Saturday 10 December 2016

Insurers told not to make up for losses by investing in risky assets

Published 26/05/2016 | 02:30

Insurance chief Kevin Thompson concerned about the cost and frequency of personal injury claims
Insurance chief Kevin Thompson concerned about the cost and frequency of personal injury claims

INSURANCE companies have been warned not to try and compensate for low returns in their core businesses by investing funds in risky assets.

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Central Bank Governor Philip Lane told a conference in Dublin yesterday that insurance companies should make up for losses in their main insurance activities by repricing policies.

“The focus should be on an appropriate return from core underwriting activity,” he said.

Motor insurance premiums have shot up by 34pc in the year up to April, according to Central Statistics Office figures. Home insurance premiums are up almost 10pc in the same period.

Firms are losing money on general insurance, and are unable to make good the losses from their investment income due to low interest rates. In the past, underwriting losses were compensated for by investment gains.

Dr Lane told Insurance Europe’s international conference that life and general insurers should not try to make up for low returns in their main businesses by investing in riskier assets.

“Excessive risk taking by insurance firms can be a source of financial instability, both directly and indirectly through the interconnections between the insurance sector, other financial intermediaries and financial markets,” he said.

The governor accepted that the low-interest rate environment was “clearly a challenge” for life insurers, such as those who have traditionally included guaranteed returns to policyholders.

“It may be tempting to seek returns from non-traditional and non-insurance activities; however, this strategy has clearly been a source of fragility for firms in the past,” he said.

General insurers claim they are losing money, particularly on motor policies.

Representative body Insurance Ireland, which is headed by Kevin Thompson, has blamed a rise in the cost and frequency of personal injuries claims.

But low investment returns, tougher regulatory rules on the level of reserves they have to keep, and an unsustainable price war have also been cited for the losses.

Insurers have been hit with an €90m bill for the collapse of Setanta Insurance. It sold insurance policies exclusively in Ireland but was registered in Malta. This decision is being appealed to the Supreme Court.

Dr Lane said the main European supervisory body, the European Insurance and Occupational Pensions Authority (Eiopa), should look into authorisation processes and standards for insurers internationally.

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