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For the insurance industry, it is a curse to live in interesting times

WHEN one insurance boss is talking about the progress of El Nino across the Pacific and another is talking about hiring a senior detective, you know something odd is afoot in the traditionally-staid industry.

But newfound preoccupations with international weather trends and increasingly zealous anti-fraud campaigns are just a tiny part of why 2010 will could go down in the annals as the most exciting year the Irish insurance industry has ever seen.

Having swerved the cataclysmic collapse endured by the banks, insurers are now heading for their own boom-time payback as horrific professional indemnity claims mount and shoddy building techniques herald permanently higher property claims.

After the initial time lag it takes for policies to expire and be renewed, insurable risk is plunging in line with the overall economy, while fierce competition continues to depress prices on personal lines like motor.

Investment return, the usual buffer for insurers in times of under-writing crises, has staged a one-off recovery but is set to be low going forward, as the scars of recent market collapses force companies into low risk low yielding assets.

Inhospitable conditions

Against these most inhospitable trading conditions, the administrators of embattled Quinn Insurance Limited (QIL) are attempting to offload the Cavan insurance giant to the highest bidder.

More than six months into the administration process, doubts on whether the company can actually be sold at all are intensifying. But however the QIL debacle is resolved, the impact for the industry will be seismic.

While QIL is by far the biggest talking point around insurance companies' water coolers, an even bigger deal is in the offing after UK insurance giant RSA launched an audacious offer for the Irish, UK and Canadian arms of fellow UK plc Aviva.

The deal, which would make the merged entity the biggest insurer in Ireland by a country mile, has already been knocked back by Aviva's shareholders but RSA insists it will plough on.

And Irish insurers have no reason to doubt RSA's commitment to the market, after the UK company stunned the industry by splashing out an eye-watering €65m for online brokerage 123.ie a few months back.

Who said insurance was boring?


Aside from the shenanigans at QIL, the sexiest insurance headlines for the year have come from the €500m claims hit triggered by last winter's floods and freeze and the catastrophic knock on for insurers' profitability.

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After last week's revelations of industry-wide losses of €179m for 2009, driven largely by €174m worth of losses on home insurance policies, freak weather events still rank high amongst insurer's concerns.

"People are very worried about household insurance," says John O'Neill, who heads up the Irish arm of Axa. "I can't see how anyone would have corrected [their premiums] enough to make money on house insurance this year.

"There's more El Nino in the Pacific, that means more storms and hurricanes and the industry doesn't have the spare cash to pay another big chunk."

The industry has been responding to the weather crisis by heaping on rate increases, sometimes in the region of 50pc, to bridge the gap between income and payouts.

But O'Neill says this strategy can actually be counter-productive. "If you have someone who was paying €800 and now they're asked to pay €1,000 they're suddenly asking themselves, 'am I over-insured?'" says O'Neill.

"Would my home still cost €800,000 to rebuild, are my contents still worth that much?"

The customer then ends up paying a higher insurance rate on a smaller insurable risk, significantly muting the impact of rate increases on actual premiums paid.

The point is backed up by figures from the Central Statistics Office (CSO) which show household insurance costs have risen less than 12pc in the first eight months of the year, sharply below the 50pc rate rises some industry executives are talking about.

Common sense suggests that if people are insuring smaller sums, then insurance companies should at least be insulated from future property claims.

"It doesn't work like that," O'Neill says. "You're usually covering partial losses, like a flood did €20,000 worth of damage... That €20,000 is the same whether a house is insured for €400,000 or €800,000. By raising rates you can end up with the opposite of what you want -- you get lower premiums and claims are still high."

Insurance bosses put those higher household claims down to more than just freak weather. At the peak of the construction frenzy we were throwing up close to 100,000 new homes a year, and apparently we weren't doing it terribly well.

"Building standards weren't as high in the boom," says one insurance boss. "Even outside we're seeing more burst pipes and other similar issues."

Below par building standards are the least of insurers worries when it comes to mopping up after the boom."Solicitors professional indemnity has become a big problem in the Irish market," says one insurance boss. "The claims are astronomical, off the radar. There have been some high profile scandals like Michael Lynn but there are so many smaller ones."

Solicitors indemnity

One company alone has seen its claims levels on solicitors professional indemnity surge by between 300 and 400pc, while the market has gotten so bad some international players have begun to withdraw ahead of November's renewal season.

"The professional indemnity market is extremely difficult in Ireland," says David Power, who heads up consultancy Distinct. "It's primarily because of the property crash, deals have gone bad, people are looking for someone to blame and they go after the conveyancing solicitor."

The situation is exacerbated by the fact that solicitors' professional indemnity sits into a commercial insurance book that's shrinking by the day. Insurable risk in the commercial sector is down by more than 20pc, according to Sean Hehir, who heads up one of Ireland's biggest commercial insurers Chartis (formerly known as AIG).

"Turnovers are down and businesses are closing," says Hehir, while an executive at another major commercial insurer points out that businesses who once ran three shifts a day now have their employees down to three day weeks.

As with the property book, the fall in insurable risk is not being met by a fall in claims, with Hehir citing less money for maintenance is one of the factors pushing up claims costs.


The other major factor weighing on corporate claims is fraud, as recession-induced desperation makes options like burning down the factory to faking the theft of company vehicles more appealing.

"There are lots of suspicious claims coming in, but the difficulty is proving them," says one insurance boss who's looking to recruit a former senior detective so more cases can be sufficiently airtight to merit the attentions of the Director of Public Prosecutions.

Commercial insurance is far from the only arena being hit by a recessionary spike in fraud. It's more than a year since FBD boss Andrew Langford announced plans for a dedicated fraud division, while other personal lines insurers are also upping their efforts.

"We have ten percent of our claims staff just looking at fraud now," says one chief executive. "They'd be referring 5 or 10 claims to me every week, and those would be significant claims."

In personal lines, fraud typically appears on the motor book in the form of fabricated crashes and exaggerated injuries while false burglaries heap more pressure on the devastated property book.

Life insurance doesn't emerge unscathed either, as the recession tempts people to make improper use of Permanent Health Insurance (PHI) by declaring themselves unable to work in an environment where there is no work.

The trials and tribulations of the underwriting environment were cushioned by a recovery in investment returns, which came in at €317m for general insurers according to data from the Financial Regulator.

While an improvement on 2008's €100m, last year's return is is lagging the €390m enjoyed in 2006. More crucially, the 2009 return is seen as a once-off bounce from the 2008 horrow show, with with future returns set to be lower as insurers shift their focus to 'safe' assets with lower yields.

"In an ideal world, if your investment return is low you switch back to rate hardening," says one industry source. "In practice it's a very competitive market, and individual companies' strategies can be completely at variance with what common sense would dictate."

The motor insurance arena is particularly dysfunctional. While players like Aviva, FBD and Axa have been talking about rate increases for almost two years, QIL has only now said it'll up premiums on its Irish book.

All the talk is not necessarily translating into action. In a recent stock-market announcement Aviva cited "aggressive and unsustainable pricing by competitors" as a factor that was "exacerbating" difficulties in the Irish general insurance market.

Aviva has responded by retrenching, with its gross written motor premiums falling by more than 20pc to €240m last year according to the latest Irish Insurance Federation (IIF) data. But other players have remained in growth mode, most notably Travelers which boosted its motor book from €15.6m to €98m last year as it expanded its foothold in urban areas and grew online.

"Some people are definitely losing share but they aren't crying about it," says one insurance boss. "That's the kind of market we're in."

The Quinn question

It is in that troubled environment that merchant bank Macquarie must try and find a buyer for Cavan insurance giant QIL, the low cost provider that's captivated the industry for more than a decade with its spectacular rise and fall. (see panel)

Industry insiders stress that the mind-boggling price RSA paid for 123.ie should not be taken as any indication of what QIL could raise, though RSA's continued interest in Ireland through the Aviva play is evidence that the market does retain some attractions.

"You could say anyone looking at QIL now is getting in at the best time because it's a distressed asset," says Power, echoing Aviva's stated reasons for not selling to RSA now.

"Other insurers have taken a lot of pain over the last few years, now could very well be a good time to get in."

With new Solvency II capital rules and a shake-up of the health insurance market looming large, boredom is possibly the only affliction QIL's new owners can definitively rule out.

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