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Insurance Brokers In South Africa – Here is an explanation why the Competition Commission is looking for eight insurers for allegedly engaging in collusive behavior to set or influence the insurance premiums they charge consumers.

On the morning of 25 August 2022, Competition Commission investigators raided the offices of major life insurance companies across the country.

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Insurance Brokers In South Africa

Armed with search warrants, the commission’s objective was clear: to raid insurers’ offices and copy documents and hard drives containing information related to their day-to-day operations.

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From now on, the seized documents and hard drives will be used by the commission to build a case against eight insurance companies suspected of fixing or influencing the insurance premiums they charge to consumers.

The companies are Old Mutual Insure, Hollard, Sanlam, Bidvest Life, Discovery, Professional Provident Society, Momentum Metropolitan and BrightRock.

The commission is a watchdog that monitors competitive dynamics in South Africa. It is empowered by the Competition Act to ensure that there is fair competition in the markets and that the markets remain free from domination, especially by large companies.

Essentially, the commission regulates markets to ensure strong competition and that large companies do not abuse their power to harm consumers. Therefore, the activities of the eight insurance companies fall fully within the jurisdiction of the commission.

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The commission has shared little information about its probe into the eight insurance companies – an investigation that began in January 2021. The insurers have so far not been charged with any wrongdoing. Indeed, the investigation is ongoing (but advanced) and any information obtained by the watchdog is considered “restrictive” under the Competition Act.

This means that information uncovered by the commission cannot be shared publicly until insurers are formally accused of wrongdoing by the watchdog and referred for prosecution by the Competition Tribunal, which acts as a court in antitrust matters. .

However, the commission says it has reasonable grounds to suspect that insurers have engaged in coordinated behavior to price the premiums consumers pay for long-term insurance products such as life insurance. . on retirement savings products.

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In other words, the commission finds that insurance companies agreed to share information — even sharing access codes so they could access each other’s systems — before setting premiums on insurance products. new.

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In the eyes of the commission, this is considered a collusive practice to influence the pricing of premiums and fees on retirement savings products. It is not clear how widespread or old this practice is, and whether the alleged collusion actually led to abnormally high insurance premiums.

Insurance companies share premium information for insurance products as part of their normal operations. Information about 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 quotes from life insurers, 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 – primarily consumer health, the assumptions of -mortality rate, the expected lapse rate of an insurance policy, the costs associated with insurance (administration, distribution and underwriting costs), money out (the potential cost of paying the claims) compared to cash coming in (expected bonuses), taxes, interest rates, consumer inflation and more.

An insurer then wants to make money from the premium charged – the so-called “new business value”, which, when expressed as a percentage of premiums, is actually its profit margin. But the margin obtained by insurers also depends on their sales volumes; if they sell more insurance products, they can earn higher margins since a significant portion of their costs are fixed in nature.

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A life insurer, for example, may want to aim for a profit margin of between 1.5% and 2.5%. This is generally the range of the industry.

Once an adequate premium is determined by an insurer – which also allows it to achieve targeted profit margins and possibly stabilize the associated insurance costs – the insurer will compare its price with that of a competitor. If the insurer cannot offer a lower premium than its competitors, it cannot introduce a new insurance product to the market.

Indeed, the insurance industry is extremely competitive and consumers are spoiled by many insurers who are able to reduce premiums to extreme levels, explains Castleden.

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“In the eyes of consumers, life insurance is highly commoditized and therefore price sensitive. When insurance companies are not competitive, they have an impact on volume. Premium pricing affects sales volumes of insurance products, and it is imperative for companies to get prices as low as possible,” says Castleden.

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He believes that the use of price comparison tools in the life insurance industry and premium transparency generally lowers prices, which benefits consumers.

In some cases, says Castleden, insurers (particularly those with core products such as life and disability insurance) have become so competitive on their premiums that they have lowered them to retain customers, meaning that insurers they realize no profit margin. In this scenario, insurers would also have to work hard to reduce insurance-related costs or decide to launch a new insurance product with low and often negative profit margins.

The first months of Covid made insurers unprofitable because the industry had to pay billions of rands in life insurance claims and froze premiums just to keep customers.

The commission is also discreet about this. But the investigation could have proceeded in two ways. The commission could have been advised by people in the insurance industry, who know how premium pricing works. A competing insurance company may have also admitted to the commission that it was part of an alleged collusive behavior that fixed premiums, and offered leniency in exchange for blowing the fuse.

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It’s anyone’s guess at this point. Business Maverick understands that the commission is still analyzing documents and hard drives it seized from the insurers’ offices in Gauteng, KwaZulu-Natal and the Western Cape. This information may be used to support the commission’s investigation.

Ahmore Burger-Smidt, specialist in competition law at Werksmans Attorneys, says the commission could have had reasonable evidence before raiding the insurers’ offices. Indeed, the commission could not have successfully obtained search warrants from high court judges in these three provinces if the watchdog did not have at least some information about possible collusive behavior.

“The commission must have had some level of prima facie evidence or reasonable information against the insurers to convince the judges to issue warrants to search the offices of the insurers,” Burger-Smidt told Business Maverick.

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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 the -insurance premiums, says Burger- Smidt. The burden of proof is on the commission.

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For example, the evidence must show that the representatives of the eight insurance companies plan to meet, eventually meet in one place, and decide on premium pricing. Or there may be electronic communication between insurers, with which they plan to set insurance premiums.

This is the kind of convincing evidence that the commission relied on when it charged more than 20 commercial banks in 2015 for conspiring to impose transactions involving the dollar-rand currency pair. In this case, the banks’ forex traders used platforms such as the Reuters currency trading platform and the Bloomberg instant messaging system (chat room), as well as conversations and meetings with phone, to coordinate activities. collusive trade between dollars and rands.

The hard work now begins for the commission to produce similar evidence for its case against the insurers.

The Competition Tribunal can impose a fine of up to 10% of their annual turnover (or sales). Getting to that point can take many years as insurers can contest the charges and penalties imposed on them. This was seen in the commission’s seven-year fight against commercial banks.

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The insurers say they are “fully cooperating” with the commission, adding that they have reason to believe they are not guilty of fixing insurance premiums. DM/BM

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