Motorists will pay if action is not taken on Setanta Insurance court ruling
Last year the High Court ruled that insurance firms are liable for losses when a rival goes bust - a decision that could see insurers leave the market, writes Ciaran Phelan.
Last year's High Court decision that indirectly makes insurance companies (through their Motor Insurance Bureau fund) liable for the claims costs of a now-defunct overseas insurer has longer-lasting consequences for insurance companies beyond the immediate issue of having to cover the €100m-plus in claims associated with the collapse of Setanta Insurance. The indirect implication of the High Court's decision is that all motor insurance providers in the Irish market will now be held responsible for any potential insolvencies that may occur to their competitors operating in Ireland.
The ruling came as a shock to the insurance sector, which has reverberated further afield as the Irish management of these mostly international insurers attempted to draft a communication to their head offices explaining that they were now responsible for the future solvency of their competitors. From what we have heard, the overwhelming reaction from the various international head offices was one of utter disbelief - could such a situation exist in any modern market?
The parent companies were, and still are, dumbfounded as to how this happened, and we are not being melodramatic when we say that some may consider exiting the Irish market as a result.
Understandably, they are concerned that if one or more of their competitors operates a below-cost model and consequentially goes bust, Irish legislation will automatically make them - and others - culpable for the losses. It begs the question: how would Apple, Google or any other IDA-backed business react to such a position in their sector? Can you see Google setting up here if it were held responsible for the failure of Yahoo?
Setanta's liquidation brought this issue to the courts - and the High Court's decision has indirectly made other insurers responsible for the €100m shortfall in their accounts. So insurers will have to come up with this money.
Insurance companies are not charities, they are commercial shareholder organisations, so funds for these additional costs will have to be found somewhere, and there's no point in sugar coating it - motorists and all policyholders will bear the brunt of these costs in the form of increased premiums or additional levies.
Aside from this €100m in Setanta claims, the ruling means that insurance companies need to substantially increase their reserves (ie, put aside millions in cash) in case another larger insurer goes bust. And again it is the policyholders who will ultimately fork out for this.
We've spoken to people throughout the industry who say that these factors combined could result in continued increases in average motor premiums to the €1,000 mark, representing a 150pc increase on 2014 levels. This will create severe difficulties in the market for consumers and business interests alike and would severely undermine the economic recovery.
So that is where we stand at the moment - but how on earth did we get here? When Quinn Insurance, PMPA and the Insurance Corporation of Ireland became insolvent, they were put into administration and the Irish Government (ie, taxpayers) effectively agreed to cover the cost of claims on policies issued in both Ireland and other markets. In each instance, the cost was met by insured parties through the payment of levies on all premiums - the key difference being that the insurers listed above were regulated by the Central Bank of Ireland (CBI).
Setanta only transacted business in Ireland, but it was licensed by the Maltese Financial Services Authority, and they were responsible for prudential oversight to ensure the company was adequately capitalised to meet its liabilities.
But it would appear that current EU legislation has allowed the Maltese government to shirk any responsibility in covering the cost of claims its insurer suffered in Ireland. Meanwhile, the Irish Government runs the risk of being viewed as a soft touch across Europe.
We estimate that the potential liability created by one of the larger motor insurers going into liquidation could run to €300m; so by our estimation that would work out at a "levy" of more than €300 per motorist.
The current position, which will indirectly pass the cost of the failure of an overseas insurer onto all Irish-based insurers and motorists, is illogical and unfair. They are clearly hoping that apathy will win out - that motorists won't notice the multitude of levies on their insurance premiums.
While it is easy to blame the High Court for the decision, a solution to this gross unfairness and irrationality is within the control of the Irish Government. Motor insurance isn't an optional purchase - it's compulsory and enforced by the State, so the State and its agencies should have some responsibility when an insurer licensed to operate in the State goes bust.
In addition, being part of the EU means European directives are transposed into Irish legislation, which Setanta Insurance then used to apply for regulation in Malta under freedom of services rules to passport insurance products into Ireland. So having signed up to the directive, the Government cannot now point the finger at Europe and claim that they have no responsibility for all insurers/motorists who will have to carry the cost of such lax regulations.
Our own Central Bank's hands were tied as European regulation passes the prudential regulation to the home nation, with the host only responsible for conduct of business rules and not for the crucial prudential oversight.
When it comes to management or even parenting, it's generally accepted that responsibility and authority must be aligned. It's unreasonable to make insurers responsible for the solvency of other insurers without granting them some oversight and authority over the companies for which they are responsible.
All insurance entities operating in Ireland and selling to Irish consumers should be prudentially regulated by the CBI as well as their home regulator. In addition, compensation funds across Europe should be harmonised so that future insurers and consumers aren't out of pocket as a consequence. If freedom of services is to work in the insurance sector, the insured must be able to trust the system - and that they will get paid irrespective by a centrally funded European compensation scheme.
Over the long-term, changes in European legislation are required to ensure that the host country has greater prudential oversight.
Over the short-term, the Government needs to act to give comfort to insurers, shareholders and employees that their only liabilities are in respect of the risks they underwrite.
What needs to happen now?
Unless the Motor Insurance Bureau successfully appeals the decision of the High Court, it will be up to the Minster for Transport to legislate with an amendment to the 2009 agreement between the Motor Insurance Bureau of Ireland and the Government (Minister of Transport) to clarify the intention of that agreement, as well as a further amendment to the Insurance Act to enable the Insurance Compensation Fund to pay 100pc of third-party claims in the event of the insolvency of an insurance company operating in Ireland.
It is critical that these changes are made as a matter of urgency to avoid further upward pressure on premiums and the serious risk of motor insurers exiting the Irish market.
Ciaran Phelan is CEO of the Irish Brokers Association
Sunday Indo Business