State-NZI deal given the nod

By RICHARD BRADDELL

WELLINGTON - The Commerce Commission has cleared the merger of the country's two largest insurance groups, despite their combined house and contents activities being too large to comply with "safe harbour" guidelines.

Under the authorisation granted yesterday, State Insurance will be able to merge with NZI as part of the global merger of their British parents, CGU and Norwich Union.

The commission's "safe harbour" guidelines are rules that allow a merger as long as the new group has under 40 per cent of market share, or under 60 per cent if it faces competition from another participant with at least 15 per cent.

The guidelines are based on a judicial definition of competition law, which holds that dominance must amount to a high degree of market control.

The commission found that CGU and Norwich's New Zealand business would exceed those thresholds in the domestic house and contents markets, although it would conform in domestic motor vehicle insurance and commercial property, motor vehicle and liability insurances.

In clearing the household component of the merger, the commission said it took into account submissions that AMI, Tower and Royal & SunAlliance were substantial competitors, and there were other insurers with a national presence.

Furthermore, the commission noted that there were no switching costs for changing from one domestic insurer to another and that market conditions were such that the merged entity would be unlikely to increase premiums and retain its market share.

But while noting that barriers to entry were low, the commission said it had also been advised that there were unlikely to be new entrants at this time due to the unattractive state of the market.

A representative of international credit rating agency Standard & Poor's last month painted a bleak picture of the New Zealand insurance market.

Standard &Poor's Melbourne-based managing director of insurance, Ian Thompson, said personal insurance had returned to profitability after premiums were raised in response to rising motor vehicle claims and Auckland burglaries two years ago, but the segment's underwriting performance had again softened.

Furthermore, he expected commercial insurers to raise premiums after poor underwriting results.