The competition divide: Why are Aussie insurers' profits so high in NZ?
Thursday, 1 October 2020
ANALYSIS: Australian house, car and contents insurers doing business on both sides of the Tasman are making higher profits in New Zealand, but the industry says it’s not because of a lack of competition here.
New Zealand’s general insurance market is dominated by IAG and Suncorp.
In the 12 months to the end of June, both IAG and Suncorp’s New Zealand general insurance businesses earned roughly NZ$4.4billion of premiums in New Zealand, their most recent financial statements show.
But despite the insurance giants’ New Zealand arms earning just 23 per cent of IAG’s total premium earnings, and 16 per cent of Suncorp’s, they accounted for roughly 40 per cent of IAG’s total group profits, and 23 per cent of Suncorp’s.
Tim Grafton, chief executive of the Insurance Council, the political lobbying body for general insurers, argues that’s not because of the structure of the local market.
“There is a good level of competition in both the consumer and the business insurance market, the New Zealand market is very dynamic, and more competition is always welcome.
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“If competition is measured by the number of competitors in the market or a range of different products and prices for consumers and businesses to choose from, then the general insurance market is certainly competitive.
“For almost all lines of consumer and business insurance there are generally six to 10 competitors.”
But many of those competitors are small, and unknown to many households – names like FMG, Hollard, Provident and Cove.
Insurance academic Michael Naylor from Massey University says IAG and Suncorp have an effective duopoly on the house, car and contents insurance markets in New Zealand.
A duopoly is a situation where two suppliers dominate a market, and which can result in what is sometimes termed “co-ordinated” effects, which is a polite term for a lack of competition in key areas which might otherwise result in prices falling.
The best word to describe the market is “stagnant” not dynamic, says Naylor.
MANY BRANDS, TOO FEW INSURERS
New Zealand does not lack for general insurance brands.
Financial product comparison website Canstar lists 11 car insurance brands on its website, including ranking them for value for money, although users of the site can’t get quotes.
But there are only four insurers behind all the brands Canstar lists.
IAG owns AMI, NZI, and State, and is behind the BNZ, Westpac and ASB car insurance policies.
Suncorp owns Vero, most of AA Insurance, and is behind ANZ’s car insurance.
The only non-IAG or Suncorp brands are small rural insurer FMG, and Tower, which is the third major general insurer for home, car and contents insurance, though far smaller than IAG or Suncorp.
Naylor does not hold out high hopes in the short term for the “duopoly” to be broken by a new entrant from overseas.
“I’m hoping that someone will come in and buy Tower,” he says, expressing surprise it has been able to survive on its own for so long.
Only then would the distant third competitor to the big two have the capital, and stomach, to expand, Naylor believes.
The last overseas insurer to make a real tilt at the New Zealand market was South African insurer Youi, which lost a huge amount of money doing it, though its attempt was stalled by a loss of consumer trust after it was investigated by the Commerce Commission for sharp sales practices.
THE MOST CONCENTRATED MARKET
Lack of competition in the insurance market has been agonised over twice by the Commerce Commission in the past decade.
The first time was in 2014, when IAG was allowed to take over Lumley Insurance, despite pleas from IBANZ, the Insurance Brokers Association of New Zealand, and from Suncorp.
IBANZ told the commission: “We have received an unprecedented level of response to this issue. There is a clear, common message from members – this proposal will adversely affect the operation of the market and have significant negative outcomes for consumers.”
Suncorp warned: “The proposed transaction represents a ‘tipping point’ in insurance markets. It will remove any remaining competitive balance in the market, give IAG substantially increased market power and will substantially lessen competition in relevant insurance markets.”
It sent the commission a chart showing how concentrated New Zealand’s general insurance market was compared to other western markets, and how much worse it would be if IAG swallowed Lumley.
There was agonising again in 2017, when Suncorp tried to buy Tower.
Naylor was among those who strongly opposed the deal.
“The market for personal house and contents insurance is already highly concentrated and uncompetitive,” he told the commission.
“My figures show that IAG has 50 per cent, Suncorp has 28 per cent, Tower 7 per cent, and FMG 4 per cent.
“The Herfindahl-Horschman index for the current market is thus 0.335, which is internationally considered to be highly concentrated. A market with a combined Suncorp-Tower would be IAG -50 per cent, Suncorp 35 per cent, FMG 4 per cent, 7 others 11 per cent. This would have an index of 0.375.
“This would be regarded as failing all overseas competition metrics.”
HIGHER COSTS IN NEW ZEALAND
There have been two other government reports noting the worryingly duopolistic shape of the general insurance market.
A 2019 paper from Productivity council placed insurance among the most concentrated of New Zealand’s industries alongside the supermarket duopoly in which Foodstuffs (New World, Pak ‘n Save and Four Square) and Woolworths (Countdown, Fresh Choice and Supervalue).
“There is some evidence of high and increasing profit margins over variable costs, which could reflect a lack of competition or other factors such as high fixed costs,” the Productivity Commission said of the general insurance sector.
Both Suncorp and IAG have higher costs per dollar of premium earned in New Zealand, though costs are being cut here, as evidenced by IAG closing the AMI branch network.
The most recent financial statements for both IAG and Suncorp show higher costs in New Zealand.
In 2017 a report from MBIE noted: “Sectors with the lowest competition intensity include finance and insurance.”
INSURERS OPPOSE COMPARISON WEBSITES
Matt Giles, head of marketing at car insurer Cove, says competition would lift, if insurers allowed insurance comparison websites to generate quotes on their insurance.
New Zealand is unusual compared to some countries like the United States and United Kingdom for insurers not sharing their pricing with comparison websites, which can generate quotes from multiple providers. These sites remove the need for consumers to seek a quote from each insurance brand separately when shopping around for cover.
“Overseas you don’t have to go to five different companies to get quotes. You just go to one website, and give them your information, and get five quotes on your screen,' Giles says.
“If customers were more aware there might be a $500, $600, $700 spread between the first, second and third, it would be a downward pressure on prices,” he says.
But IAG and Suncorp refused to share their pricing with financial product comparison sites like Glimp.
Grafton says: “Comparison sites overseas are better described as price comparison sites than product comparison sites, that is, the focus on providers marketing their sites has been on selection on price and often the cheapest price.”
“Our concern is that the cheapest is not necessarily the best for the consumer’s own needs,” he says.
Grafton says it is already easy to get quotes and change insurer by calling insurers or seeking quotes from their websites, or by engaging an insurance broker.
Giles says comparison sites can be designed to compare both price and the scope of cover offered, pointing to Life Direct, an online business letting people get life insurance quotes from one website.
When seeking a quote on Life Direct, a shopper for insurance, is asked whether they want the quotes listed by lowest price, most popular, financial strength, policy features, or customer service.
Lowest price is the default setting on Life Direct.
CYNICISM STOPS SHOPPING AROUND
Naylor says there’s cynicism among consumers that one insurer is very like another.
“There’s a lot of unhappiness with existing brands, but when you talk to customers they say other brands are just as bad,” he says.
“Consumers are fairly sticky,” he says. “Unless they are really forced to, they won't change brands.”
That makes it hard for new insurers to build their market shares, he says.
And unlike in the electricity market, government has shown little appetite to intervene. It was instrumental in the launch of the Powerswitch website.
UNEMPOWERED CONSUMERS
Eight out of 10 insurers think the consumer is underpowered when it comes to insurance.
Members of the Insurance Council attending an online session in late August were asked to answer the question: “The social media/technology power balance has some way to go until consumers are really empowered”.
The response was “true, there is some way to go yet” from 80 per cent of the insurance professionals listening.
The next question was how could regulation best support consumer empowerment?
The most common answer was from the 43 per cent who felt promoting financial literacy and education was the answer.
But another 25 per cent said “by being tech-neutral and fit for the digital age”.
Claire Sutton, executive manager, customer insights and culture at Suncorp New Zealand, told listeners consumers were on a quest for purpose and self-reliance, and their main tool was the mobile phone.
Some small regulatory changes could help empower consumers, says Jessica Wilson, head of research at Consumer, such as requiring insurers to spell out clearly how much premiums have risen when people get their annual renewal letters.
THE PRICE OF NATURAL HAZARDS
Insurers argue higher prices, and higher profits, are the price New Zealand has to pay to compensate shareholders of insurers for New Zealand’s high natural hazard risk, in which one earthquake can effectively wipe out a decade or more of profits.
“As we are a high risk country for natural hazards – as the last decade has proved – prices will reflect the risks in higher risk areas,” Grafton says.
“Where risks are identifiably higher insurers, depending on their appetite for risk, will decide whether to accept the risk and if they do will inevitably price the risk higher,” he says.
Naylor says it’s reasonable that insurers facing a higher risk of having their profits wiped out by natural disasters would seek a higher return on their capital.
“If you look at Christchurch. It will take a decade or two to earn that back after what they lost, especially the reinsurers,” he says.
“They [IAG and Suncorp] were pretty close to being bankrupt,” Naylor says.
AMI did have to be bailed out by the government, and was eventually sold to IAG.
IAG, which responded to Stuff through a written statement, says: “The profitability of an insurance company is impacted by a wide range of matters, including the prevalence of natural disasters and weather events.”
It also says its size and financial strength meant policyholders could be sure it would be able to pay claims when called on.
CAN THE DUOPOLY BE BROKEN?
Other than a giant overseas insurer sweeping in to buy Tower, is there any hope of the duopoly being broken?
“There’s a lot happening internationally. There’s not a lot happening in this country at the moment,” Naylor says.
The change happening overseas is the transformation of insurance by technology, he says.
The next big insurer may not even be an insurer, Naylor says. It could be a company like Amazon.
House insurance is complicated, and relies on accurate, local risk-pricing information, which IAG, Suncorp and Tower have, says Naylor.
“Most international firms don’t have the data to price correctly in this country,” he says.
But that was not true of contents insurance, or car insurance, though the latter is an industry Naylor expects to dwindle.
Naylor says the cost for a New Zealand insurer, with its antiquated systems, to write a new insurance policy could be $400.
Automation could drop that price significantly, and it was beginning to happen overseas.
“Once that starts to spread worldwide the competitor will be a non-insurance company,” says Naylor.
“Someone like Amazon could come in and offer contents insurance just using software at a fraction of the cost per customer,” Naylor says.
Failure by IAG and Suncorp to match the innovation happening overseas could see them lose competitiveness, Naylor says. But he suspects they lack sufficient competitive pressure on them to force them to go through the structural and cultural adjustments required to innovate.
NEW ZEALAND VERSUS AUSTRALIA
The competitive landscapes in which IAG and Suncorp operate on each side of the Tasman are very different.
By contrast to their huge market share in New Zealand, in Australia, IAG and Suncorp have around a third of the total market.
The profit landscapes are different too, though natural disasters like the Timaru hail storm of November can result in sudden declines in profit on either side of the Tasman, says Grafton.
“Loss ratios change continually from year to year and by lines of insurance. For instance, insurer loss ratios after the Canterbury and Kaikoura earthquakes were astronomically high and far higher than in Australia, and in the past year Australia has been significantly impacted by bushfires,” Grafton says.
“While the Timaru hailstorm drove higher claims here in New Zealand, this was not on the same scale as the events in Australia.”
In the 12 months to the end of June, IAG booked an “insurance profit” of A$420m on gross written premiums of A$9.37b from its Australian business.
Its insurance profit in New Zealand was A$330m on gross written premiums of A$2.75b.
The New Zealand business made up 23 per cent of IAG’s total gross written premium, but just over 40 per cent of its profit.
There was a similar pattern for Suncorp with an after-tax profit of A$384m on gross premiums of A$8.33b in Australia in the 12 months to the end of June,.
In New Zealand, the after-tax profit on its general insurance operation was NZ$219m on gross premiums of NZ$1.71b.