It's no surprise that motor insurance costs are rising in an industry that must bail out rivals
With recent increases in motor insurance premiums, it is fair to say a policy debate on how much insurers should pay when a rival company goes into liquidation will not generate too much public sympathy for the industry.
Unfortunately, this is not an academic point. What is at stake here is important for all motorists and the viability of the motor insurance market.
In light of the decision of the Gibraltar Regulator last Friday to take Enterprise Insurance into liquidation, and the outstanding issue of claims arising from the failure of Setanta Insurance, the need to get this policy right has been brought into sharp focus.
Pricing Risk and Liability:
In essence, insurers price risk and liability - that is the likelihood of something happening and how much it could cost to address when it does.
At present, motor insurers are pricing insurance in an environment where the number of claims is increasing on top of the increasing cost of processing them and settling them. The independently validated trends are clear, from high legal fees to higher court awards, creating a volatile environment that is impacting on the premiums charged to customers.
Into this mix comes the complicated matter of who pays the customer for claims where the insurer has gone into liquidation. Due to a court decision with Setanta, the rest of the market is being asked, through The Motor Insurers' Bureau of Ireland (MIBI), to foot the €95m bill of a competitor that failed. This has, unfortunately, had to be factored into premiums.
We know of no other industry where this happens - it is the equivalent of a big supermarket chain factoring in the cost of bailing out a rival.
Timing and impact - A systemic risk
Last Friday, the Department of Finance published its Review of the Framework for Motor Insurance Compensation in Ireland. This document sought to address how future claims would be settled, so customers have certainty in the event of a motor insurer becoming insolvent.
The industry has been calling for this review for some time in order to take some of the uncertainty out of the motor market and help bring relief to motorists' premiums.
Two bodies currently provide last resort protection for customers. The MIBI, funded by insurers, pays out claims for persons who are victims of uninsured or untraced drivers, while the Insurance Compensation Fund (ICF), has dealt with all insurance company insolvencies since 1964.
The key element of both is the timing and impact of how they are funded. The Department's proposal will mean the liabilities of any future insurance failure will be assumed by the ICF and the MIBI, with no upper limit on the exposure of insurance companies and by default their customers.
Insurance Ireland supports the use of the ICF to resolve insolvencies but strongly opposes the funding model being proposed given the unlimited liabilities.
Unfortunately, unlike in the UK and France there is no cap on what insurers could have to pay in a year through MIBI.
The French and UK systems impose a cap so the cost of the insolvency does not threaten the viability of the other companies in the market.
The Government's proposal, however, makes any future failure potentially systemic by passing unlimited losses on to other insurers in one fell swoop.
This opens the door to a future financial shock for Government, consumers and insurers.
Volatility breeds volatility
It makes no sense to further increase the volatility in a market where premiums are already being driven by volatility.
Insurance Ireland has instead put forward a detailed funding model that would provide a smoothing effect on the market and ensure there are no shocks.
There is an opportunity to solve this issue now so the uncertainly facing Setanta customers is not repeated.
Insurance Ireland is calling for this proposal to be reconsidered and for further industry engagement to develop a response that works and provides much needed certainty for customers.
Kevin Thompson is ceo of Insurance Ireland, which represents 95pc of the domestic insurance market and 80pc of the international Life Insurance market.