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

Similar documents
Introduction. Enterprises and background. chapter

Portfolio investments accounted for the largest outflow of SEK 77.5 billion in the financial account, which gave a net outflow of SEK billion.

Effective from 1 April Version 1.0

2. Quantity and price measures in macroeconomic statistics 2.1. Long-run deflation? As typical price indexes, Figure 2-1 depicts the GDP deflator,

(1 + Nominal Yield) = (1 + Real Yield) (1 + Expected Inflation Rate) (1 + Inflation Risk Premium)

Balance of Payments. Second quarter 2012

Final Exam Answers Exchange Rate Economics

Ch. 10 Measuring FX Exposure. Is Exchange Rate Risk Relevant? MNCs Take on FX Risk

2. Remittances, other than dividends, by business entities to be made against invoices consistent with bills of entry collected by ZRA.

Balance of Payments. Third quarter 2009

If You Are No Longer Able to Work

GUIDELINE Solactive Gold Front Month MD Rolling Futures Index ER. Version 1.1 dated April 13 th, 2017

How Risky is Electricity Generation?

Capital Strength and Bank Profitability

Parameters of the IRB Approach. 1. Class of exposures to central governments and central banks, exposures to institutions or corporate exposures

OPTIMUM FISCAL AND MONETARY POLICY USING THE MONETARY OVERLAPPING GENERATION MODELS

Origins of currency swaps

*Corresponding author Keywords: CNH, Currency Intervention Index, Central Bank Reaction Function, Exchange Rate Intervention.

GUIDELINE Solactive Bitcoin Front Month Rolling Futures 5D Index ER. Version 1.0 dated December 8 th, 2017

Session IX: Special topics

Description of the CBOE Russell 2000 BuyWrite Index (BXR SM )

Proposed changes to the compilation of zone aggregates for monetary aggregates and other variables in the OECD Main Economic Indicators publication

An Incentive-Based, Multi-Period Decision Model for Hierarchical Systems

The Impact of Interest Rate Liberalization Announcement in China on the Market Value of Hong Kong Listed Chinese Commercial Banks

Description of the CBOE S&P 500 2% OTM BuyWrite Index (BXY SM )

CRO Forum Best Practice Paper - Extrapolation of Market Data

Secretary-General of the European Commission, signed by Mr Jordi AYET PUIGARNAU, Director

Technological progress breakthrough inventions. Dr hab. Joanna Siwińska-Gorzelak

EVA NOPAT Capital charges ( = WACC * Invested Capital) = EVA [1 P] each

Subdivided Research on the Inflation-hedging Ability of Residential Property: A Case of Hong Kong

DYNAMIC ECONOMETRIC MODELS Vol. 7 Nicolaus Copernicus University Toruń Krzysztof Jajuga Wrocław University of Economics

BUDGET ECONOMIC AND FISCAL POSITION REPORT

OFFICIAL INFORMATION OF THE CZECH NATIONAL BANK of 24 October 2017

Services producer price indices for Market research and public opinion polling

Section 4 The Exchange Rate in the Long Run

Service producer price index (SPPI) for storage and warehousing Industry description for SNI group SPPI report no 14

DO FINANCIAL MARKETS DISCIPLINE FIRMS FOR ILLEGAL CORPORATE BEHAVIOUR?

Corporate Finance. Capital budgeting. Standalone risk of capital project

Suggested Template for Rolling Schemes for inclusion in the future price regulation of Dublin Airport

Li Gan Guan Gong Michael Hurd. April, 2006

An Introduction to PAM Based Project Appraisal

Stock Market Behaviour Around Profit Warning Announcements

The relation between U.S. money growth and inflation: evidence from a band pass filter. Abstract

GUIDELINES. Having regard to the Treaty on the Functioning of the European Union, and in particular Article 128 thereof,

1 Purpose of the paper

NASDAQ-100 DIVIDEND POINT INDEX. Index Methodology

Market and Information Economics

A Simple Method for Consumers to Address Uncertainty When Purchasing Photovoltaics

DOES EVA REALLY HELP LONG TERM STOCK PERFORMANCE?

Essay 3. The liquidity impact of open market share repurchases * repurchases *

A Decision Model for Investment Timing Using Real Options Approach

Ch. 1 Multinational Financial Mgmt: Overview. International Financial Environment. How Business Disciplines Are Used to Manage the MNC

Appendix B: DETAILS ABOUT THE SIMULATION MODEL. contained in lookup tables that are all calculated on an auxiliary spreadsheet.

PRESS RELEASE EURO AREA ECONOMIC AND FINANCIAL DEVELOPMENTS BY INSTITUTIONAL SECTOR - FIRST QUARTER August 2012

Jemena Electricity Networks (Vic) Ltd

Memorandum of Understanding

Documentation: Philadelphia Fed's Real-Time Data Set for Macroeconomists First-, Second-, and Third-Release Values

Revenues and Earnings as Key Value Drivers in Various Contexts: Implications for Financial Management and Statement Analysis

Joint Committee on Taxation

A Method for Estimating the Change in Terminal Value Required to Increase IRR

1. FIXED ASSETS - DEFINITION AND CHARACTERISTICS

The Concept of Generational Accounts (GA) in Comparison with National Transfer Accounts (NTA)

Fundamental Basic. Fundamentals. Fundamental PV Principle. Time Value of Money. Fundamental. Chapter 2. How to Calculate Present Values

The Fair Value of Insurance Contracts by Sam Gutterman, David Rogers, Larry Rubin, David Scheinerman

Managers beyond borders: side-by-side management in mutual funds and. pension funds.

Privatization, Foreign Entry, and Bank Risk in an Emerging Banking System: The Case of Argentina,

The Relationship between Money Demand and Interest Rates: An Empirical Investigation in Sri Lanka

Trading Costs of Public Investors with Obligatory and. Voluntary Market-Making: Evidence from Market Reforms

FINAL EXAM EC26102: MONEY, BANKING AND FINANCIAL MARKETS MAY 11, 2004

Volume 31, Issue 1. Pitfall of simple permanent income hypothesis model

Bank of Japan Review. Performance of Core Indicators of Japan s Consumer Price Index. November Introduction 2015-E-7

The Empirical Study about Introduction of Stock Index Futures on the Volatility of Spot Market

POSITIVE SCOPING STUDY OUTCOME

The Mathematics Of Stock Option Valuation - Part Four Deriving The Black-Scholes Model Via Partial Differential Equations

INNOVATIVE CUSTOMISED SOLUTIONS. Global Securities Lending

Gas Distribution Services Default Price-Quality Path Determination 2013 [2013] NZCC 4

Watch out for the impact of Scottish independence opinion polls on UK s borrowing costs

PUBLIC CONSULTATION. April Consultation on copper local-loop costing methods

Problem 1 / 25 Problem 2 / 25 Problem 3 / 11 Problem 4 / 15 Problem 5 / 24 TOTAL / 100

Background paper prepared for the Education for All Global Monitoring Report Youth and skills: Putting education to work.

ABN AMRO Bank N.V. The Royal Bank of Scotland N.V.

Horizontal Product Differentiation: Disclosure and Competition

Problem Set 1 Answers. a. The computer is a final good produced and sold in Hence, 2006 GDP increases by $2,000.

Inflation Tax and Economic Growth in Iran

Labour market participation rate in the euro area: performance and outlook, a long-term view

Price and Volume Measures

Provide a brief review of futures markets. Carefully review alternative market conditions and which marketing

Federal Reserve Bank of Chicago

Chapter 12 Fiscal Policy, page 1 of 8

Chapter 10: The Determinants of Dividend Policy

Completing Markets in a One-Good, Pure Exchange Economy. Without State-Contingent Securities

UNIVERSITY OF MORATUWA

Balance of Payments. Third quarter 2008

Warranty Reserve: Contingent Liability, Strategic Signal, or Earnings Management Tool?*

GUIDELINE Solactive US Large Cap CAD Index (CA NTR) Version 1.0 dated December 15 th, 2017

Session 1 AUTOMATIC STABILISERS AND DISCRETIONARY FISCAL POLICY

VERIFICATION OF ECONOMIC EFFICIENCY OF LIGNITE DEPOSIT DEVELOPMENT USING THE SENSITIVITY ANALYSIS

Boxes Box 12.1 Compilation and Revision Schedule: An Example...16 Box 12.2 Presentation of Revisions: An Illustration based on Country Practices...

A Note on Missing Data Effects on the Hausman (1978) Simultaneity Test:

ECON Lecture 5 (OB), Sept. 21, 2010

Transcription:

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 2000. 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 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 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 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. 12 13 16 8 1 13 12.9 Sanam 8 18 21 6 1 12 14 GNI 19 16 12 20 4 8 12.2 CGU 9 21 11 5 3 10 9.5 SA Eagle 6 10 10 2 1 6 7.1 (a) Ohers 46 23 30 60 90 51 44.2 Toal 100 100 100 100 100 100 100 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. 27.3 32.6 34.9 22.6 5.73 19 25.6 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 Pre (a) 88 118 102 156 116 174 100 118 239 240 69 HHI 0 8 9 0 5 6 5 6 0 2 7 in HHI 308 531 581 181 12 180 Source: FSB, Regisrar of Shor Term Insurance, Annual Repor 1998. (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 700 328 1028 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 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 mergers6. 20. 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 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 significan7. 23. 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 2000 7 See Table 13 a page 34 of he Commission s repor.

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