IN THE COMPETITION TRIBUNAL REPUBLIC OF SOUTH AFRICA. Case No: 14/LM/Feb00. In the large merger between: Santam Limited. and

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1 IN THE COMPETITION TRIBUNAL REPUBLIC OF SOUTH AFRICA Case No: 14/LM/Feb00 In he large merger beween: Sanam Limied and Guardian Naional Insurance Company Limied Reasons for Compeiion Tribunal s Decision Approval 1. We approved he merger beween Sanam Limied ( Sanam ) and Guardian Naional Insurance Company Limied ( Guardian Naional ) wihou condiions on 4 April The reasons for our decision follow below. The Merger Transacion 2. The ransacion involved Sanam acquiring he enire issued share capial of Guardian Naional from Guardian Naional s shareholders, which included Libery Life Associaion of Africa Ld ( Libery ) and GRE Souh Africa Holdings (Py) Ld ( Gresa ). Prior o his ransacion Libery and Gresa held 40.8% and 52.56% of Guardian Naional s shares. The holding company of Gresa, AXA S.A., was a pary o he merger agreemen and a paricipan in he merger hearing. Evaluaion of he Merger The Relevan Marke 3. Boh Sanam and Guardian Naional are regisered shor erm insurers in erms of he Shor Term Insurance Ac 53 of 1998 and are auhorized in erms of he Ac o carry on shor erm insurance business under all he classes of policies provided

2 2 for in Secion 67 he Ac1. As a resul, here is a direc produc overlap beween he businesses of he wo firms. However, he wo firms concenrae on differen classes of producs: Sanam focuses on personal insurance producs, while Guardian Naional focuses more on insurance for corporaes and group schemes2 4. There are a leas hree approaches o defining he relevan produc marke in his merger: (a) (b) (c) Defining a separae marke for each ype of shor erm insurance produc; Defining a single marke for all shor erm insurance producs; and Defining a separae marke for differen clusers of shor erm insurance producs. 5. The Commission s analysis of he merger concenraed on he firs wo of hese approaches, alhough heir repor did in passing menion he possibiliy of a relevan marke based on clusers. 6. The firs approach is consisen wih inernaional pracice in respec of mergers in he shor erm insurance indusry. This pracice is o define a separae relevan marke for each ype of risk covered3. Such a definiion recognizes ha insurance cover for a paricular risk is a disinc produc, which is no subsiuable from he cusomer s poin of view for cover in respec of any oher risk for insance fire cover canno be subsiued for burglary cover. 7. In he presen case, he Commission used he produc classes provided for under he repealed Insurance Ac, 1943 as he basis for defining a produc marke based on his concep of a separae marke for each risk caegory. The repealed Ac recognized six produc classes, as opposed o he eigh esablished under he new Ac, o which we referred in paragraph 3 above. The six produc classes under he repealed Ac are fire, marine, moor, personal acciden, guaranee and miscellaneous. The Commission appear o have chosen he produc classificaion of he repealed Ac raher han he classificaion esablished under he new Ac in order o use hisorical (1998) informaion on marke shares in heir analysis. 8. The broader definiion based on a single marke for all shor erm insurance producs may neverheless also be jusifiable if sufficien supply side subsiuion beween he various produc classes is possible i.e. if insurers ha only paricipae in cerain of he classes are able o swich from providing one ype of 1 The Ac currenly provides for eigh classes of policies: acciden and healh, engineering, guaranee, liabiliy, miscellaneous, moor, propery, and ransporaion. 2 See Figure 2 a p. 40 of he Compeiion Commission s repor. 3 See for example he approach of he European Commission in Allianz/AGF (Case no. IV/M.1082); Commerial Union/General Acciden (Case no. IV/M.1142); CU Ialia/Banca Delle Marche/JV (Case no. IV/M.1627).

3 3 cover o providing anoher ype of cover or are able o exend heir produc lines o include oher caegories of cover. Alhough we have no been presened wih sufficien informaion o evaluae he exen of supply side subsiuion in he indusry in any deail, he evidence on enry condiions, o which we will refer in more deail below, suggess ha he supply side srucure of he marke may indeed suppor a produc definiion based on a single produc marke for all shorerm insurance producs. 9. The remaining marke definiion, which was no pursued by he Commission, is based on he general idea ha a separae produc marke exiss for various combinaions of he disinc produc caegories. This would be he case if consumers of shor erm insurance producs showed a preference for insurance policies ha covered more han one ype of risk. The Commission advised us ha some of he brokers ha hey inerviewed had confirmed ha consumers do in fac normally seek combinaion insurance i.e. cover for a number of differen risks under a single policy. Defining he relevan marke in erms of specific clusers would, however, lead o a myriad of relevan markes due o he large number of differen combinaions of risk ha can be incorporaed under a single policy. Due o limied informaion, we have defined a surrogae cluser marke insead of defining a separae marke for each cluser permuaion. Our surrogae marke focuses on he supply side of he marke and includes all insurers ha are in a posiion o offer clusered producs. In his case, we have included all insurers ha are regisered in all or mos of he produc classes provided for in he repealed Ac. 10. We do no have sufficien informaion o deermine which of hese approaches o defining he relevan produc marke is he mos appropriae for analyzing his merger. We have herefore considered he merger s effec on compeiion based on all hree approaches. In any even, as is clear from our analysis below, he choice of produc marke definiion is no deerminaive of our decision in his merger. 11. We agree wih he Commission s recommendaion ha he relevan geographic marke for shor erm insurance producs in Souh Africa is a naional marke. Unlike mos reail producs, insurance producs are no sold o consumers hrough reail oules a specific locaions. Raher, consumers rely on a naionwide nework of brokers who source insurance cover from insurers naionwide. The geographic marke does no exend beyond he naional boundaries because legislaion requires insurers who operae wihin he counry o be licensed here. Consumers can accordingly no source shor erm insurance inernaionally. Marke Concenraion

4 4 12. Table 1 conains he pre merger marke shares of firms in he six relevan markes based on produc classes. The column on he exreme righ gives he marke shares in he single marke for all shor erm insurance producs. The pos merger marke share of he merged eniy in each of hese markes is shown in Table 2. Table 1 Insurer Fire Marine Moor Personal Acciden Guarane e Miscel. Toal Mu. & Fed Sanam GNI CGU SA Eagle (a) Ohers Toal Source: Fich IBCA Saisical Repor (Augus 1999) and draf 1998 FSB Repor (Table 4 in he Compeiion Commission s recommendaion) (a) The oher caegory comprised more han sixy small firms wih very small markes shares. Table 2 Marke Share Fire Marin e Moor Personal Acciden Guarane e Miscel Source: FSB, Regisrar of Shor Term Insurance, Annual Repor, 1998 (Table 7 of Compeiion Commission s recommendaion) mainly Toal Shor erm insurance 13. The marke shares in Tables 1 and 2 ranslae ino low o moderae pre merger concenraion levels in mos of he produc markes, as refleced in Tables 3 and 4. However, he increase in concenraion in mos of he markes following he merger will be subsanial. Table 3 Concenrai on Fire Marine Moor Personal Acciden Guaranee Miscel.

5 5 Pre (a) HHI in HHI Source: FSB, Regisrar of Shor Term Insurance, Annual Repor (Table 7 of Compeiion Commission s recommendaion) (a) Herfindahl Hirschman Index4 Table 4 Po s 87 7 Shorerm Insurance Source: Compeiion Commission Recommendaion, Table 10 a p. 28 Pre merger HHI in HHI Pos merger HHI 14. Marke concenraion in he surrogae marke for clusers, which we defined in paragraph 9 above, can be roughly esimaed wih reference o he marke shares of hose insurers regisered in all or mos of he six policy classes. According o Financial Services Board records, as a 30 June 1999 more han wo hirds of he 90 regisered shor erm insurers were regisered in all six produc classes, and many of he remaining insurers were regisered in hree or more of hose classes. The marke for clusers should herefore no be much narrower han he marke based on all shor erm insurance producs. This mean ha he level of concenraion in his marke, and increase in concenraion as a resul of he merger, is likely o be only slighly higher han in he marke based on all shorerm insurance producs. 15. In summary, while marke concenraion afer he merger will be moderaely high in mos of he markes considered, he increase in concenraion will be relaively high5. The only marke ha will be highly concenraed afer he merger is he narrow marke for guaranee insurance. However, his marke was highly concenraed before he merger as well and he increase in concenraion as a resul of he merger is quie small. Effec on Compeiion 16. Despie he relaively high increase in concenraion in mos of he relevan 4 According o he US Merger Guidelines (1992, as revised in 1997) a marke wih pos merger HHI of beween 0 and 1000 poins is considered o be unconcenraed; a marke wih pos merger HHI of beween 1000 and 1800 poins is considered o be moderaely concenraed; a marke wih pos merger HHI above 1800 poins is considered o be highly concenraed. 5 The US Merger Guidelines consider an HHI increase of more han 100 poins in a merger ha leads o a moderae level of concenraion as a relaively large increase in concenraion.

6 6 markes, he srucural and dynamic characerisics of he shor erm insurance indusry in Souh Africa sugges ha he merger is unlikely o significanly resric compeiion in hese markes. 17. The role played by independen insurance brokers as inermediaries beween consumers and insurers is a paricularly significan characerisic of he indusry from a compeiion perspecive. According o he Commission s repor, more han 95% of insurance business is conduced hrough independen brokers. These brokers receive requess for insurance cover from cusomers and hen shop around for he bes producs available from insurers in erms of price and produc characerisics. Because brokers have exensive knowledge of he indusry and are well informed abou produc choices and marke condiions, his arrangemen conribues o a compeiive marke for shor erm insurance producs. 18. The manner in which brokers are remuneraed suppors he pro compeiive role broker inermediaion plays in his indusry. They are remuneraed in a manner which boh encourages consumers o use brokerage services o source insurance cover as well as encourages brokers o pursue he bes ineress of cusomers in doing so. Consumers are encouraged o use brokers as inermediaries because hey do no hemselves pay for he brokers services; he insurer whose produc is evenually chosen by he consumer pays he broker a commission. Moreover, insurers are prohibied by legislaion from paying brokers an incenive bonus. This measure seeks o ensure ha he fac ha brokers are remuneraed by insurers does no encourage brokers o esablish a comforable relaionship wih any given insurer and hus reduce compeiion beween insurers. Insead, brokers incenives in recommending an insurer are direced a proecing heir clien base hrough saisfacory cusomer service. 19. The broker s role as inermediary beween he cusomer and insurer effecively consolidaes he buying power of cusomers and should herefore conribue significanly owards counervailing he poenial marke power esablished by moderae o high concenraion levels on he supply side of he markes. This conclusion is consisen wih he findings of he European Commission in insurance mergers Furhermore, he increase in concenraion in he markes arrived a on he basis of simply summing he marke shares of he merging firms probably overesimaes he rue increase, because his approach does no ake ino accoun he run off ha could be expeced as a resul of he merger. The merging firms esimaed ha hey sood o lose up o 15% of heir combined marke share afer he merger. They aribued his o wo facors: he pracice by brokers of sourcing insurance producs from a number of differen insurers; and he effec of uncerainy afer he merger on service levels. Alhough he exen o which hese facors will 6 See for example Allianz/AGF (Case no. IV/M. 1082) a par. 33.

7 7 conribue o he merged eniy losing marke share is difficul o quanify, he pracice by some brokers of using a shor lis of insurers wih which hey place heir business suppors he view ha a cerain amoun of run off will resul from he merger if boh merging firms appeared on a broker s shor lis before he merger, an addiional firm would now be included on is lis afer implemenaion of he ransacion, which could resul in less business being placed wih he merged firm han he combined amoun of business placed wih he wo merging firms prior o he merger. 21. Anoher facor ha enhances compeiion in he shor erm insurance markes is he ease wih which cusomers are able o move heir business from one insurer o anoher. According o a number of brokers inerviewed by he Commission, he exisence of claim reducing measures such as so called no claim bonuses does no resric cusomers from moving beween insurers since hese bonuses are generally ransferable beween insurers. 22. Apar from regulaory requiremens, here do no appear o be significan barriers o enry ino any of he shor erm insurance markes. The mos significan regulaory requiremen is ha regisraion in erms of he Shor Term Insurance Ac, 53 of 1998 is required o gain access o he indusry. The Ac prescribes a number of requiremens for regisraion mainly of a prudenial naure, none of which are paricularly onerous. The large number of smaller firms ha have enered he marke recenly suppors he view ha barriers o enry o he shorerm insurance markes are no significan The exisence of a highly compeiive environmen in he shor erm insurance indusry is verified by commens made in inernal managemen documens of Guardian Naional, which were prepared for purposes unrelaed o noificaion of he merger. A background documen for a Business Review and Budge Meeing held on 2 November 1998 menions he aggressive markeing campaigns of compeiors who were engaging in fierce price compeiion, saing ha compeiion from new and exising players [was] making i increasingly difficul o reain cliens. 24. Based on he above, we conclude ha his merger is unlikely o subsanially preven or lessen compeiion in any of he relevan markes. We herefore need no consider he long lis of mainly unsubsaniaed efficiency gains claimed by he merging firms. Dae: 3 May See Table 13 a page 34 of he Commission s repor.

8 8 N.M. Manoim D. H Lewis and S. Zilwa concurred.