EXPLAINED: COMPETITION COMMISSION PROBE
Did South Africa’s biggest insurers collude on fixing premiums?
Here is an explainer on why the Competition Commission is going after eight insurers for allegedly being involved in collusive behaviour to fix or influence the insurance premiums they charge consumers.
On the morning of 25 August 2022, investigators from the Competition Commission descended on the offices of major life insurance companies across the country.
Armed with search warrants, the commission’s goal was clear: raid the offices of insurers and copy documents and hard drives containing information relating to their day-to-day operations.
The unexpected swoop sent shockwaves through South Africa’s insurance industry.
Now, the seized documents and hard drives will be used by the commission to build a case against eight insurance companies suspected of colluding to fix or influence the insurance premiums they charge consumers.
The companies are Old Mutual Insure, Hollard, Sanlam, Bidvest Life, Discovery, the Professional Provident Society, Momentum Metropolitan and BrightRock.
Why is the commission involved in the affairs of insurers?
The commission is a watchdog that oversees competition dynamics in South Africa. It is empowered by the Competition Act to ensure that there is fair competition in markets, and that markets remain free from dominance, especially by large firms.
In essence, the commission regulates markets to ensure there is vibrant competition and that large firms don’t abuse their power to harm consumers. So, the activities of the eight insurance companies are squarely in the commission’s remit.
What is the commission’s case about?
The commission has shared little information about its investigation into the eight insurance companies — a probe that started in January 2021. The insurers have so far not been charged with any wrongdoing. This is because the investigation is ongoing (but advanced) and any information the watchdog has obtained is deemed “restrictive” under the Competition Act.
This means that the information discovered by the commission cannot be shared publicly until the insurers are formally charged with wrongdoing by the watchdog and referred for prosecution by the Competition Tribunal, which acts as a court on antitrust matters.
However, the commission says it has reasonable grounds to suspect that insurers were involved in coordinated behaviour to fix the prices of premiums consumers pay for long-term insurance products such as life insurance, funeral cover, dread disease cover, disability cover and fees they pay on retirement savings products.
In other words, the commission believes the insurance companies were in agreement to share information — even sharing passcodes so that they could access each other’s systems — before formulating premiums on new insurance products.
In the commission’s eyes, this is seen as a collusive practice to influence the pricing of premiums and fees on retirement savings products. It’s not clear how widespread or how far back this practice dates, and whether or not the alleged collusion did in fact lead to abnormally high insurance premiums.
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Can premiums be manipulated to enrich insurance companies?
Insurance companies share information about the premiums of insurance products as part of their normal operations. The information on insurance premiums is publicly available in the market for anyone who wants to get a quote from any life insurer. Insurance brokers, for example, have access to all life insurers’ quotations, which they use to find the best and most competitive premium quotes for consumers on a daily basis.
Peter Castleden, a former actuary, tells Business Maverick that when launching new insurance products, insurers and their actuaries determine the premium charged based on several factors – mainly the health of consumers, assumptions on the mortality rate, the expected lapse rate of an insurance policy, insurance associated costs (administration, distribution and underwriting costs), money going out (the potential cost of paying out claims) versus money coming in (expected premiums), tax, interest rates, consumer inflation and more.
An insurer would then want to make money from the premium charged — something that is known as a “value of new business”, which, when expressed as a percentage of the premiums, is effectively their profit margin. But the margin achieved by insurers also depends on their sales volumes; if they sell more insurance products, they can achieve a higher margin since a significant part of their expenses would be fixed in nature.
A life insurer, for example, may want to target profit margins of between 1.5% and 2.5%. That’s usually the industry range.
Once an adequate premium has been determined by an insurer – which also provides it room to achieve targeted profit margins and possibly stabilise associated insurance costs – the insurer would compare its premium pricing to that of a competitor. If the insurer cannot offer a lower premium than competitors, they may not bring a new insurance product to the market.
This is because the insurance industry is fiercely competitive and consumers are spoiled with many insurance providers that can lower premiums to extreme levels, says Castleden.
“In the eyes of consumers, life insurance is very commoditised and is therefore price-sensitive. When insurance companies are uncompetitive, they get a volume impact. The pricing of premiums affects sales volumes of insurance products, and it is a business imperative to get the pricing as low as possible,” says Castleden.
He believes that the use of price comparison tools in the life insurance industry, and making premiums transparent, usually drives prices lower, benefiting consumers in the process.
In some cases, says Castleden, insurers (especially those offering flagship products such as life and disability insurance) have become so competitive on their premiums that they have lowered them to keep customers, resulting in insurers not making any profit margin. In this scenario, insurers would also have to work hard to lower insurance-related costs or decide to launch a new insurance product at a low, and often negative, profit margin.
The early Covid months rendered insurers unprofitable because the industry had to pay out billions of rands in life insurance claims, and froze premiums just to keep customers.
How did the commission’s investigation come about?
The commission is also tight-lipped about this. But there are two ways in which the investigation could have arisen. The commission could have been tipped off by players in the insurance industry, who know how the pricing of premiums works. A competitor insurance company could have also confessed to the commission to being part of alleged collusive behaviour to fix premiums, and offered leniency in exchange for spilling the beans.
Does the commission have enough evidence to build a strong case against the insurers?
It’s anyone’s guess at this point. Business Maverick understands that the commission is still analysing the documents and hard drives it has seized from the offices of the insurers in Gauteng, KwaZulu-Natal and the Western Cape. This information can be used to support the commission’s investigation.
Ahmore Burger-Smidt, a competition law specialist at Werksmans Attorneys, says the commission might have had reasonable evidence before it raided the offices of insurers. This is because the commission could not have successfully secured search warrants from high court judges in those three provinces if the watchdog didn’t at least have some information about possible collusive behaviour.
“The commission must have had some level of prima facie evidence or reasonable information against the insurers to convince judges to issue it with warrants to search the offices of insurers,” Burger-Smidt tells Business Maverick.
What will it take to get charges to stick (if and when they are eventually filed)?
In its evidence-gathering process, the commission must prove that there was an agreement or concerted effort between Old Mutual Insure, Hollard, Sanlam, Bidvest Life, Discovery, the Professional Provident Society, Momentum Metropolitan and BrightRock to fix insurance premiums, says Burger-Smidt. The burden of proof lies with the commission.
For example, the evidence must point to representatives of the eight insurance companies planning to meet, eventually meeting at some location, and deciding on premium pricing. Or there could be electronic communication among the insurers, whereby they plan to fix insurance premiums.
This is the kind of smoking gun the commission relied on when it charged more than 20 commercial banks in 2015 for conspiring to rig trades involving the dollar-rand currency pair. In this case, currency traders of banks reportedly used platforms such as the Reuters currency trading platform and the Bloomberg instant messaging system (chat room), as well as telephone conversations and meetings, to allegedly coordinate collusive dollar-rand currency trading activities.
The hard work now begins for the commission to produce similar evidence for its case against the insurers.
What kind of penalties can be imposed against the insurers?
The penalties, if the major insurance firms are found guilty, could be huge.
The Competition Tribunal can impose a fine of as much as 10% of their annual turnover (or sales). Getting to this point could take many years because the insurers could challenge any charges and subsequent penalties imposed on them. This has been seen in the commission’s seven-year fight against the commercial banks.
What do the insurers have to say about the commission’s investigation?
The insurers say they are “cooperating fully” with the commission, adding that they have reason to believe they are not guilty of fixing insurance premiums. DM/BM