Wednesday 28 September 2016

Exit of FBD's Andrew Langford shows how insurers are still being buffeted by storms

Published 06/08/2015 | 02:30

A wave pounds Lahinch in Co Clare during the 2014 storms. Photo: PA
A wave pounds Lahinch in Co Clare during the 2014 storms. Photo: PA

Irish banks have been in the intensive care ward for seven years now. With so much focus on getting the banks fixed, relatively little attention has been paid to the enormous storm that has hit the insurance sector.

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FBD lost its chief executive last week. RSA fired its chief executive Philip Smith over an accounting issue, only to lose his employment appeals action. He was awarded over €1m.

Insurers have been shedding jobs and hiking up prices as collectively they have been losing money from underwriting insurance.

Against that backdrop the Central Bank has warned about its own resources and ability to regulate the sector while encouraging insurers that they have to put up premium prices.

If banks have been in intensive care, insurance companies have been in A&E. They have been hit by a perfect storm in recent years. Economic collapse, some of the worst weather on record, higher claims costs, lower investment returns and cut throat competition, have all impacted on the financial performance of the sector.

It hasn't been all bad news but every time they had a reasonably good year or so, a new freak storm would come along the next and hit profits.

This is particularly true of FBD whose chief executive Andrew Langford announced last week he was stepping down. This came after seven years at the helm. He had been with the business for over 12 years before becoming chief executive.

Last year was tough for the insurance sector and for FBD in particular.

The storms that battered the Irish coast at the start of 2014 cost the firm €36m in payouts. It issued two profit warnings and in March reported a loss for the year of €4.5m compared to a profit of €51m in 2013.

This came despite an increase in net premium income. The insurer's share price has taken a hammering with €360m wiped off the market value of the company in the last 18 months. Its shares have tumbled from €17.90 to €7.49.

Despite the company's woes, the announcement that Langford was stepping down with immediate effect came as a surprise. In its 2014 annual report , entitled 'Seeing through the storm', FBD chairman Michael Berkery praised management and staff for all they were doing in this challenging environment.

Langford himself gave no indication of not wanting to stay on even after the 2014 results showed a loss for the year.

FBD had pulled back from motor insurance in 2015 as premium increases introduced last year are slow to hit the bottom line.

The extent of the challenges facing FBD will become clearer when the company announces interim results on August 26.

But insurance is a strange business. It does undergo price and profit cycles, but by its very nature it is supposed to be a steady long term investment proposition without massive growth or massive losses.

Despite this "steady as she goes" business model, the sector has been hit with a number of real challenges. With interest rates and bond yields so low, investment returns have been badly affected in recent years.

Regulators don't like it when insurers rely too heavily on investment return to make a profit while losing money in their core business of underwriting insurance.

In that sense 2013 was a watershed year for the Irish non-life insurance sector. Collectively the industry wrote €1.1bn worth of motor insurance premiums. They paid out €985m in claims and made a loss on that business of €253m. Even after including investment income of €61.9m, they made an operating loss of €191m on motor insurance.

Good profits were made across property and travel insurance but the industry as a whole made a collective loss of €80m in 2013.

Insurance companies were under-pricing motor insurance in Ireland in order to compete, while facing higher costs. Something had to give. Motor insurance premiums have gone up massively since then. We have all noticed it. Motor premiums went up by an average of 16pc last year and some insurers appear to be abandoning higher risk drivers by quoting totally unrealistic prices.

RSA had led the price cutting but later got hit with an accounting scandal. Setanta Insurance collapsed last year with a hole in its accounts to be filled. Drivers are still on the way towards paying €1bn for the under-reserving of Quinn Insurance and so on.

The Central Bank has definitely taken an interest in what is going on in the sector. Earlier this year correspondence emerged showing that the Central Bank deputy governor Cyril Roux had written to the Department of Finance expressing concern about how he did not have sufficient powers or staff to regulate the insurance sector effectively.

There have also been reports that the Central Bank has been actively encouraging insurers to increase premiums in order to bolster their capital positions ahead of new tougher regulations coming in next year.

The insurance industry was hit with a massive fall-off in economic activity in 2008. Less activity meant less insurance. The economic recovery has provided an opportunity for insurers to improve their financial performance but there are always mitigating factors in insurance.

For example, an improving economy means more cars. This means more miles, so more accidents and more claims. Actuaries will tell you that even lower petrol prices, which we now have, means people take more journeys which increases accidents and claims.

A High Court judgment this year changed the methodology for calculating a large personal injury award, while earlier this week Axa reported a higher frequency of personal injury claims in Ireland.

FBD is practically the only remaining significant Irish company in the general insurance market here. Foreign multinationals dominate the sector. Hopefully, it can turn things around.

Whatever about FBD's company-specific challenges, the insurance sector doesn't look out of the woods yet. Serious questions have been raised about the effectiveness of regulation of the sector, which is vitally important given the high profile collapses drivers are already paying for.

For consumers there are dangers that different insurers will line up in different market segments as a way to drive profitability. This would undermine overall competition in insurance and could lead to higher and higher premiums.

Having very strongly capitalised insurers in the market may require higher premiums anyway.

Either way, motorists look set to pay even more for their driving.

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