PUBLIC COPY ISSN NO. 0114-2720 J3965 Decision No. 391 Determination pursuant to the Commerce Act 1986 in the matter of an application for clearance of a business acquisition involving: CGU Plc and Norwich Union Plc The Commission: M J Belgrave (Chair) M N Berry P R Rebstock Summary of Proposed Acquisition: CGU Plc and Norwich Union Plc to merge, by means of a scheme of arrangement between Norwich Union and its shareholders. Determination: Pursuant to section 66(3)(a) of the Commerce Act 1986, the Commission determines to give clearance for the proposed acquisition. Date of Determination: 9 May 2000 CONFIDENTIAL MATERIAL IN THIS REPORT IS CONTAINED IN SQUARE BRACKETS [ ] 2 TABLE OF CONTENTS THE PROPOSAL ..........................................................................................................................................3 THE PROCEDURES.....................................................................................................................................3 THE PARTIES...............................................................................................................................................3 CGU............................................................................................................................................................3 NORWICH UNION .........................................................................................................................................3 OTHER RELEVANT PARTIES...................................................................................................................4 OTHER GENERAL INSURERS..........................................................................................................................4 INSURANCE COUNCIL OF NEW ZEALAND.......................................................................................................4 BACKGROUND ............................................................................................................................................4 INTERNATIONAL TRENDS IN INSURANCE .......................................................................................................4 REGULATORY ENVIRONMENT .......................................................................................................................5 DISTRIBUTION OF INSURANCE PRODUCTS......................................................................................................5 BROKERS .....................................................................................................................................................5 BANKS.........................................................................................................................................................6 CAPTIVE INSURANCE....................................................................................................................................6 REINSURANCE..............................................................................................................................................6 MARKET DEFINITION...............................................................................................................................6 INTRODUCTION ............................................................................................................................................6 THE RELEVANT MARKETS ............................................................................................................................7 Other Insurance Products .......................................................................................................................8 CONCLUSION ON MARKET DEFINITION..........................................................................................................9 COMPETITION ANALYSIS ........................................................................................................................9 INTRODUCTION ............................................................................................................................................9 The Dominance Test .............................................................................................................................10 THE MARKET FOR DOMESTIC HOUSE AND CONTENTS INSURANCE ...............................................................11 Market Concentration ...........................................................................................................................11 Existing Competition.............................................................................................................................12 Constraint from Potential Competition..................................................................................................13 Countervailing Power ...........................................................................................................................14 Conclusion on the Market for Domestic House and Contents Insurance.................................................15 THE MARKET FOR DOMESTIC MOTOR VEHICLE INSURANCE.........................................................................15 Market Concentration ...........................................................................................................................15 Existing Competition.............................................................................................................................16 Constraint from Potential Competition..................................................................................................16 Conclusion on the Market for Domestic Motor Vehicle Insurance..........................................................16 THE MARKET FOR COMMERCIAL PROPERTY INSURANCE..............................................................................16 Market Concentration ...........................................................................................................................16 Existing Competition.............................................................................................................................17 Countervailing Power ...........................................................................................................................18 Constraint from Potential Competition..................................................................................................18 Conclusion on the Market for Commercial Property Insurance..............................................................18 THE MARKET FOR COMMERCIAL MOTOR VEHICLE INSURANCE....................................................................18 Market Concentration ...........................................................................................................................18 Conclusion on the Market for Commercial Motor Vehicle Insurance......................................................19 THE MARKET FOR COMMERCIAL LIABILITY INSURANCE ..............................................................................19 Market Concentration ...........................................................................................................................19 Conclusion on the Market for Commercial Liability Insurance ..............................................................20 OVERALL CONCLUSION.........................................................................................................................21 DETERMINATION ON NOTICE OF CLEARANCE...............................................................................21 3 THE PROPOSAL 1 Pursuant to section 66(1) of the Commerce Act 1986 (the Act), CGU Plc and Norwich Union Plc (the Applicants) gave notice to the Commission dated 6 April 2000 (the Application), seeking clearance to merge by means of a scheme of arrangement between Norwich Union and its shareholders under section 425 of the United Kingdom Companies Act. 2 This Application is part of a decision to merge the global activities of the ultimate parent companies. In New Zealand the scheme of arrangement between CGU and Norwich Union has been considered only to the extent that the proposal affects the relevant New Zealand markets. THE PROCEDURES 3 Section 66(3) of the Act requires the Commission either to clear, or to decline to clear, a notice given under section 66(1) within 10 working days, unless the Commission and the person who gave the notice agree to a longer period. An extension of 10 working days was sought by the Commission, and agreed to by the Applicants. Accordingly, a decision on the Application is required by 9 May 2000. 4 The Applicants sought confidentiality for certain information contained in the Application, and a confidentiality order was made in respect of that information for a period of 20 working days from the Commission’s determination of the Application. When the confidentiality order expires, the provisions of the Official Information Act 1982 will apply to the information. 5 The Commission’s determination is based on an investigation conducted by its staff, and their subsequent advice to the Commission. 6 In the course of their investigation of the proposed acquisition, Commission staff have discussed the Application with a number of parties. These parties included other insurance companies, trading banks, insurance brokers, and the Insurance Council of New Zealand. THE PARTIES CGU 7 CGU is an international company operating in the United Kingdom, Europe, and other international markets including Poland, Ireland,