Central Bank told insurers to raise their prices to cover the cost of claims
Published 09/01/2016 | 02:30
Several insurance companies were instructed by the Central Bank to review their prices because they weren't charging enough to cover claims costs and expenses.
In a letter to Finance Minister Michael Noonan in August last year, then Central Bank Governor Professor Patrick Honohan said that, by failing to charge adequate premiums, the companies were burning through their reserves.
Prof Honohan urged the insurers to take a number of measures, including revising their prices and underwriting policies to plug losses.
"In effect, by failing to charge premiums sufficient to cover claims costs and expenses, several Irish general insurance companies have eroded their capital base," Prof Honohan wrote.
Consumers have been hit, in particular, with soaring premiums for motor insurance.
Official figures show the average premium has risen by 26pc in the past year, and the sector has warned of similar rises to come this year.
A survey by the AA, released just after Christmas, found more than one third of motorists saw the cost of their insurance rise by up to 50pc last year.
In the letter, the then governor argued that before the financial crisis, the insurance industry enjoyed premium growth and increasing employment. But a number of non-life insurance firms took an optimistic view of the economy, built up unsustainable costs, and followed an "imprudent pricing and underwriting approach." This resulted in companies' business plans becoming less resilient to risks, such as an increase in the frequency and severity of claims.
"These market conditions, combined with developments including changes in the Irish legal environment resulting in higher claims costs and the increasing frequency of exceptional weather events, have impacted the performance of the larger insurers."
Fianna Fáil's finance spokesman Michael McGrath, who obtained the letter under Freedom of Information, said the documents reveal the extent of concern in the Central Bank at developments in the sector in recent years.
"Motorists are absolutely reeling from increases in motor insurance premiums.
"By the end of 2016, the cost of insuring an average-size family car is likely to have gone up in the region of €300. This is a massive hit to disposable income," he said.
"The benefits that were achieved from the work of the Motor Insurance Advisory Board to reduce premiums are now evaporating. I am reiterating my call for the re-establishment of MIAB".
Prof Honohan also suggested that legislation should be tightened to dissuade individuals in firms from lying in information they provide to the Central Bank. He said there have been instances where the Central Bank has been given false or misleading information.
Why this affects you
A rise in premiums will obviously put a dent in our pockets. And consumers are currently being hit with soaring premiums for motor insurance in particular, as drivers are paying the price, in part, for insurance executives' shocking mismanagement of their own companies.
Everyone with motor insurance is paying a 2pc levy on their policy for the management failures and the regulatory mistakes that saw Quinn Insurance having to be rescued.
The AA Motor Insurance survey of over 5,000 motorists revealed that 34pc saw their insurance premiums rise by between 20pc and 50pc when compared with 2014.
Fraudulent activity, high legal and claims costs, poorly resourced regulation, low levels of enforcement and a lack of industry transparency have cost motorists dearly, the AA said.