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Insurance crash: who pays the price?


The insurance sector is in crisis

The insurance sector is in crisis

The insurance sector is in crisis

Tomorrow, FBD, the last Irish-owned insurer, will publish its half-year results. They won't paint a pretty picture. Continuing underwriting losses mean that FBD will need a capital injection of at least €100m to meet tough new solvency rules.

FBD is not alone. Since the appointment of administrators to Quinn Insurance in March 2010, the Irish insurance sector has been a scene of financial carnage.

The failure of Quinn - which lost €905m in 2009 and €160m in 2010 - was followed by that of Setanta Insurance, which collapsed in April 2014 with an estimated €90m shortfall.

Even many of those insurers who survived the bloodbath suffered serious pain. RSA's Irish arm sprung a leak in November 2013 that cost its UK parent £200m (€275m) to plug.

The latest Central Bank insurance statistics (which are for the year 2013) give some idea of the problems facing the insurance sector. These show that the combined underwriting loss across the industry came to €116m.

Motor insurance was the big loser, with a combined underwriting loss of €175m - the underwriting profit/loss figure is the difference between the premiums paid by customers less the insurer's cost of claims and management expenses, but doesn't include any investment returns or losses.

The biggest losers in the motor insurance market in 2013 were RSA, which recorded an underwriting loss of €187m; Liberty (the buyer of the ongoing Quinn Insurance business) lost €16.5m; Zurich €9m; AIG €6.1m; and Allianz €5.7m. In 2013, motor insurers lost €1 at the underwriting level for every €6 of premiums they received from customers.

The other big loser for the insurers was liability - also known as 'slips and trips'. Total 2013 liability underwriting losses came to almost €39m. The biggest loser was again RSA, which recorded an underwriting loss of almost €82m. The other big loser in liability was Aviva, whose underwriting loss was almost €26m.

This torrent of red ink has coincided with a steady stream of departures at the top of the insurance industry. In fact, six of the country's seven largest non-life insurance companies have changed their chief executives since administrators were first appointed to Quinn Insurance five-and-a-half years ago.

One insurer - Aviva - has changed its chief executive no fewer than three times since then, while another - Quinn/Liberty - has changed its boss twice.

In fairness, it should be pointed out that some of these departures represented nothing more than the normal ebb and flow of corporate life. Ken Norgrove quit as boss of Zurich's Irish non-life insurance arm last year to become chief executive of RSA Ireland, while AXA's Gerard Healy moved to a senior position with another AXA group company in the UK earlier this year.

The circumstances surrounding some of the other departures were much less happy. Andrew Langford, who had been chief executive of FBD since 2008, quit with "immediate effect" last month. His departure followed two profit warnings and a 60pc fall in the company's share price.

At least Mr Langford's exit from FBD was handled with a modicum of tact and delicacy - which is more than can be said about Philip Smith's defenestration at RSA.

Mr Smith was initially suspended in November 2013 when a hole was discovered in the insurer's balance sheet and it had to be recapitalised by its UK parent. He resigned later that month.

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He then sued his former employer for unfair dismissal and earlier this year was awarded €1.25m by the Employment Appeals Tribunal. In its ruling, the tribunal stated that RSA had "annihilated" Smith's future employment prospects. With RSA vowing to appeal the award, this affair looks set to run and run.

In fact, only one of the 'big seven' insurance bosses from March 2010 is still in his job today. The last man standing is Brendan Murphy, who been chief executive of Allianz since 2007.

Such a high level of turnover at chief executive level is extraordinary and demonstrates the complexity of the sector.

And things may get worse before they get better. Last June, the Central Bank warned: "The insurance sector continued to contend with on-going challenges. Intense competition in difficult operating conditions has resulted in profitability concerns emerging in the non-life sector, with underwriting losses being reported among insurers in 2014 and profitability becoming increasingly reliant on investment returns."

Meanwhile, correspondence concerning the insurance sector between Central Bank deputy governor Cyril Roux and Aidan Carrigan, assistant secretary in the Department of Finance's financial services division, has been released under the Freedom of Information Act.

On March 19, Mr Carrigan wrote to Mr Roux, expressing concern at press reports that price competition in the insurance sector was not "viable" and that reserve levels and actuarial knowledge might not be adequate.

"I am therefore requesting that you provide a report setting out any issues of concern in the insurance industry, including in relation to RSA Insurance, Liberty and FBD Holdings," wrote Mr Carrigan.

Mr Roux replied the following day, pointing to the "disjointed" nature of insurance regulation and the 40pc staff vacancy rate in the Central Bank's insurance enforcement section - that is, it lacked the powers and staff necessary to do its job properly.

Life will get even tougher for insurers when the EU's Solvency II Directive comes into force at the beginning of 2016. Solvency II imposes tough new capital requirements on insurers.

The looming Solvency II implementation deadline is likely to lead to a spate of mergers and acquisitions across the European insurance sector, with analysts putting the likely value of Solvency II-linked M&A activity at £10bn (€13.8bn) in the UK alone.

Indeed, this process is already under way - with Zurich seeking to purchase RSA for more than £5bn in cash. One doesn't need to be a crystal ball-gazer to see where this is heading. A Zurich acquisition of RSA, both of which have major Irish operations, will be followed by further such deals as the strong gobble up the weak. The top seven or eight firms that dominate the Irish insurance sector could easily shrink to just three or four.

And that will be bad news for customers.

Already, the price of insurance is rocketing. The most recent figures from the CSO show that the average cost of motor insurance has jumped 16pc during the 12 months to July, while home insurance rose by almost 5pc. Most analysts expect the cost of insurance to rise by at least as much again over the next 12 months.

That would translate into a cumulative increase of about 35pc in the cost of motor insurance and 10pc in home insurance over the space of just two years.

So what went wrong in the insurance sector - and what, if anything, can be done to put it right again?

The establishment in 2004 of the Injuries Board to adjudicate on personal injuries claims was one of the most successful reforms introduced by any Irish Government, with the average price of motor insurance falling by almost a third between 2004 and 2007.

Then recession struck. As anyone involved in insurance will attest, when times are bad and people are strapped for cash, more claims are made. And this drives up premiums.

Between 2008 and July of this year, the cost of motor insurance jumped by 41pc - at a time when prices throughout the rest of the economy were flat or falling.

However, an increase in the number of claims is at best only a partial explanation for the jump in motor insurance costs. When the Injuries Board was set up over a decade ago, it was designed to be a lawyer-free zone.

That didn't happen. In fact, over 90pc of those making a personal injuries claim before the Injuries Board are legally represented.

Further complicating matters is that 40pc of all Injuries Board awards are then appealed to the courts - hardly a surprise, with average Circuit Court awards up 14pc and High Court awards up 34pc in 2014. As a result, legal fees still account for 46pc of total claims costs.

Then there is what can only be described as the quite incredible softness of the Irish neck.

In this country, the average whiplash claim is settled for €15,000. In the UK the average claim is just €5,000. And 80pc of Irish motor insurance claims are for whiplash, according to Micheal Horan, non-life manager at Insurance Ireland. The comparable figure in France is just 3pc.

Insurance Ireland says fraudulent claims add €50 to the cost of every motor policy.

Last month Aviva and Allianz both said they would no longer insure new customers whose cars are more than 15 years old. This was in response to a wave of staged 'accidents', where the driver of a car with several passengers brakes suddenly, resulting in the car behind crashing into its rear. The driver and all of his passengers then submit whiplash claims, which, when legal expenses are added, brings the total cost of the claim to over €100,000.

The Injuries Board has also been undermined in other ways. In early 2014, the limit for Circuit Court awards was raised from €38,100 to €60,000. This in turn raised the expectations of claimants - and awards rose in lockstep. Other changes that look set to drive up claims costs still further include last year's High Court decision cutting the discount rate applied to payouts in catastrophic injury cases from 3pc to 1pc - a decision that has been appealed to the Supreme Court.

"The legal profession has driven a coach and four through the Injuries Board system," says Mr Horan.

Even so it might not be all bad news on the subject of insurance. With the recovery gathering pace, will the post-2007 increase in claims be reversed - or at least halted?

This year has also seen a sharp reduction in road deaths, with fatalities down by almost a fifth on 2014. If current trends are maintained, not alone will the increase in road traffic deaths experienced in 2013 and 2014 be reversed, 2015 could end up being the least bloody year on our roads since records begin in 1961. Insurance customers can only hope that this will this feed through into lower claims and premiums.

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