Tue Feb 18

What is divestiture and how would it stop insurance companies ‘ripping off’ customers?

Written by: Allan Fels, Professor Allan Fels, Professor of Law, Economics and Business at the University of Melbourne and Monash University., The University of Melbourne

Australia is creeping towards adding a divestiture power to its Competition and Consumer Act ^[1].

Under such a law ^[2], the courts, on the recommendation of the Australian Competition and Consumer Commission, could break a firm into parts.

Divestiture is currently used in Australia when the competition and consumer commission considers proposed mergers. Often it will only approve a merger when certain parts of the business are broken up to prevent monopolies.

It has also been used to deal with abuse of market power by electricity providers.

Under the proposed change, a company with substantial market power which breaches the Consumer and Competition Act may be forced to divest assets to restore balance and ensure the market is competitive. This would reduce the possibility of consumers being over-charged.

The Coalition has already proposed breaking up the major supermarkets ^[3], Coles and Woolworths which have been long-accused of price gouging customers.

On Sunday, Coalition leader Peter Dutton signalled ^[4] he was likely to introduce divestiture if elected to stop insurers from “ripping off” customers by charging exorbitant premiums or refusing to pay claims.

Premiums have soared by 16.4%^[6] in the last year as Australia has been hit by major floods and bushfires. Climate Valuation analysts last month warned one in ten properties could be uninsurable ^[7] by 2035.

Repeating his position on Monday ^[8], Dutton said:

If we have a situation where people are being priced out of insurance or they’re deemed an uninsurable risk when they shouldn’t be, that is a failure of the market and we’ll respond accordingly to that.

He said insurance companies had to be responsible corporate citizens and work with their customers.

We’re not going to have a situation where people can’t afford insurance or they’re being priced out of products.

Previously the Morrison government enacted laws ^[9] which enabled a breakup of energy companies in certain circumstances.

Labor has not supported ^[10] a divestiture power. One reason is the Shop, Distributive and Allied Employees Association has opposed such measures.

The case for divestiture

In principle there is a strong case for a divestiture law.

Monopolies and market power stem from an industry being highly concentrated. Often the only way to prevent them from misusing their monopoly is to break them up. The solution could be left to the market or to price regulation or other remedies but these do not address the source of the problem.

A divestiture power has long existed in the United States. It was used to break up oil, cigarettes, and chemicals in the early days of antitrust law. In the mid-80s it was successfully used to break up the AT&T telephone monopoly ^[11]. AT&T controlled both long distance and local calls before it was broken up.

But divestiture is only occasionally used and only when stringent criteria are satisfied.

Some 20 years ago the US Department of Justice proposed a breakup of Microsoft ^[12] – the case was never finalised because of procedural problems. However, the Federal Court laid out many prerequisites before this drastic remedy could occur.

The power has been used in a number of other OECD countries including the United Kingdom ^[13].

When divesting is necessary

There has been heavy use in Australia of divestiture powers to break up gas and electricity monopolies ^[14] in the last 30 years

And there is a strong case for making it a general remedy available for all industries, even though its use would be infrequent.

Importantly, the availability of this sanction would provide an incentive for firms to comply with abuse of market power provisions of the competition law. These provisions are intended to stop powerful businesses from deterring competition by making it difficult for new entrants to join the market.

The sanctions for this part of the law currently are very weak. Fines are rarely imposed and if they are, they are small and seen as a cost of doing business to be weighed up against the benefits of anti-competitive behaviour.

Another reason is that cases take many years. For example, the ACCC case v Safeway ^[16] 19 years ago took seven years before a court resolution.

A divestiture power would make firms far more careful before breaching the law.

Too ‘Russian’?

Occasionally people question the desirability of this power on the grounds it is the sort of thing you would only see in a country like Russia.

In an ABC interview last February, Prime Minister Albanese ^[17] said:

We have a private sector economy in Australia and not a command and control economy […]We’re not the old Soviet Union. What we have the power to do is to encourage competition and encouraging new entrants.

However, most observers agree one of the big failures of the Soviet economy has been failure to divest monopolies in energy, transport and other parts of the economy.

The Coalition’s adoption of a divestiture remedy in three industries is welcome. We need at some point to move to a divestiture power that is available for the whole economy.