Affected market: Life insurance
The OFT's decision on reference under section 22 given on 6 May 2005.
Full text of the decision published 1 June 2005.
Britannic Assurance plc (BA) is a wholly owned subsidiary of
Britannic Group PLC (BG). BG is a financial services group specializing
in asset management and ownership and administration of closed life
funds. Its closed funds relate to life assurance policies, pension
policies and health insurance policies. It has around £10 billion assets
in its life operations. BG has two divisions: the Asset Management
Division, which manages investment portfolios on behalf of individuals
and large institutional clients and the Assured Services Division, which
owns and administers its closed funds through a number of companies, one
of which is BA. Another subsidiary of BG and an entity within the
Assured Services Division is Britannic Management Services (BM) which
provides administration services for BG's companies in connection with
life and pension policies.
Allianz Cornhill Insurance plc (ACI) is the UK subsidiary of Allianz
AG. The life assurance operations of ACI comprise the life assurance
operations of both the ACI life division (LD) and Allianz Cornhill
Direct Life Division (DIL). Its closed funds also relate to life
assurance policies, pension policies and health insurance policies. All
ACI's life operations are also closed to new business. LD closed to new
business in 2001 and from late 2004 the DIL business was also a closed
book. The turnover of ACI life operations in 2003 was £139.3 million.
BG through its wholly owned subsidiary BA acquired the life assurance
operations of ACI on 31 December 2004. The transaction was an agreed
acquisition for the sum of approximately £110 million, with £93 million
being paid on completion and the balance being paid once the completion
valuation has been agreed. The total consideration is unlikely to exceed
On 31 December 2004, the operational assets of ACI (for example,
property, leases, computer hardware and software and third party
contracts) were transferred to BG pursuant to a business Purchase
Agreement. At the same time, the entirety of ACI's life business was
reassured to BG pursuant to a Reassurance Agreement; the entirety of
ACI's life assurance business is now administered by BG, pursuant to an
administration Services Agreement; and investment management of ACI life
funds was transferred to BG pursuant to an Investment Management
A legal transfer of life policies from one company to another requires
court approval pursuant to the Financial Services and Markets Act 2000.
The parties are in the process of obtaining the necessary court approval
but have already effected the transfer of the economic interest.
Details of the transaction were obtained from the parties through direct
enquiry by the OFT. A satisfactory submission was received on 18 March
2005 and therefore the administrative timetable expires on 18 May 2005.
The transaction completed on 31 December 2004 and the four month
statutory time limit was extended to 6 May 2005.
As a result of this transaction BG and ACI's life assurance business
have ceased to be distinct. The UK turnover of ACI's life assurance
business exceeds £70 million, so the turnover test in section 23(1) (b)
of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore
believes that it is or may be the case that a relevant merger situation
has been created for the purposes of section 22 (1) (a) of the Act.
Open and closed life funds
A life fund, whether open or closed, invests premiums from life
assurance policies in, for example, equities, property, fixed interest
securities and cash. When a customer opens a policy in a life fund they
are deemed to purchase units in the fund. A life fund can be open or
closed. An open life fund continues to take on new life assurance
policies whereas a closed life fund is one which has stopped writing
policies to new policyholders and hence is not taking on any new
The parties submit that open life funds tend to close for a variety of
reasons such as there being no new business prospects due to a lack of
strong brand, lack of economies of scale, strong competition or simply
where the sales and marketing costs of obtaining new policies are too
high. The parties further submit that closed funds seldom re-open for
new business, a contention supported by third parties.
Life companies may own open or closed funds or both. The parties own
only closed life funds generally made up of life assurance policies that
have both investment and protection elements for the customer (e.g.
with-profit bonds and endowment policies). According to the parties,
there are many reasons why some companies choose to sell their closed
life funds. This may be because closed funds are non-core operations
tying up management and administrative resources, they absorb capital
that could be redeployed to other core growth areas or because the
medium term run-off becomes less economical over time (see [note
Areas of overlap
The parties' activities overlap in the ownership, management and
administration of their own closed life funds. Neither party is involved
in the management or administration of funds owned by third parties.
Demand side substitution
Policies held in closed funds owned by BG and ACI consist of life
assurance, pension and permanent health. Although closed funds do not
compete with each other because no new business is accepted into the
fund, a competitive constraint on closed funds could arise from open
funds which accept new business. Even though a closed fund does not
accept new business, it must continue to offer competitive terms and
service levels to existing policyholders or risk losing its customers to
If switching or termination costs for policyholders in closed funds are
high, each closed fund could be in a separate frame of reference. This
could lead to policyholders being unable to switch to an open fund in
the event of a price rise in premiums or deterioration in service
levels. If this were the case then the merger may not have an effect on
competition as each owner of a closed fund would already be a monopolist
in respect of its fund customers.
One third party submitted that policyholders can and do switch from one
fund to another (ie from closed to open or from open to open).
Surrendering or terminating a policy may often result in a cost to the
policyholder. The parties were unable to provide termination costs but
said that the ability of owners of closed funds to protect themselves
against switching, by introducing surrender penalties, is limited by the
same rules and practices that also apply to owners of open funds under
the Financial Services and Markets Act 2000.
Supply side substitution
As outlined above, although in principle closed funds could re-open for
business, the evidence suggests that this seldom occurs unless there is
a specific change in the circumstances that led the fund to close in the
first place. This is supported by third party views.
In conclusion, evidence of switching from closed funds to open funds may
suggest that the relevant frame of reference should to be wider to
include open funds. However, given that the OFT concludes that no
competition concerns arise on any definition, it is not necessary to
reach a firm conclusion on the relevant product frame of reference.
Insurers from abroad would need to gain regulatory clearance from the
Financial Services Authority to operate in the UK. Previous cases
involving the UK insurance sector considered the UK as the relevant
geographic frame of reference (see note 2), and the OFT has
found no evidence in this case to suggest that a substantial number of
individuals look beyond the UK for life assurance suppliers. Therefore
the relevant geographic scope is considered to be the UK.
The parties overlap in the ownership, management and administration of
closed life funds which invest the premiums from life assurance
policies. However, given the nature of closed funds and the fact that no
new business is accepted the parties are not considered to be actual or
material potential competitors. The parties manage only their own closed
funds and do not compete with other closed funds. In any event, even if
pre-merger the parties' closed funds were competing with each other,
the parties' combined share of supply of life, pension and permanent
health policies in the UK is less than 10 per cent.
There is no evidence that this transaction raises any vertical
THIRD PARTY VIEWS
No third party expressed any concern.
Although the parties to the transaction overlap in the ownership,
management and administration of closed funds the OFT does not consider
that they are each other's competitor. The parties are involved solely
in closed funds which invest the premiums from life assurance policies
and given that no new business is accepted into closed funds the parties
were not competing with each other pre-merger. In any event, post-merger
the combined share of supply of the number of life assurance, pensions
and permanent health policies in the UK is low and does not raise any
Consequently, the OFT does not believe that it is or may be the case
that the merger has resulted or may be expected to result in a
substantial lessening of competition within a market or markets in the
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.
- The run off problem occurs when there are only a small number of
policies left in a fund after a certain duration resulting in increased
unit costs. This problem might be deferred by selling off closed funds
to consolidators such as BG as these will have more policies from other
closed funds to help meet the expenses of administering and managing the
- See Unum/Swiss
reference decision of 31 October 2003.