'Stress tests' plan for insurers to examine their reserve funds
THE Central Bank has kicked off a major review of general insurers' reserving levels to make sure the industry isn't at risk of another Quinn Insurance-style collapse.
The Irish Independent understands that the Central Bank has written to major insurers in recent days asking them for detailed information on how much cash they had set aside for future claims as of June 31.
Insurers are also being asked how their reserve levels will perform against a 7pc rise in claims inflation over the coming years, and how they will cope with a 30pc "one-off step change" in personal motor claims.
Another section of the review asked them to analyse what factors could lead them to fall below the Central Bank's minimum solvency requirements.
"It's like a stress test for insurers," one senior industry source said, though some sources rejected this, saying it wasn't "as broad" as the stress tests banks were going through.
The test comes against a backdrop of significant "reserve releases" from Irish insurers in recent years -- a mechanism that allows them to take money out of their claims reserve and put it back into the business.
Releasing reserves creates the appearance of profits in less profitable times, and allows companies to price more competitively than they might otherwise be able to.
"It's essentially reserves cheating," one industry source said. "It allows you to do things you wouldn't otherwise be able to do."
Senior industry sources said there was anecdotal evidence that some companies were using reserve releases to support "inappropriate" pricing that was putting pressure on premiums across the industry.
The Central Bank is likely to explore this area, though the main area of concern will probably be whether reserves releases have gone on to such an extent that reserves have fallen to levels that aren't prudent.
Any issues uncovered by the review will be dealt with on a "case-by-case" basis, and insurers may be asked to reassess some of their reserves policies, the Irish Independent understands.
Insurers have broad discretion on reserving matters, and can take their own view on things like the likely time to settle a claim, the likely rate of claims inflation, and the likely incidence of claims.
If the review discovers significant discrepancies in insurers' views on reserving, there may be a move toward some standardisation to ensure every company is pricing for an "appropriate" level.
The focus on reserves comes after inadequate reserving at Quinn Insurance contributed to a €740m call on the Insurance Compensation Fund, which will ultimately be funded by Irish policyholders.
"They have to make sure they don't have another Quinn," said one insurance source.