IN THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 14/LM/Feb00
In the large merger between:
Santam Limited
and
Guardian National Insurance Company Limited
Reasons for Competition Tribunal’s Decision
Approval
1. We approved the merger between Santam Limited (“Santam”) and Guardian
National Insurance Company Limited (“Guardian National”) without conditions
on 4 April 2000. The reasons for our decision follow below.
The Merger Transaction
2. The transaction involved Santam acquiring the entire issued share capital of
Guardian National from Guardian National’s shareholders, which included
Liberty Life Association of Africa Ltd (“Liberty”) and GRE South Africa
Holdings (Pty) Ltd (“Gresa”). Prior to this transaction Liberty and Gresa held
40.8% and 52.56% of Guardian National’s shares. The holding company of
Gresa, AXA S.A., was a party to the merger agreement and a participant in the
merger hearing.
Evaluation of the Merger
The Relevant Market
3. Both Santam and Guardian National are registered shortterm insurers in terms of
the ShortTerm Insurance Act 53 of 1998 and are authorized in terms of the Act to
carry on shortterm insurance business under all the classes of policies provided
for in Section 67 the Act 1. As a result, there is a direct product overlap between
the businesses of the two firms. However, the two firms concentrate on different
classes of products: Santam focuses on personal insurance products, while
Guardian National focuses more on insurance for corporates and group schemes 2
4. There are at least three approaches to defining the relevant product market in
this merger:
(a) Defining a separate market for each type of shortterm insurance
product;
(b) Defining a single market for all shortterm insurance products; and
(c) Defining a separate market for different ‘clusters’ of shortterm
insurance products.
5. The Commission’s analysis of the merger concentrated on the first two of these
approaches, although their report did in passing mention the possibility of a
relevant market based on ‘clusters’.
6. The first approach is consistent with international practice in respect of mergers in
the shortterm insurance industry. This practice is to define a separate relevant
market for each type of risk covered 3. Such a definition recognizes that insurance
cover for a particular risk is a distinct product, which is not substitutable from the
customer’s point of view for cover in respect of any other risk – for instance fire
cover cannot be substituted for burglary cover.
7. In the present case, the Commission used the product classes provided for under
the repealed Insurance Act, 1943 as the basis for defining a product market based
on this concept of a separate market for each risk category. The repealed Act
recognized six product classes, as opposed to the eight established under the new
Act, to which we referred in paragraph 3 above. The six product classes under the
repealed Act are fire, marine, motor, personal accident, guarantee and
miscellaneous. The Commission appear to have chosen the product classification
miscellaneous. The Commission appear to have chosen the product classification
of the repealed Act rather than the classification established under the new Act in
order to use historical (1998) information on market shares in their analysis.
8. The broader definition based on a single market for all shortterm insurance
products may nevertheless also be justifiable if sufficient supplyside substitution
between the various product classes is possible – i.e. if insurers that only
participate in certain of the classes are able to switch from providing one type of
1 The Act currently provides for eight classes of policies: accident and health, engineering, guarantee,
liability, miscellaneous, motor, property, and transportation.
2 See Figure 2 at p. 40 of the Competition Commission’s report.
3 See for example the approach of the European Commission in Allianz/AGF (Case no. IV/M.1082);
Commerial Union/General Accident (Case no. IV/M.1142); CU Italia/Banca Delle Marche/JV (Case no.
IV/M.1627).
2
cover to providing another type of cover or are able to extend their product lines
to include other categories of cover. Although we have not been presented with
sufficient information to evaluate the extent of supplyside substitution in the
industry in any detail, the evidence on entry conditions, to which we will refer in
more detail below, suggests that the supplyside structure of the market may
indeed support a product definition based on a single product market for all short
term insurance products.
9. The remaining market definition, which was not pursued by the Commission, is
based on the general idea that a separate product market exists for various
combinations of the distinct product categories. This would be the case if
consumers of shortterm insurance products showed a preference for insurance
policies that covered more than one type of risk. The Commission advised us that
some of the brokers that they interviewed had confirmed that consumers do in fact
normally seek combination insurance – i.e. cover for a number of different risks
under a single policy. Defining the relevant market in terms of specific clusters
would, however, lead to a myriad of relevant markets due to the large number of
different combinations of risk that can be incorporated under a single policy. Due
to limited information, we have defined a surrogate cluster market instead of
defining a separate market for each cluster permutation. Our surrogate market
focuses on the supplyside of the market and includes all insurers that are in a
position to offer clustered products. In this case, we have included all insurers that
are registered in all or most of the product classes provided for in the repealed
Act.
10. We do not have sufficient information to determine which of these approaches to
Act.
10. We do not have sufficient information to determine which of these approaches to
defining the relevant product market is the most appropriate for analyzing this
merger. We have therefore considered the merger’s effect on competition based
on all three approaches. In any event, as is clear from our analysis below, the
choice of product market definition is not determinative of our decision in this
merger.
11. We agree with the Commission’s recommendation that the relevant geographic
market for shortterm insurance products in South Africa is a national market.
Unlike most retail products, insurance products are not sold to consumers through
retail outlets at specific locations. Rather, consumers rely on a nationwide
network of brokers who source insurance cover from insurers nationwide. The
geographic market does not extend beyond the national boundaries because
legislation requires insurers who operate within the country to be licensed here.
Consumers can accordingly not source shortterm insurance internationally.
Market Concentration
3
12. Table 1 contains the premerger market shares of firms in the six relevant markets
based on product classes. The column on the extreme right gives the market
shares in the single market for all shortterm insurance products. The postmerger
market share of the merged entity in each of these markets is shown in Table 2.
Table 1
Insurer Fire Marine Motor Personal
Acciden
t
Guarante
e
Miscel. Total
Mut. & Fed. 12 13 16 8 1 13 12.9
Santam 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
Others (a) 46 23 30 60 90 51 44.2
Total 100 100 100 100 100 100 100
Source: Fitch IBCA Statistical Report (August 1999) and draft 1998 FSB Report
(Table 4 in the Competition Commission’s recommendation)
(a) The “other’ category comprised more than sixty small firms with mainly
very small markets shares.
Table 2
Fire Marin
e
Motor Personal
Acciden
t
Guarante
e
Miscel
.
Total
Shortterm
insurance
Marke
t
Share
27.3 32.6 34.9 22.6 5.73 19 25.6
Source: FSB, Registrar of ShortTerm Insurance, Annual Report, 1998
(Table 7 of Competition Commission’s recommendation)
13. The market shares in Tables 1 and 2 translate into low to moderate premerger
concentration levels in most of the product markets, as reflected in Tables 3 and 4.
However, the increase in concentration in most of the markets following the
merger will be substantial.
Table 3
Concentrati
on
Fire Marine Motor Personal
Accident
Guarantee Miscel.
4
Pre Pos
t
Pre Pos
t
Pre Pos
t
Pre Pos
t
Pre Pos
t
Pre Po
st
HHI (a) 88
0
118
8
102
9
156
0
116
5
174
6
100
5
118
6
239
0
240
2
69
7
87
7
∆ in HHI 308 531 581 181 12 180
Source: FSB, Registrar of ShortTerm Insurance, Annual Report 1998.
(Table 7 of Competition Commission’s recommendation)
(a) HerfindahlHirschman Index 4
Table 4
Source: Competition
Commission Recommendation, Table 10 at p. 28
14. Market concentration in the surrogate market for clusters, which we defined in
paragraph 9 above, can be roughly estimated with reference to the market shares
of those insurers registered in all or most of the six policy classes. According to
Financial Services Board records, as at 30 June 1999 more than two thirds of the
90 registered shortterm insurers were registered in all six product classes, and
many of the remaining insurers were registered in three or more of those classes.
The market for clusters should therefore not be much narrower than the market
based on all shortterm insurance products. This mean that the level of
concentration in this market, and increase in concentration as a result of the
merger, is likely to be only slightly higher than in the market based on all short
term insurance products.
15. In summary, while market concentration after the merger will be moderately high
in most of the markets considered, the increase in concentration will be relatively
high5. The only market that will be highly concentrated after the merger is the
narrow market for guarantee insurance. However, this market was highly
concentrated before the merger as well and the increase in concentration as a
result of the merger is quite small.
Effect on Competition
16. Despite the relatively high increase in concentration in most of the relevant
4 According to the US Merger Guidelines (1992, as revised in 1997) a market with postmerger HHI of
between 0 and 1000 points is considered to be unconcentrated; a market with postmerger HHI of between
1000 and 1800 points is considered to be moderately concentrated; a market with postmerger HHI above
1800 points is considered to be highly concentrated.
5 The US Merger Guidelines consider an HHI increase of more than 100 points in a merger that leads to a
moderate level of concentration as a relatively large increase in concentration.
Short
term
Insurance
Premerger
HHI
∆ in
HHI
Postmerger
HHI
700 328 1028
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markets, the structural and dynamic characteristics of the shortterm insurance
industry in South Africa suggest that the merger is unlikely to significantly restrict
competition in these markets.
17. The role played by independent insurance brokers as intermediaries between
consumers and insurers is a particularly significant characteristic of the industry
from a competition perspective. According to the Commission’s report, more than
95% of insurance business is conducted through independent brokers. These
brokers receive requests for insurance cover from customers and then shop around
for the best products available from insurers in terms of price and product
characteristics. Because brokers have extensive knowledge of the industry and are
well informed about product choices and market conditions, this arrangement
contributes to a competitive market for shortterm insurance products.
18. The manner in which brokers are remunerated supports the procompetitive role
brokerintermediation plays in this industry. They are remunerated in a manner
which both encourages consumers to use brokerage services to source insurance
cover as well as encourages brokers to pursue the best interests of customers in
doing so. Consumers are encouraged to use brokers as intermediaries because
they do not themselves pay for the brokers’ services; the insurer whose product is
eventually chosen by the consumer pays the broker a commission. Moreover,
insurers are prohibited by legislation from paying brokers an incentive bonus.
This measure seeks to ensure that the fact that brokers are remunerated by
insurers does not encourage brokers to establish a ‘comfortable’ relationship with
any given insurer and thus reduce competition between insurers. Instead, brokers’
any given insurer and thus reduce competition between insurers. Instead, brokers’
incentives in recommending an insurer are directed at protecting their clientbase
through satisfactory customer service.
19. The broker’s role as intermediary between the customer and insurer effectively
consolidates the buying power of customers and should therefore contribute
significantly towards countervailing the potential market power established by
moderate to high concentration levels on the supply side of the markets. This
conclusion is consistent with the findings of the European Commission in
insurance mergers 6.
20. Furthermore, the increase in concentration in the markets arrived at on the basis of
simply summing the market shares of the merging firms probably overestimates
the true increase, because this approach does not take into account the “runoff”
that could be expected as a result of the merger. The merging firms estimated that
they stood to lose up to 15% of their combined market share after the merger.
They attributed this to two factors: the practice by brokers of sourcing insurance
products from a number of different insurers; and the effect of uncertainty after
the merger on service levels. Although the extent to which these factors will
6 See for example Allianz/AGF (Case no. IV/M. 1082) at par. 33.
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contribute to the merged entity losing market share is difficult to quantify, the
practice by some brokers of using a ‘shortlist’ of insurers with which they place
their business supports the view that a certain amount of runoff will result from
the merger – if both merging firms appeared on a broker’s short list before the
merger, an additional firm would now be included on its list after implementation
of the transaction, which could result in less business being placed with the
merged firm than the combined amount of business placed with the two merging
firms prior to the merger.
21. Another factor that enhances competition in the shortterm insurance markets is
the ease with which customers are able to move their business from one insurer to
another. According to a number of brokers interviewed by the Commission, the
existence of claimreducing measures such as socalled “noclaim bonuses” does
not restrict customers from moving between insurers since these bonuses are
generally transferable between insurers.
22. Apart from regulatory requirements, there do not appear to be significant barriers
to entry into any of the shortterm insurance markets. The most significant
regulatory requirement is that registration in terms of the ShortTerm Insurance
Act, 53 of 1998 is required to gain access to the industry. The Act prescribes a
number of requirements for registration mainly of a prudential nature, none of
which are particularly onerous. The large number of smaller firms that have
entered the market recently supports the view that barriers to entry to the short
term insurance markets are not significant 7.
23. The existence of a highly competitive environment in the shortterm insurance
industry is verified by comments made in internal management documents of
Guardian National, which were prepared for purposes unrelated to notification of
Guardian National, which were prepared for purposes unrelated to notification of
the merger. A background document for a Business Review and Budget Meeting
held on 2 November 1998 mentions the aggressive marketing campaigns of
competitors who were engaging in fierce price competition, stating that
“competition from new and existing players [was] making it increasingly difficult
to retain clients”.
24. Based on the above, we conclude that this merger is unlikely to substantially
prevent or lessen competition in any of the relevant markets. We therefore need
not consider the long list of mainly unsubstantiated efficiency gains claimed by
the merging firms.
________________ Date: 3 May 2000
7 See Table 13 at page 34 of the Commission’s report.
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N.M. Manoim
D. H Lewis and S. Zilwa concurred.
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