the cyclones are now producing in that geographical area,” he said. “So the only way to deal with it is to expand the premium pool.”
Hawke said the same result - adequate coverage and lower premiums - could perhaps be achieved in northern Queensland by merging three or four insurance companies.
“So, if you’re asking me whether I think it’s good that insurance companies get bigger, well, it may reduce competition and it may keep Rod Sims or Graeme Samuel awake at night, but I think it’s what’s going to have to happen if we’re going to manage global risks on a global scale,” he said.
