Why is the commission involved in the affairs of insurers?
The commission is a watchdog that oversees competition dynamics in SA.
It is empowered by the law (the Competition Act) to ensure that there is fair competition in markets and that markets remain free from dominance, especially by large firms.
The commission regulates markets to ensure there is vibrant competition and that large firms don’t abuse their power to harm consumers. So, the affairs of the eight insurance companies fall right within the commission’s focus.
What is the case against the insurance companies about?
The commission has shared little about its probe into the eight insurance companies, which started in January 2021.
The insurers have, so far, not been charged with any wrongdoing. This is because the investigation is ongoing. Under the Competition Act, any information obtained 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.
The commission says it has reasonable grounds to suspect that insurers were involved in coordinated behaviour to fix the prices of premiums that consumers pay for long-term insurance products, such as life insurance, funeral cover, dread disease cover and disability cover, as well as fees they pay on retirement-savings products.
In other words, the commission believes that the companies had agreed to share information – even passcodes to access other’s systems – before they formulated 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 far this alleged practice dates back, or whether the alleged collision led to abnormally high insurance premiums.
Can premiums be manipulated through collusive practices to enrich insurance companies?
Insurance companies share information about the premiums of insurance products as part of their normal operations. This information is publicly available to anyone who wants to get a quote from any insurer.
Insurance brokers, for example, have access to all life insurers’ quotations, which they use daily to find the best and most competitive premium quotes for consumers. Peter Castleden, a retired actuary, told
that when launching new insurance products, insurers and their actuaries determine premiums by looking at several factors, mainly the health of consumers, the mortality rate, the expected lapse rate of an insurance policy (usually 10 years), administration costs, etc.
To make money from the premium charged, an insurer sets a profit margin (usually between 1.5% and 2%).
Once a premium has been determined by an insurer, which also gives it room to achieve targeted profit margins, the insurer compares its pricing with its competitors. If the insurer cannot offer a lower premium
than competitors, it may decide not bring a new insurance product to the market. This is because the insurance industry is fiercely competitive and consumers are spoiled with many providers that can lower premiums to extreme levels, Castleden said.
“The pricing of premiums affects sales volumes of insurance products, and it is a business imperative to get the pricing as low as possible,” he said.
Castleden believes that the use of price-comparison tools usually drives prices lower, benefiting consumers.
Castleden says insurers have become so competitive in some areas that they have lowered their premiums to keep customers, resulting in insurers not making any profit. During the Covid period, for example, insurers froze premiums just to keep customers, while still having to pay billions of rands in life insurance claims, rendering the industry unprofitable with no or waferthin margins.
How did the commission’s investigation come about?
The commission is tight-lipped about this. But there are two possible ways the investigation may have arisen: the commission could have been tipped off by players who know how the pricing of premiums works, or a
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 between the insurers, in which 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.
What kind of penalties could be imposed against the insurers?
The penalties, if the 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 against them. This has been seen in the commission’s seven-year-long fight against more than 20 commercial banks.
What do the insurers have to say about the investigation?
Insurers have said they are “cooperating fully” with the commission, adding that they have reason to believe they are not guilty of fixing insurance premiums.