Information received “from one of the players in the industry” prompted the Competition Commission to launch its investigation into alleged price fixing by some of the country’s major life insurers.
This was all the commission was willing to divulge to Moonstone, which asked the competition watchdog what prompted it to launch its investigation in January 2021.
The investigation led to the commission raiding the premises of eight major long-term insurance companies on Thursday.
In a statement, the commission said it conducted search-and-seizure operations at the premises of BrightRock Life; Discovery; FMI, a division of Bidvest Life; Hollard Insurance Group; Momentum; Old Mutual Insure; Professional Provident Society; and Sanlam.
The commission said it has reasonable grounds to suspect that the eight life insurers have engaged in collusive practices to fix prices and/or trading conditions in respect of fees for investment products such as retirement annuities and premiums for risk-related products, namely, life insurance cover such as dread disease cover/chronic medical condition cover, disability cover, life cover and funeral assistance benefits, in contravention of section 4(1)(b)(i) of the Competition Act.
This section states that an agreement between or a concerted practice by firms, or a decision by an association of firms, is prohibited if – (b) it involves any of the following restrictive horizontal practices: (i) directly or indirectly fixing a purchase or selling price or any other trading condition.
According to the information at the disposal of the commission, the companies under investigation share information on premium rates for risk-related products and fees for investment products, which enables them to adjust the prices of their existing and new insurance products.
“The search-and-seizure operation is part of the routine process of evidence gathering, and we urge all involved to allow the investigation to run its course. The commission will at an appropriate stage reveal the outcome of the investigation,” Commissioner Tembinkosi Bonakele said.
The operations were conducted at five sites in Gauteng, two in the Western Cape, and one in KwaZulu-Natal. The commission seized documents and electronic data, which will be analysed, together with other information gathered, to determine whether the firms have contravened the Competition Act.
What must the commission prove?
On 702’s The Money Show on Thursday, Bruce Whitfield asked Makgale Mohlala, the manager of the cartels division at the Competition Commission, what it would take for the commission to prove collusion. Mohlala said the commission was “talking about the backroom information” that goes into developing pricing, “not the ultimate price that you see”.
Asked whether the commission has any evidence to suggest that the insurers were holding meetings to discuss their strategies, Mohlala said: “So far, the evidence that we have is that they are interacting; they give each other pass codes to access each other’s systems, so they can access that information.”
Mohlala said although Liberty’s offices had not been raided, it was a respondent in the investigation.
Whitfield also asked Ahmore Burger-Smidt, director and specialist in competition law at Werksmans Attorneys, what the commission would have to do to show collusion.
Burger-Smidt responded: “The burden of proof for the commission is still to prove that there was an agreement or a concerted practice, similar behaviour, amongst different participants within an industry, and that’s the evidence that they will have to present before the [Competition Tribunal] to prosecute the insurance companies for collusion. So, one would assume – and that’s what they have been announcing throughout the day – is that they’ve got a level of information, and on the basis of that, they have obviously applied for search warrants […] So, they must have some or other level of prima facie evidence to have convinced a judge to issue a warrant […] So, that is actually the interesting point. What do they have? What is the smoking gun that they are pursuing through the raids?”
Burger-Smidt said there was nothing wrong with insurers following publicly available information and building products based on this data. However, it became collusion when companies got together to decide which products they would launch and at what price points.
The post-Covid increase in the premiums of some insurance products, such as critical illness, might have sparked the commission’s investigation.
“This does not necessarily mean there is collusion. It can be that actuaries have formulated models and realised they have to increase premiums to make the business model work,” she said.
Allegations have yet to be substantiated
In an interview with Moneyweb on Friday, Sipho Ngwema, the head of communications at the Competition Commission, said he wanted to emphasise that the commission was still gathering evidence, and “if after we have sifted through that information, [we hope to be] able to ascertain whether or not indeed the allegations that we have right now can be substantiated”.
Ngwema went on to say that the information the commission had at its disposal “has passed the credibility test”, which was why it conducted the raids.
Comments from the life insurers
At the time of publication, the following life insurers have commented publicly on the raids:
Bidvest Life said it has complied and was complying with the commission’s request for information. “As it’s an investigation, we cannot provide further comment at this time.”
Discovery said it “became aware of a Competition Commission investigation into the life assurance industry this morning. We uphold all of the principles of the Competition Act and are complying with the commission’s request for data and information related to their investigation and will continue to co-operate with their industry-wide investigation to the fullest extent possible.”
Momentum Metropolitan said it was co-operating fully with the commission’s investigation and was providing it with the required documentation. “We have no reason to believe that we are guilty of price fixing. We reiterate our commitment to ongoing compliance with all regulatory requirements.”
Old Mutual said it was co-operating fully with the Competition Commission after the commission “conducted a dawn raid this morning at our Mutual Park Office building in Cape Town. Old Mutual cannot comment further at this stage. We are committed to acting responsibly while executing our business strategy and delivering great value to all our stakeholders.”
Sanlam Life said it has co-operated with the commission’s investigators and “will communicate to all our relevant stakeholders as appropriate”.
Views from the financial services industry
Fin24 quoted Warwick Bam, the head of research at Avior Capital Markets, as saying he was surprised that the Competition Commission identified any evidence of price fixing, considering the extent of regulation and independent broker networks in the insurance industry.
Looking at the declining business margins among many life insurers, his assessment was that the market appears robust.
“The best counterargument I have is that the long-term insurance industry has not achieved its cost of capital for a few years due to a change in the risk profile of its policyholder base. A change in the population risk profile does warrant changes to pricing. Pricing models are not necessarily company-specific, so it depends on what they believe is being shared and impeding competition,” Bam was quoted as saying.
The Sunday Times Business Times published comments on the raids from First National Bank portfolio manager Wayne McCurrie, Sasfin Securities chief global equities strategist David Shapiro, and Ashburton chief investment officer Patrice Rassou.
McCurrie was quoted as saying that he was surprised by the raids because the life insurance sector did not have big monopolies.
“We have plenty of players in the life insurance industry. They might all be quite big, but there are not one or two players, like in telecom, or one player, like Eskom in the power sector. All I know is that this is a well-represented industry with plenty of players and competition is fierce.
“If one player is charging excess fees or too much for a service, competition will sort that out because the other players will come in and undercut them. This is not an industry where there is a lack of competition between the players.”
Shapiro and Rassou were also of the view that this country’s life insurance sector was highly competitive.
Shapiro was quoted as saying that life insurers monitor what their rivals are doing, and when it comes to negotiating fees for products and services, much of the market intelligence often comes from prospective clients.
Rassou said the raids by the Competition Commission were “not unique”: there has been an increase in investigations by competition authorities around the world in the wake of higher inflation.
He said the best evidence of possible price fixing would be the margins achieved by companies investigated by an antitrust authority.
The financial services sector “took quite big losses during Covid” and was only just starting to recover.
“I don’t think one could say that our companies have excessive margins or huge levels of profitability. They are recovering from very depressed levels.
“Then in the insurance industry, you tend to find that pricing is cyclical and driven by reinsurance rates, and this leads to a level of correlation in the sense of everyone tends to price according to the cycle.
“To go there and go one step further and say there is collusion is not something that is easy to judge from the outside, unless the authorities have a whistleblower with inside information. That is not really evident,” Rassou was quoted as saying.
What made collusive practices difficult was that brokers who sold insurance products often obtained two or three quotes for prospective clients. In terms of their mandate, brokers would try to get the best price for clients.
