Wednesday, 6 November 2013

A new state-owned insurance company?

Let me say two things first, before asking a question about the new state-owned KiwiAssure insurance company that David Cunliffe proposed as a new Labour policy over the weekend.

First thing is, none of us was born yesterday, we recognise that politics is politics, and we know that you don't expect to see detailed economic analysis in a speech to a party conference of why a new policy was thought up. You may not see any economic basis at all for some policies, and a good deal of the rationale was more nationalistic than anything ("Labour will confront the challenges of an insurance industry that is no longer Kiwi-owned", with the aim of "local ownership that keeps profits here").

Second thing is, I'm very pro-competition. I spent more than 12 years at the Commerce Commission, where the Commerce Act required us "to promote competition in markets for the long-term benefit of consumers within New Zealand", and I was minded that way even without the crack of the legislative whip. So I generally look pretty kindly on ideas that aim to improve competition and consumer choice, keep suppliers efficient, and keep costs down for buyers, which are among the stated objectives of KiwiAssure.

Currently, according to Mr Cunliffe, service from the insurance industry "we know from painful experience has not met Canterbury’s needs", whereas "Just as KiwiBank gave us a customer-focused, low cost Kiwi-owned bank, KiwiAssure will give everyone a choice for better service, competitive premiums and local ownership that keeps profits here...And like KiwiBank, it will offer customers an alternative and raise the bar across the insurance industry".

I suppose what's missing for me, thus far, is this: where's the solid evidence that the insurance industry is indeed non-competitive and inefficient?

Now, I know that it's not going to be an easy judgement to make: assessing whether an industry is genuinely competitive, as opposed to collusive or sleepy, is always a tricky exercise. But so far I haven't seen any good evidence put on the table that would convince me there's a screamingly obvious competition problem.

Premiums going up (if they are going up, which they likely are after the Canterbury and Wellington earthquakes) doesn't cut it as evidence on its own. Premiums can go up (and down) for all sorts of genuine, market-driven reasons. You don't start state-owned avocado farms just because avocados have hit $3 in the veggie shop.

For another thing, there look to be quite a lot of players: I counted 96 companies with full licences on the Reserve Bank's register of licensed insurers, and if the Insurance Council can be said to represent the bigger ones, then there are 29 companies on the Council's membership list. The number of players isn't, obviously, a slam dunk indication that there is lots of competition, and if the data in this article, Doubts cast on KiwiAssure's influence, are correct, then there's certainly one quite large player (IAG, which includes AMI, NZI, and State) with some 40% market share. So it's not a case of 29 (or 96) equals fighting it out tooth and nail. It's possible there could be some sort of cosy or dozy oligopoly operating, but normally, though, you'd expect an industry with that number of participants to be workably competitive.

The existence of the whole insurance broker industry is also somewhat suggestive that there are, indeed, competing companies offering different customer propositions. There are other interpretations (insurance is so complex you need professional help through the process), but on its face it looks as if there are people running around getting you competitive quotes from alternative providers.

What I'd like to see, and I've said so before - 'Competition to the rescue - again' - is that, if people feel that an industry is not competing for their business and isn't giving them the choice, prices and services they could reasonably expect, there should be an express power given to the Commerce Commission to look into it. You'd think they have the power already, but they don't, or at least not in any straightforward sense.

So let's see the evidence first. The policies can come second.


  1. I am in two minds. Whether or not there is enough competition, there is clearly market failure in the ChCh market. The insurance companies are not paying the claims that the owe their customers, and we wont talk about the ones that went broke. There maybe are 29 insurance companies, but actually - if you want the normal sort of insurance that ordinary people want (house, personal and car) there are not really 29 companies to choose from. One company has nearly half the country's business and many of the others are either tiny or specialist (e.g. rural insurance). So, normally, in these circumstances I would support a state owned company to provide an honest broker role. But then I recall that we already have 2 state owned companies EQC and ACC and both of them are complete dogs. Without their legislated monopoly they would be out of business tomorrow I suspect. So what I would like to see is some decent regulation to balance up the power imbalance that occurs in practice whenever real disasters hit people.

  2. Thanks for the comment. I don't have any direct feel for the ChCh market, I know, and I have no feel at all for whether what's happening is typical of the sort of headless chicken syndrome you might get after any big disaster (I wonder what's happened in the US post-Sandy or Japan post-tsunami?), or whether we've got a bijou problemette of our own. And if we have a problem, I lean towards where you're going (a stab at decent regulation) as a first response


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