Why you are picking up the tab for company's losses
Published 26/04/2011 | 05:00
Quinn Insurance has run up losses so large that not even the new buyers of the company (Anglo Irish and Liberty Mutual) are prepared to absorb the full amounts involved.
Like any insurance company, Quinn Insurance has claims from customers coming due all the time and there has to be enough money to pay out claim.
Big losses wipe out the reserves of insurance companies, leaving them without enough money to meet claims. This is what has happened at Quinn. As a result, extra cash is needed.
Without this, Quinn Insurance customers making legitimate claims might not get paid.
To avert this, the Government uses the Insurance Compensation Fund.
The fund works simply. The government deducts 2pc from the insurance revenues of the other firms and puts the money aside.
In turn, the insurance company puts a levy on its customers. In other words, the whole industry bails out the company in trouble.
It is difficult to say for how many years the Quinn levy might apply, but when it was done for PMPA the deductions were made over the course of 10 years.
The Government is already on the line in the Quinn Insurance deal via Anglo Irish Bank, which is a nationalised lender since September 2009.
That firm is putting some fresh money into Quinn Insurance, but it does not want to use its money to pay for all the old and existing claims on its books.
As a result, another solution has been arrived at.
The application for this €620m will be made by the administrators to Quinn soon and it is likely to be granted.