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Concerted Practices

The case of sharing price information

between motor insurers in the UK

Dr Luke Wainscoat

Senior Economist, HoustonKemp

11 May 2016

Allens, Sydney

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Economics of information

sharingWhen is competition harmed by information

sharing, and how?

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Consider concerted practice and lessening of

competition separately

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“A person shall not engage in a concerted practice with one or

more other persons if the concerted practice has the purpose,

or has or is likely to have the effect, of substantially lessening

competition.”

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Need a coherent theory of harm

• Facilitate collusion

› Collusion more likely/stable

• Soften competition

› Less uncertainty reduces competition (sometimes)

• Foreclosure

› Firms without information cannot compete

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How often usedPotential theories

• Consistent with

› economic theory

› facts of the case

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Three conditions required for collusion

Condition Potential effects of information exchange

Firms able to

reach

agreement

• Help firms reach agreed price

Cartel is internally

stable

• Help firms to monitor collusion and

determine who has cheated on an

agreement

Cartel is

externally stable

• Help identify who has entered and what

prices they are setting

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All

conditions

must hold

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Conditions required for there to be an SLC

Condition Counterfactual Factual Change due to

conduct

Firms able to

reach

agreement

Cartel is

internally stable

Cartel is

externally stable

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Both conditions need to

hold

Required for SLC All conditions

hold

At least one

condition more

likely to hold

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Soften competition

• Information changes firm behaviour if it alters

expectations about demand or costs

• Effect on competition depends on

› Type of uncertainty, eg idiosyncratic or market

› Firms’ expectations

› Type of competition

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Effect of uncertainty depends upon expectations

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1

2

Cost

$5

Price

$8

Case A: Expect price of firm 2 is $10

Case B: Expect price of firms 2 is $6

Optimal

price is $9

Reduce price

to $7Share price

information

Optimal

price is $5

Increase

price to $7Share price

information

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Example: Informed Sources

• Softening competition

“…the Informed Sources Service increased the cost,

and reduced the benefit, to each Subscriber of

engaging in retail price competition and rivalry”

• Collusion

The agreements to exchange information “were likely

to increase retail price coordination and cooperation”

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Motor Insurance CaseA description of the relevant facts to the case

involving motor insurance firms sharing price

information

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Private motor insurance is sold through three routes

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Insurance Companies

Customer

Affinity

RelationshipsBrokers

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Calculation of insurance premiums

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Cost of Underlying Risk

or Expected Claims Costs

Insurer’s rating model

Expense Recovery

Commercial Strategy

Insurance premiums

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Information flows

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In order for brokers to be able to quote insurance prices to their customers,

Insurance

company A

Insurance

company B

Insurance

company C

IT service

providers

IT service

providers

IT service

providers

Broker A Broker B

Premium

software

calculation

Premium

software

calculation

Quotation

exchanges

Rating

modelRating

model

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Exchanged information

• Insurers have access to other insurers' pricing

information for any risk profile

• Insurers can undertake batch processing to

determine the detailed structure of their rivals' pricing

strategies/models

› Eg input 1000’s of similar risks, changing only the age of the

driver

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Is this conduct illegal under Australian law?

• Current law

› No contract, arrangement or understanding between insurers

› Contract between IT service providers and insurers

• Harper amended section 45

› Arguably a concerted practice. Each firm

knows that their information is being shared

receives price information from all other firms

› Does it substantially lessen competition?

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Effect on CompetitionAn assessment of how sharing of price information

between motor insurers in the UK may have

affected competition

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Effect of information exchange on competition

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Net effect of information exchange

Benefits of information

exchange

Increased

likelihood of

collusion

Market

characteristicsMarket

coverage

Characteristics of

information

exchanged

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Is this type of information likely to aide collusion?

More likely to aide collusion Assessment

Future prices

Commercially sensitive

Non-public

Individualised

Exchanged frequently

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Market coverage Assessment

Large part of the market

Exchange of individualised future prices is a restriction of competition

by object under Article 101 TFEU

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Is the market susceptible to collusion?

More likely to aide collusion Assessment

Transparent prices/outputs

Concentrated market

Simple market environment ?

Stable demand and supply

Symmetric ?

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When is there an SLC?

Condition Counterfactual

(no price

sharing)

Factual (prices

shared)

Change due to

conduct

Firms able to

reach

agreement

?

Cartel is

internally stable

Cartel is

externally stable

?

Required for SLC All conditions do

not hold

Conditions more

conducive to

collusion

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Condition Counterfactual

(no price

sharing)

Factual (prices

shared)

Change due to

conduct

Firms able to

reach

agreement

Cartel is

internally stable

Cartel is

externally stable

Required for SLC Conditions more

conducive to

collusion

Condition Counterfactual

(no price

sharing)

Factual (prices

shared)

Change due to

conduct

Firms able to

reach

agreement

?

Cartel is

internally stable

Cartel is

externally stable

?

Required for SLC All conditions do

not hold

Conditions more

conducive to

collusion

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Efficiency gains from information exchange

• Efficiency gains

› Benchmark performance

› Allocate production to high demand markets

› Track data on consumers, eg history of accidents

› Market shares can signal quality

› Public information exchange can inform consumers

• Indispensability

• Pass-on to consumers

• In this case

› Assist entry by small firms

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OFT DecisionsHow and why the OFT decided to proceed with

this case

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Should the conduct be prosecuted?

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More likely to accept undertakings Assessment

Identifiable competition concerns

Competition concerns fully addressed by

undertakings

Undertakings are capable of being

quickly implemented

Conduct is not ‘serious’

Undertakings do not undermine

deterrence

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What undertakings should be accepted?

• Purpose:

› reduce risk that information exchange would assist collusion

› retain benefit for small insurers

• Principles:

› must not be able to access individualised future data

› must not be able to access data unless this is

anonymous, and

averaged across at least five UK Insurers.

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Key points

• Must have theory of harm that is consistent with facts

and economics

› Most commonly used theory is increased risk of collusion

• Sharing information (even privately) will not always

lead to a collusive outcome

• EU concerted practices law is broader

› EU: Sharing of future price intensions is prohibited (by object)

› Australia: All conduct subject to SLC test

• But, privately sharing future price intensions is

greatest compliance risk

• Undertakings are often accepted

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Contact us

Dr Luke Wainscoat

Level 40, 161 Castlereagh Street

Sydney NSW 2000

02 8880 4821