Sunday 17 December 2017

Richard Curran: Noonan's insurance review looks like a pre-election sop

TIMING: Hard to see what Noonan’s review of the insurance industry will achieve. Photo: Brian Lawless/PA Wire
TIMING: Hard to see what Noonan’s review of the insurance industry will achieve. Photo: Brian Lawless/PA Wire
Richard Curran

Richard Curran

Michael Noonan has finally got the finger out and the Department of Finance is conducting a review of the insurance industry. This comes in the same week that Taoiseach Enda Kenny was “butching up” by having a “frank exchange of views” with insurance companies about flooding.

The insurance companies have become the new bad boys — the new fat cats. The only problem is they don’t seem to be making any money here. Setting up the Department of Finance review makes a good pre-election sound bite, but it is hard to see what it can actually achieve.

Motor insurance premiums have been rising for over two years. Why only examine them now? They went up by 30pc last year and a further 25pc is expected this year. The Central Bank is cheerleading the rises as it wants insurers to rebuild their balance sheets. The higher the premiums, the more financially secure insurers are. That is all the Central Bank needs to know. 

The price increases have been truly staggering. The insurance industry says it has to charge more because of the rising cost of claims and greater capital requirements set by the Central Bank. Others say the insurers are price-gouging and profiteering.

Who is telling the truth? Insurance industry figures show that in 2009, net written premiums amounted to €1.03bn. In 2014 they were €1.19bn. A higher intake of premiums on probably fewer drivers reflects the increase in average premiums.

However, in 2009 the industry lost €6.4m underwriting motor insurance. This was after it bagged investment income of €138m by investing all those insurance premiums it collected. In 2014, insurers lost €140m after taking in just €79m in investment income. Insurers can point to recent court judgments on injuries, as well as a collapse in investment income, as real pressures.

Critics of the industry say it was insurers’ own fault for selling insurance too cheaply in the past and they don’t believe the ‘higher cost of claims’ scenario. They might also argue that insurers have some flexibility in their insurance assumptions and reserves policy, which allows profits and losses to fluctuate from year to year to suit their needs. 

There is no doubt higher premiums will do the trick for insurance companies. Liberty Mutual, which is heavily involved

in the motor insurance market, said during the week it doesn’t expect to make a profit this year either, but should make one next year.

This was the former Quinn Insurance business for which Liberty paid €1 in 2011 for a 51pc share. IBRC held on to the other 49pc and there was some spoof at the time on the vendor’s side about how, within five years, its stake could be worth €400m.

But IBRC sold its stake two years later for €100m and right now it looks like a pretty good deal.

Liberty made losses of €22m in its first two full years of trading and has invested around €225m in the business.

Despite massive motor insurance premium hikes last year and this year, it reckons it still won’t make a profit until 2017.

It has hit several bumps, including weaker than expected internal systems and bad timing on expansion plans.

The best thing the Department of Finance can do is assess the cost of claims. This goes right to the heart of public policy regarding the legal profession, government legislation, fraud etc. There is either a way of bringing down the cost of claims or there isn’t.

It is hard to argue against setting up some kind of Motor Insurance Advisory Board which would deliver a comprehensive assessment of all aspects of insurance premiums.

If insurers are telling the truth about the cost of claims, they have nothing to fear. Consumers deserve explanations and answers. The Department review is just a starter. Noonan should have gone straight into the meat of the issue with a deeper probe and a commitment to act on it.

Oil price pain could come back to haunt us

It is hard not to have a bit of a smile on your face as you fill up for petrol at current low prices. Fuel prices are at six-year lows and one retailer in the West was selling diesel for 99c per litre last week.

After all, cheap fuel is good for motorists, anyone heating their home with gas or home-heating oil, electricity prices, and keeps the overall cost of doing business low. The assumption is that it is good for everyone except the greedy oil industry which doesn’t need the money anyway.

In fact, that isn’t actually true. There is the fact that, for some people, their entire cost savings on fuel in the last 18 months have probably been wiped out by the increase in their motor insurance premium.

With speculation mounting that oil will hit $20 a barrel and could go to $10, the fallout is reaching very wide.

Emerging economies reliant on oil and other commodity revenues are getting squeezed. The strong dollar is hurting their currencies as much of their sovereign and corporate debt is owed in dollars. It is driving down stock markets. This raises questions about the performance of pension fund investments as oil shares fall and struggle to pay dividends.

Some oil industry companies may default on debts which in turn could have a negative impact on bank lending and the performance of bank shares.

The knock-on effects aren’t always obvious. For example, Norway and Chile are the two biggest exporters of salmon in the world. In Norway, the krone has weakened against the dollar by 16pc in the last year. It makes Norwegian salmon cheaper for international buyers, which in turn is bolstering Norwegian exports of the product and producers’ profit margins.

In Chile, cheap oil has hit the currencies of its two largest export markets — Russia and Brazil. Even its sales to the US have been hit by canny Norwegians selling at reduced prices.

Hard to figure how a Chilean salmon producer is in trouble because the price of oil on world markets has fallen so dramatically.  But it is happening.

Despite the negative fallout, the core benefit to Ireland remains. As an exporting economy, heavily dependent on fuel imports and part of the European single currency zone, we are getting a very good run out of cheap oil.

But if it gets too cheap for too long, then the carnage elsewhere could really start to hit us.

Dublin’s tech potential will be stymied by high tax and rents

Good luck to Oracle in finding the 450 people it needs to fill those jobs announced for Dublin during the week.

The US giant is looking for people with experience in IT sales to help sell its new cloud computing products to the European, Middle East and African markets from its Dublin location.

The investment is great news, but one wonders how long it will be before Dublin prices itself out of attracting people with the relevant experience and language skills to come here for these kinds of jobs.

A search of recruitment sites shows that an IT sales specialist in cloud computing earns between €35,000 and €45,000 per year, plus a bonus. Take the salary mid-point and a generous bonus of €15,000 and the sales person could earn €55,000 per year.

A single person deciding to come to Ireland to take up a good job like that will pay €11,980 in income tax, €2,200 in PRSI and a further €2,318 in USC – a total of €16,458 per year. This leaves them with €38,542.

One-bedroom apartments in Rathmines for example, cost between €1,200 and €1,700 per month. A mid-point of €1,500 per month devours almost half of their take home pay. That is before paying bills or living expenses, never mind a few craft beers in the city centre on a Friday night.

Should someone in that situation have the audacity to think they might buy a car, if the insurance premium and motor tax doesn’t put them off, parking charges in Dublin will.

At some point, Dublin will run into a wall on these issues and it could be soon.

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