Peter Dutton wants to break up insurers and investors are fearful, but should they be?

Some investors are worried that Peter Dutton wants to break up insurers. Not just because he is in with a chance at the forthcoming federal election, but his ambitions appear legitimate. You cannot say at least some investors are worried – Suncorp (ASX:SUN) fell over 20% in a single day earlier this week. How legitimate is the threat and how could companies like Suncorp, as well as QBE and IAG, be impacted? If companies do break up, what will happen to investors’ shares?

Peter Dutton wants to break up insurers

Insurers are peculiar companies. You buy their policies because you hope you’ll be helped if ‘worst comes to worst’. But it rarely happens, and if doesn’t you’re not getting your money back. If the worst does come to worst, there’s no promise you’ll be helped – insurers may find loopholes to deny helping people.

In many instances, people have no choice but to have insurance – if you don’t have health insurance and earn above a certain level on income, you may be liable to pay a ‘Medicare levy surcharge’ on top of your regular ‘Medicare levy’ which is on top of the tax you already pay.

Insurers are not a liked industry – people often feel they’re being ripped off. Peter Dutton has in recent days claimed people pay too much for insurance – this results in some being ‘ripped off’ and others opting out of it altogether. He already threatened divestments for supermarkets and said on Sky News last Sunday the same thing may be on the table.

‘We need competition, we need depth in the insurance pool and we need to make sure that we’re not being ripped off by insurance companies,’ Dutton said. If you feel ripped off by insurance companies, his comments sound amazing. To be clear, he has not formally called for divestment and his colleagues have confirmed this is not an official policy, at least not yet. But clearly, something will give.

We don’t think any more than a handful of people would switch their vote just because of this, but if you think the cost of living is too high, you might find his comments amazing. Insurance has grown 30% over the last 2 years according to the ABS – four times the rate of CPI.

On the other hand, if you’re an insurance company or an investor…not so much.

Insurers and their investors are not happy

Insurers are doing just what you’d expect…defending themselves. The boss of the Insurance Council of Australia, has claimed rising premiums can be attributed to the rising risk (and incidence) of natural disasters, and a break up would not solve this problem.

‘We’re going to need to find a way to spread that cost across the community more broadly,’ he told ABC RN Breakfast. ‘And it’s a difficult discussion to have. I wish it was as simple as divestiture – there is not a silver bullet here for this problem’.

His comments may appear fair, although a high school economics student would know that industries in an oligopoly state are price makers whilst industries in competitive states are price takers.

Economist Alexander Sanchez, a former advisor to Anthony Albanese and General Manager of Policy at the ICA, wrote an op-ed in the AFR. He warned that the alternatives to private insurance were worse – having taxpayers foot enormous bills, or having people have to fend for themselves. Moreover, he warned that regulating the industry would be worse – there would be better ways to force prices down, such as more efficient supply arrangements or by easing taxes like stamp duties or fire levies.

What if insurers were broken up

Let’s leave the arguments to one side. What would happen in the event of a divesture for companies like Suncorp and QBE as well as for their investors?

If what has happened in other sectors are any guide (particularly the resources sector), investors would potentially have the option to hold shares in the ‘spin-off’ companies. To what extent, and whether or not new investors could buy in, would be up to the specifics of the individual deal.

This may leave investors with the question of whether they should own both companies or just stick with one? We’ll save the question for any specific deals when they occur, because we can only speculate. But if the insurers’ claims are true that consumer insurance in Australia is low-margin (insurers claim only $5 in profit is collected from every $100 paid in premiums), stick with whatever division is sticking with higher-margin corporate insurance.

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