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New backer seen as necessary

01 Aug 2017

Tower needs to find a new financier after New Zealand’s Commerce Commission declined Vero’s application to acquire the insurer, according to an industry commentator.

As reported in a Breaking News bulletin last week, commission Chairman Mark Berry says the merger could “substantially lessen” competition in the personal insurance market, leaving just Vero and IAG as the only significant insurers in the market.

Michael Naylor, Senior Lecturer in Finance and Insurance at Massey University, told he is not surprised by the decision.

But he says Tower, which was subject to a previous bid from Canada’s Fairfax Financial Holdings, urgently needs to find a new backer.

“In terms of logic, the [Vero] deal had no basis,” he said. “But Tower cannot stand alone. Either it goes back to Fairfax, finds another international backer, or it folds up.”

Dr Naylor understands Vero parent Suncorp may feel aggrieved, because IAG’s purchase of Lumley was approved by the commission in 2014.

“There may be a feeling of, if they can buy a major player, why can’t we?” he said.

“But the Lumley takeover is regarded by the industry as a mistake. It is what ruined competition in the market.

“Why would the commission make the same mistake again?”

Suncorp says it is disappointed, but is yet to provide any indication of its intentions.

Dr Naylor says there are avenues to appeal, but he “can’t see a court agreeing with Suncorp”.

The commission says the merger would bring together the second and third-largest insurers for domestic house, contents and private motor insurance in New Zealand, leaving only two substantial competitors. 

“The merger would remove Tower as the only independent competitor to Vero and IAG with the scale, brand strength and experience to compete effectively across the breadth of personal insurance markets,” Dr Berry said.

“While there are other smaller competitors in personal insurance, we do not consider that they replicate the level of constraint that Tower imposes.

“Without the competition that Tower provides, there is a real risk that consumers would end up paying higher prices for insurance cover while receiving lower quality, such as reduced insurance coverage.”

 - insuranceNEWS

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