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South African insurance company heads to New Zealand

South African insurer eyes NZ market

source: Sunday Star Times
Last updated 05:00 11/05/2014

Giant South African insurer Youi is tipped to launch in New Zealand in a bid to exploit what Insurance Council figures suggest is weak price competition in the car, house and contents insurance markets.

On Wednesday, the Commerce Commission gave the green light to Australian insurer IAG to take over Lumley General Insurance as part of a A$1.85 billion trans-Tasman deal, saying it did not believe it would cause a “substantial lessening of competition”.

But figures released by the Insurance Council imply that even before the merger, competition in the house, contents and car insurance sectors is not delivering lower prices for consumers.

And sources say Youi, part of the Johannesburg Stock Exchange-listed Rand Merchant Insurance group, is attracted by the profits to be made in New Zealand.

After launching in Australia in 2008, it boasts that: “Our customers could fill Eden Park five times, with over 500,000 policies open with Youi.”

The company opened a call centre in Auckland last August and its website says it has “big plans” for its business her

Spokesman Trevor Devitt said the company was looking at opportunities, but its plans for New Zealand were subject to “detailed investigations and board approval”.

IAG, which owns the NZI, AMI and State brands, has a market share of just over 40 per cent of the entire general insurance market, but the Lumley deal, will see that rise to just over 50 per cent, giving this country a level of insurance concentration far beyond that in other developed countries (see chart).

Its share of the home and contents and vehicle insurance market will rise to 66 per cent from 60 per cent.

It protested that competition was strong when seeking the commission’s approval for the deal.

But the Insurance Council’s annual release of statistics shows that the ratio of claims to premiums paid for car insurance has been falling.

In the 12 months to the end of September 2008, private and commercial vehicle insurance paid out $73.68 in claims for every $100 of net earned income. The following years saw it fall to $70.08, then $64.17, before in 2011 going up to $65.16, dropping again in 2012 a new low of $63.52, before rising to $68.11 in the year to the end of September 2013.

Safer cars, and the insurers extracting better and better deals from collision repairers have been behind that shift, but in a highly competitive environment, it might have been expected to see premiums falling as the claims ratio fell.

There has been a similar pattern for domestic building and contents. The Insurance Council

splits out the earthquake cover associated with those policies, and with that removed, the loss ratios have dropped from $82.33 in 2008, to just $59.33 in 2012, and $58.11 in 2013, painting a picture of people paying much more for getting the same non-earthquake risks covered.

Tim Grafton, chief executive of the Insurance Council, denied that competition was weak and said focusing on individual loss ratios was misleading, especially at a time when the insurers were being required to hold more capital by the regulators.

“There are a number of providers for motor insurance out there,” he said, adding: “People do shop around and they can get better deals by shopping around. Our observation would be that the market is working. There is plenty of advertising of motor insurance and no barriers to switching.”

Grafton said the bigger picture of the total loss ratio across insurers’ entire lines of business, including all commercial insurance, marine, cargo, director liability and earthquake, showed a flatter line, with the loss ratio of $68.46 in 2008 having fallen to $62.03 in the latest figures.

He also pointed out that once payments to staff, and other business costs, including payments to overseas parent companies, were included, the net profit was just $3.73 for every $100 earned.

IAG said in a statement: “IAG believes its premiums are very competitive and reflect good value for the risk cover they provide. While claim costs in some categories have fallen other costs in our business remain stubbornly high and we must price for long term sustainability.”

Gary Young, head of the Insurance Brokers Association, said households were being told to brace for further premium rises, while corporate insurance premiums were level or falling as reinsurers soften their stance on New Zealand.

Richard Conway, a British expat trying to launch an online insurance comparison service called iCompare with former Vero chief executive Roger Bell, said he was not convinced competition is particularly strong in the house, contents and car markets.

Neither IAG and Suncorp’s New Zealand businesses will deal with iCompare, which is designed to make shopping around for insurance easier.

Conway, who is expecting Youi to launch here soon, said the big insurers were very focused on not allowing prices to “erode”.

“It doesn’t seem like there’s a huge amount of competition.”

Grafton, who also expects a launch by Youi, said: “If premiums in any line rise then the natural counter to that is aggressive business plays in those lines.”

In fact, just the kind of move Youi, which has opened a corporate office in Auckland and is hiring staff, appears to be planning.

Grafton said Youi’s planned move “indicated we have got no barriers to entry and people can provide a level of competition, if there’s seen to be money to be made.”

The public has to wait for the Commerce Commission’s detailed report on why competition is not necessarily reduced by its decision, as it works to “redact” parts of the document which are not for the premium-paying public’s eyes.

“There’s a confidentiality issue and some material has to be redacted from the public version and then that must be signed off internally,” the commission said.

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