Insurance costs rise with return of the brass neck
Published 20/09/2015 | 02:30
A massive war of words has broken out among everyone connected with the insurance industry. The row takes me back about 20 years, when the Irish motor insurance industry was a disaster - and I was charged £1,850 (€2,349) for my first motor insurance policy. It is a lot of money today. It was a fortune back then.
The problems in the early 1990s were lack of competition, personal injuries fraud, high legal costs, huge personal injury court awards by judges and a lack of will on anybody's side to concede ground. Everybody in the sector blamed everybody else.
Well, it looks like it's all kicking off again.
In recent weeks all of the above, except lack of competition, have surfaced in a new wave of recrimination about rising insurance premiums. The suspicion is always that insurers are fleecing customers while blaming lawyers, courts and fraudsters.
The reality is a little different. After years of cheap insurance pricing in a battle for market share, the sector has been losing money. There are lots of different reasons, but the biggest problem seems to relate to motor insurance in particular.
The Injuries Board was set up after the last major review of the whole system. The Injuries Board has worked well - but there are problems with the way the system is being gained. Judges appear to be incredibly generous in compensating any damage to incredibly delicate Irish necks.
Whiplash accounts for 33pc of all the money spent by insurers on claims. Average whiplash payouts are around €15,000 - four times the figure for the UK. The industry says that 60pc of litigation claims goes on legal costs. Cases go before the Injuries Board first - but 40pc of its injuries awards are rejected. This will only occur where the chances of getting a higher award through the courts are much better.
The Central Bank is due to publish a report into the sector in the coming weeks which will look at issues like payouts. But in the background, the Central Bank is concerned about solvency ratios and wants insurers to set aside more capital anyway. Premiums will continue to rise.
Insurers were under-pricing risk in recent years as they lost €250m in Ireland between 2010 and 2014. Motor claims appear to be the biggest part of that. In 2013, the industry lost €200m on motor insurance alone.
If it is true that customers are being fleeced now to fund insurance industry mismanagement in the past, then it is also true that customers benefited from under-priced insurance in the past anyway.
The question is what happens next?
There is a real danger that competition will evaporate from the sector as different players pick off different market segments they will go after. Others might withdraw from some types of insurance entirely.
During the week, FBD secured a €70m investment from Canadian private equity investor Fairfax. This convertible bond will allow the insurer to meet new capital requirements but it will have to pay Fairfax 7pc per year on the money. Fairfax can convert the bond into equity after three years. Or if the FBD share price goes above €8.50 per share for more than six months, the loan can convert to a 19pc stake in the Irish insurer before the three years are up. This is a win/win for Fairfax - securing a 7pc return on its money or landing a 19pc stake in FBD down the road. FBD also benefits by getting out of an immediate short-term cash crunch.
Fairfax will not want FBD messing around with whiplash and fielding fraudulent slip and sue claims, but has given a strong vote of confidence in the insurer's future in business and farm insurance. Don't expect FBD back in motor insurance any time soon.
The Central Bank has also been remiss in recent years by letting this industry crisis build. The solution for the sector may involve revisiting the claims process, the courts system and the value of payouts. But once the legal process is in the spotlight, don't expect major change any time soon.
Willie Walsh's Aer Lingus bargain clear for take-off
The value of something is what somebody is willing to pay for it. The value of Aer Lingus to IAG may end up being a lot more than the €1.36bn takeover price. But that doesn't mean Aer Lingus did a bad deal, or could have got any more from anybody else.
The Irish airline is worth more to Willie Walsh's IAG than to anybody else. IAG plans to grow Aer Lingus long-haul passengers from 1.3 million in 2014 to 3.7 million in 2020. This is a lot more than Aer Lingus's own previous target of 2.3m. If achieved, it could add 60p per share to the value of IAG by 2018 according to Goodbody stockbrokers.
With IAG's market cap currently at around £11.82bn, an additional 60p would add around £1.18bn (€1.6bn) to the value of the British airline group. Bear in mind it just bought Aer Lingus for €1.34bn.
A target is not money in the bank and no expansion of that size could happen without serious investment in new runway capacity by the Dublin Airport Authority.
So it was music to Willie Walsh's ears that the DAA is examining a new plan to build a second runway at Dublin. The old plan had been in place back in 2007 but had to be shelved as the economy crash-landed. The grant connected to the plan was valid for a 10-year period so it remains valid.
The DAA is also committing to a major €60m refurbishment of existing runways.
For Aer Lingus to achieve the new IAG target for long haul, it would have to fly an average of 480,000 additional long-haul passengers per year, every year from 2015 to 2020. That is over 9,000 per week. In reality growth would be skewed closer to 2020 but it is still a lot of luggage.
If achieved we will see IAG deliver on significant job growth for Aer Lingus. Add on the additional North American business that rival airlines will target, and Dublin Airport looks set to become a very busy place indeed.
Flies in the ointment here include plans by other European airports to have their own US immigration operations. The long-haul target for Aer Lingus is also being set at the height of an aviation travel boom driven by cheap credit and cheap fuel.
Either way, Dublin looks set to benefit.
Oil price slump still weighing down Tullow
Tullow Oil's tale of woe continues. This time it is in Uganda - home to one of its biggest oil finds.
Tullow found oil resources of about 1.7 billion barrels in Uganda and a further 600 million barrels in Kenya. However, the slump has cast doubt on the countries' ability to fund full development of the resources - which would include a refinery and a 900-mile pipeline. In the latest twist, the Ugandan government had intimated that the pipeline route, already agreed to go through Kenya, could in fact go through Tanzania.
The rethink might be driven by the need to find the cheapest route, which would favour Tullow and its partners - but analysts suggest it could mean further uncertainty around the time frame for completing the project and getting the oil out of Uganda.
One upside is that development and extraction costs will fall as the industry suffers, and by the time the pipeline is built, oil prices may well have bounced back.
But in a sector that is being squeezed, any kind of uncertainty is being punished by investors. Tullow shares are trading at 207p, down 50pc since January and down 83pc in less than two years.
Sunday Indo Business