Watchdog sniffing around IAG’s latest insurance buy

RACWA’s insurance arm has a 60 per cent market share.

Insurance Australia Group’s latest deal to buy the Royal Automobile Club of Western Aust­ralia’s insurance business is expected to face heavy scrutiny from the Australian Competition and Consumer Commission.

Market experts believe the competition watchdog will be wary of the deal after IAG paid $855m in November to buy 90 per cent of the RACQ’s insurance business.

In that transaction, $333m was to be paid upfront for an entry into an exclusive 250-year distribution agreement, and $522m when the deal was finalised, adding $1.3bn to IAG’s gross written premiums.

It has 1.7 million members and holds the No.2 position in Queensland.

This transaction involves a payment of $400m for the RACWA’s insurance operations, and $950m for a distribution and brand licensing agreement.

It will add $1.5bn of gross written premium to IAG and offer access to its 1.3 million members while creating $100m of pre-tax synergies.

RACWA has a 60 per cent market share, and if the ACCC looks at the market nationwide, rather than statewide, it may determine that IAG’s market share is too large.

The underbidder for RAC WA was Allianz, which owns the Royal Automobile Association of South Australia, so concentration of the market as a whole could be an issue.

The provisional date for the ACCC findings was initially May 14 but has been delayed, as has the ACCC’s probe into the Queensland deal, originally set down for May 22 but also pushed back.

The competition watchdog, under Gina Cass-Gottlieb, is taking a tougher stance on market concentration, and the insurance industry is front of mind amid higher living costs, when essential household bills, such as insurance, are increasing annually.

IAG paid more for the WA business, say market experts, because it was less strategically challenged than the Queensland operation, but had a similar market share.

In Queensland, the RAC had withdrawn from providing insurance for CTP green slips, and there were higher claims on the back of more extreme weather events such as floods and fires.

Barrenjoey advised RAC WA, while IAG was advised by Goldman Sachs.