Insurers pose a premium-level problem

Insurers pose a premium-level problem

We are great at carrying out clean ups in this country – cleans ups that occur after lengthy periods during which the area affected has been allowed to go to rack and ruin.

Back in the early Noughties, the Enterprise Minister presided over one such ambitious tidy up of the non-life insurance sector.

This came about after years during which judges handed out – with gay abandon – large awards to people suffering or claiming to suffer from all variety of injury. Ms Harney was finally nudged into action when it became clear that the future of many local businesses and community activities found themselves under threat.

I can recall that events at the local community hall, down the road, were faced with cancellation because of the large premiums being demanded by insurance companies.

Minister Harney – in many ways, an able and hard working politician – pressed ahead with the establishment of a new body, PIAB – the Personal Injuries Assessment Board. The idea was that the assessment of appropriate levels of awards for various injuries would be carried out by an independent body which would refer to a ‘book of quantum’ offering detailed guidance.

Such an approach has appeared to work well in Britain. The reforms met with considerable resistance within the legal profession. Some would argue that in the past, the insurance industry has dictated the pace of reform with its own ulterior motives in mind.

They have a point – the industry secured a reduction in the role of juries yet the cost of premiums did not come down as anticipated. All that said, the PIAB – in the early years – appeared to succeed in reining in awards and this was reflected in the cost of insurance.

We have to be careful, however, in linking the two. Other factors intervene. At first, the financial crash may have served to rein in costs as the ability of firms to meet such costs were reduced.

But the crash also led to a big drop in interest rates worldwide. This meant that insurers could no longer make large profits on their large cash hoards from customers. In recession conditions, some companies, arguably, undercharged. That is, they did not put aside sufficient funds to meet the cost of awards down the line.

A good example is the British insurer RSA, which, at the end of 2018, was fined €3.5m by the Central Bank – the regulator concluded that the Irish division had under provisioned as part of an effort to boost recorded profits. But on occasions, the opposite is the case.

Many insurers regard Ireland as a good market in which to operate right now. The economy – at least across much of urban Ireland – is performing strongly. Insurers, in common with most other corporates, are reluctant – for good reason – to give breakdowns of their profits.

In the past, for example, mobile phone operators made big profits in Ireland, but could never be made to admit to the fact in any detail. Cross subsidisation is the name of the game for many multinationals.

In the world of non-life insurance, climate change - one suspects - is boosting this phenomenon. Insurers offload risk onto the reinsurance market – many reinsurers have been hit badly, in recent years, by climate-related disasters.

The costs of a huge disaster in California, Portugal or Australia tend to be borne widely. Insurance companies are not transparent when it comes to offering breakdowns of revenues and profit sources. There are sound competitive reasons for such reticence. However, the authorities here could do much more to secure such breakdowns – on a confidential basis – so that they can begin to get a real sense as to whether proper competitive markets exist.

Insurers pose a premium-level problem

Dorothea Dowling, as long serving claims manager with CIE, was a major figure in securing the Harney reforms. She went on to serve as the first chairperson of the PIAB. She is currently working on a doctorate on the insurance companies and their accounting practices. She has suggested the industry has inflated costs to make the market less attractive to new entrants.

In July 2017, the EC directorate general for competition carried out targeted raids of motor insurance providers as part of a probe into an alleged cartel. This investigation remains ongoing. At the time, one lawyer – Jason O’Sullivan- described this as a "seminal moment for both the Irish insurance industry and their consumers".

A separate investigation by the Competition and Consumer Protection Commission is also continuing, but is behind schedule. Many are concerned that this body is simply too poorly resourced. Lawyer bodies and insurance industry representatives like to point the finger at each other when it comes to allocating blame for what amounts to a de facto market failure across much of the non-life insurance world.

Colm Croffy, the head of a group that represents festivals and events organisers, has pointed to a near eightfold increase in the cost of cover for events, forcing many to consider closure. Play group operators have been facing a similar surge in premiums being demanded.

The persistence of high awards, particularly at lower court level, is - if anything - providing insurers with a pretext to charge ever high premiums. Recently, a government personal injuries commission, chaired by Mr Justice Kearns- a former president of the High Court – produced some interesting findings. It concluded that the average motor claim award, here, is worth almost €21,000 compared to €4,000 in the UK and €1,500 in France.

Accountants KPMG put the average soft tissue award in Ireland at €17,335 compared to €4,000 in Britain. Judges have been instructed to slash payouts. There are also calls to establish a new Garda insurance fraud division.

The Government and Central Bank have come in for criticism for dragging their feet in tackling the problem. Peter Boland, director of the Alliance for Insurance Reform, questions why the Central Bank ditched its private motor statistics back in 2015 and also got rid of the Blue Book, "an absolute reference point for data supervision", according to him.

He questions suggestions from the industry that their members lose money during certain points in the business cycle, contending that the industry - as a whole - made €1.7bn in profits in Ireland over the ten years to 2014. In 2016, the then minister in charge of financial services Eoghan Murphy accepted that it was "difficult to verify industry explanations for higher premiums."

A cost of insurance working group was set up to examine a 40% surge in premiums. Mr Murphy, however, cautioned that "in developing solutions, we have to be very conscious of the need for a stable insurance sector."

Peter Boland believes that the objective of industry stability is being placed ahead of that of consumer protection by the Central Bank. A new approach may be needed by the State.

This could involve the establishment of a new State agency working under the Ntma umbrella bargaining on behalf of policyholders with the insurance companies so as to ensure that premiums were affordable from the perspective of both parties. Another big clean-up is needed and let’s hope that when it is completed, there is regular maintenance carried out at the site.

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