Insurance Australia Group Ltd - proposed acquisition of Wesfarmers' insurance underwriting business

Acquirer(s)

  • Insurance Australia Group Ltd

Target(s)

  • Wesfarmers' insurance underwriting business

Market definition

For the purposes of considering the likely competition effects of the proposed acquisition, the ACCC considered the proposed acquisition with reference to the following markets:

- the national market for the supply of home building and contents insurance products;
- the national/state markets for the supply of domestic motor insurance products;
- the national market for the supply of rural insurance products, including packaged farm and crop insurance;
- the national market for the supply of commercial insurance products;
- local/regional markets for the acquisition of smash repair services; and
-local/regional markets for the acquisition of windscreen repair/replacement services.

As the ACCC considered that market definition was unlikely to be determinative of the competition issues arising from the proposed acquisition, the ACCC did not reach a final view in relation to the precise product or geographic boundaries of the relevant markets.

Competition analysis

Supply of home building and contents and domestic motor insurance

The ACCC considered that the proposed acquisition would be unlikely to substantially lessen competition for the supply of home building and contents insurance or domestic motor insurance. Common factors relevant to reaching this view in both markets included that:

- Wesfarmers' market presence is currently small in the supply of both home building and contents insurance and domestic motor insurance, being approximately the ninth and tenth largest supplier respectively in these home and motor insurance markets;
- while Wesfarmers, via Coles, likely represents significant potential future competition to IAG, other suppliers also have the potential to significantly expand supply. Other relevant competitors in this regard include: Woolworths (with a similarly recognised brand, extensive distribution base and ability to leverage customer data); each of the major banks (with a similar ability to Coles to leverage brand and customer data to engage in targeted marketing initiatives); and other 'challenger' brands (including Budget Direct and Youi);
- the merged firm is also likely to face effective competitive constraints from incumbent insurers competing nationally, including Allianz and QBE, and regional insurers in some states, including RACQ and RAA;
- specifically in relation to domestic motor insurance, the proposed acquisition was considered unlikely to materially change the ability of rival insurers to secure competitive supply of smash repair services and is therefore unlikely to increase barriers to entry and expansion.

Also, Coles would continue to offer consumers insurance products via its supermarkets and online, underwritten by IAG in accordance with the terms of a 10-year distribution agreement. The ACCC reviewed this agreement, with particular reference to arrangements for pricing and benchmarking to competitors. The ACCC determined that, while the proposed acquisition removes an independent underwriter from the markets, at the retail level the proposed acquisition is unlikely to materially change competitive dynamics.

Supply of commercial insurance

The ACCC considered that the proposed acquisition is unlikely to substantially lessen competition for supply of commercial insurance. Relevant factors included that:

- the merged firm would continue to face effective competitive constraints from other general insurers including QBE, Suncorp, Allianz and Zurich; and
- these rival insurers have the ability and incentive to expand supply in the event that the merged firm sought to increase prices.

Further, the ACCC identified a significant overlap between the merger parties in relation to supply of heavy vehicle insurance. IAG supplies heavy vehicle insurance via a joint venture, NTI, with Suncorp. The ACCC determined that current and potential rival insurers of heavy vehicles, including QBE, Zurich and RACQ, would exercise effective competitive constraints. The ACCC also considered whether the proposed acquisition would raise barriers to entry or expansion in relation to the supply of heavy vehicle insurance, in terms of access to heavy vehicle repair services. The ACCC determined that the proposed acquisition would not materially change rival insurers' access to heavy vehicle repair services and that the proposed acquisition is unlikely to substantially lessen competition in this regard.

Supply of rural insurance products

The ACCC considered that the proposed acquisition is unlikely to substantially lessen competition for supply of rural insurance products. Relevant factors included that:

- the merged firm would face effective competitive constraints from four main alternative underwriters, namely QBE (Elders), Allianz, Munich Re (the underwriter, via a subsidiary, of Rural Affinity and ARGIS products), and Achmea. Achmea is a recent new entrant that is underwriting rural insurance products marketed to clients of Rabobank, a leading agribusiness bank with a branch network and customer base in regional Australia;
- the potential for future competition in the market. In particular, Suncorp and Zurich represent credible threats of re-entry; and
- in relation to packaged farm insurance specifically, some customers can unbundle their purchases and source key products including home and vehicle insurance (including, for example, tractor insurance) from general insurers not active in supplying packaged farm insurance.

Acquisition markets

The ACCC considered that the proposed acquisition is unlikely to substantially lessen competition for the acquisition of smash repair or windscreen repair/replacement services. Relevant factors included that:

- while some smash repairers raised strong concerns about the proposed acquisition, these concerns largely reflect IAG's existing strong position; and
- the merged firm is likely to have real incentives, particularly in terms of its claims handling reputation, to ensure the quality of smash repair and windscreen repair/replacement services provided to the merged firm's insurance customers does not decline.

Accordingly, on 26 March 2014 the ACCC decided not to oppose the proposed acquisition.

Timeline

DateEvent
23/12/2013ACCC commenced review under the Merger Process Guidelines.
24/01/2014ACCC requested further information from Wesfarmers.
03/02/2014Closing date for submissions from interested parties.
06/02/2014ACCC requested further information from IAG.
10/02/2014ACCC received further information from Wesfarmers.
14/02/2014ACCC received further information from IAG.
19/02/2014ACCC requested further information from the merger parties.
06/03/2014ACCC received further information from IAG.
13/03/2014ACCC received further information from Wesfarmers.
26/03/2014ACCC announced it would not oppose the proposed acquisition.