Claim and counterclaim: what is really driving up insurance costs?
New injury payout guidelines, underpricing and ever-increasing fraudulent claims are whipping up a perfect storm for insurers
New guidelines setting out the size of personal injuries awards, published earlier this week, have recommended even higher compensation payouts for the most common claims. This has prompted fears of even more pressure on insurance premiums for the State's two million drivers. It will also heap pressure on insurers to increase reserves.
Insurance Ireland chief executive Kevin Thompson said the new guidelines, when added to changes in lower court limits from €38,000 to €60,000, will have a detrimental knock-on effect on pricing. "It could take five years for some claims to unwind. So if firms have reserved for say €38,000 and they've booked that in their reserves and suddenly the rules of the game have changed, they have to go back in and reserve again and that flows through to current pricing."
The new set of official guidelines recommends that 35 categories of injuries should get higher awards than previously set out.
Pay-outs for whiplash injuries - which can be open to exaggeration and insurance fraud as they are more difficult to disprove - are recommended to be 9pc higher. Under the guidelines, the compensation for a "lower range" soft tissue neck injury, or whiplash, has gone up to €15,700, an increase of more than €1,000. This will have a significant knock-on effect on pricing because whiplash makes up eight out of 10 of all personal injuries claims. Awards here are already almost three times the level of UK awards (€14,500 versus £5,000).
The new recommendations are outlined in what is known as the book of quantum, a general guide to the compensation that should be awarded for various types of injuries, depending on their severity.
The State body that assesses personal-injuries claims - the Injuries Board - must refer to it in all its evaluations for personal-injury claims. But judges only have to "have regard" to the book of quantum.
Insurance premiums - especially in motor, where the average premium is up 70pc in the last three years - continue to rise, with insurers blaming high claims costs and fraud, and consumers pointing the finger at what they see as price-gouging insurers.
Fraud costs the Irish insurance industry an estimated €200m annually.
This estimate is based on an accepted industry standard that for every €1 in fraudulent claims that is detected, another €3 is thought to remain undetected.
The actual figure for detected fraud in Ireland's insurance sector is closer to €50m.
To put this figure in context, total gross written premiums in the Irish market are worth approximately €37bn. The majority of this income is generated from premiums derived from foreign markets, whereby Irish-based firms underwrite in other jurisdictions. The value of domestic premiums is about €13bn.
Based on those calculations, insurance fraud represents less than 1pc of industry losses in a domestic sector that has a turnover of more than €13bn. Thus the figure for fraudulent claims in insurance is far lower than, say, the bad loan provision at many banks. In fact, proportionately, it's probably far closer to the standard accounting approach to 'breakages' in the retail, hospitality and transport sectors.
But many consumers are probably under the impression that insurance fraud and 'compo culture' is a significant driver behind the recent surge in premiums.
Hundreds of thousands are being hit by double-digit rises in insurance costs for a variety of reasons cited by insurers including fraud, underpricing, the collapse in insurers' investment income, the cost of settling claims and increases in awards due to a change in court jurisdictions.
Insurance is a notoriously cyclical sector, with seasonal peaks and troughs. A bumper year for profits can be followed by a record year for payouts. But weather patterns, legal costs, and the standard of driving training and examinations play a far greater role in determining underwriting losses than insurance fraud.
Insurance fraud is a headline-grabber at a time when the industry is facing unprecedented scrutiny on a number of fronts. Irish insurers are currently being investigated over alleged cartel activity by the competition watchdog, an Oireachtas finance committee is examining the rising cost of motor insurance, and government officials are on record over their scepticism at the industry's claims in relation to rising premiums.
Despite a 'perfect storm' of underpricing and increased claims costs affecting the entire industry, in August Aviva still managed to post a €43m profit for the first half of the year, showing a 7pc rise on the same period last year. Aviva Ireland - which has about 18pc of the market - said its operating profit rose by 39pc to €85m for 2015 - up from €61.1m in 2014 - its best performance in five years.
British insurer RSA posted a 2015 operating profit of £523m (€660m) in February, up 43pc on a year earlier.
Although the company said its Irish operations last year saw an operating loss of £26m, much reduced from the £97m loss reported in 2014, RSA chiefs expect to return to an operating profit in Ireland this year.
The reason why RSA - with 14pc of the Irish market - had to inject almost €400m in capital into its Irish operations was because of losses resulting from historic accounting issues and under-provision for claims - not fraud.
The consequences of aggressive competition have left the industry wounded too. Winning market share came at a cost. More policies means more payouts. And intense competition led to under-pricing by motor insurers in a bid to capture more market share, admits Insurance Ireland CEO Kevin Thompson.
"We have publicly acknowledged that this was the case in Ireland, with rates driven too low by over competition in the market and insurers fighting to maintain market share, a process that was also accelerated by new entrants to the market who subsequently collapsed, leaving a financial burden on customers, the State and prudent insurers," he said.
But the Insurance Ireland chief refutes the claim that his members like to play the poor mouth when it's convenient.
"I don't think we're portraying a poor mouth image. We still have a strong sector, we still have a lot of major international players participating in the sector, and we have over 8,000 people employed in the general insurance sector here in Ireland. And as an industry we contribute about €1.8bn in taxes to the Irish Exchequer. We are a solid business and all we've done is highlight that in the insurance cycle we are in the middle of a hardening cycle. All we've tried to do is identify what has exacerbated that. But we're not giving a poor mouth.
"We still pay our claims, we're still here for our consumers. And I think this is a point that gets lost, particularly in the whole fraud debate: our job is to pay claims. And of the thousands of claims that we pay every year, we cannot view every claim with suspicion, and our job is to pay claims as fairly and as quickly as we can. All we've tried to do is build awareness around fraud, and to try and make people understand that it is not free money, at the end of the day the consumer pays for this."
But is the fraud issue being used to distract from wider problems in the insurance industry, such as allegations of alleged cartel activity investigated by the Competition and Consumer Protection Commission?
"We don't overplay or underplay fraud," said Thompson, who is hosting a half-day industry seminar on combating fraud on Wednesday in Croke Park Conference Centre. "If you're asking me is fraud the main driver of the current difficulties we are facing in the marketplace, it's a driver but it's not a main driver. We've been on a campaign for the last 15 years fighting fraud, and even if the market improves in the morning we'll still be fighting fraud. So I wouldn't like to be over-labouring the fraud piece."
However, there was more bad news for the industry recently when it was revealed that officials advising Transport Minister Paschal Donohoe were less than convinced about industry claims that premiums were rising because of rising compensation awards.
In a briefing document released under the Freedom of Information Act, department officials stated that "motor insurers are now imposing higher premium rates to return themselves to profitability or to boost profitability after a number of years of insurers competing for market share, with prices driven down".
The document added: "The question does arise for motor insurers - if motor insurance is so unprofitable why does anybody do it?"
Such scepticism at the highest levels is hardly a vote of confidence in the insurance industry. Do insurers have a trust issue with consumers and the Government?
Thompson rejects this, insisting his industry still has the trust of Irish consumers.
"I haven't seen any statistic or poll which says the public have a trust issue with us. The Competition and Consumer Commission has launched an investigation. And we will cooperate fully with that investigation. But we are also very clear that as we go through the process we will find that we have no case to answer. It's not for me to second guess the Competition Authority. They are well within their rights to launch any investigation they so wish. We will fully comply with it. But we are very clear on one thing: there is no cartel."
But despite renewed efforts by the industry to combat insurance fraud by policy holders, the former president of the High Court has criticised the State's insurers for not seeking the prosecution of people found to have made fraudulent injury claims. Mr Justice Nicholas Kearns, speaking at a June conference on Ireland's soaring personal injury costs and insurance premiums, said: "A particular bugbear of mine is the lack of resolve there appears to be by many insurers to tackle fraudulent claims and fight them to the end."
When fraud is uncovered in civil cases, typically the claimant withdraws their claim without any further repercussions, he said, with insurers failing to make a complaint to the Gardai, who could investigate and refer to the Director of Public Prosecutions.
"Where our members are convinced there is fraud, regardless of the quantum, they will fight it tooth and nail. But there is a grey area: having a suspicion and having proof are two very different things, and you have to give people the benefit of the doubt. I see the industry taking a far tougher line in respect of fraud. If you look at the skillsets they are employing now, they have beefed up their skill sets within each of their companies to fight fraud," insists Thompson.
Sunday Indo Business