Colm McCarthy: Public will pay price of Quinn saga
Consumers face a new insurance levy for the next 20 years, thanks to a family who claim to be the victims, writes Colm McCarthy
Two sizeable insurance companies collapsed in the Ireland of the Eighties, PMPA and ICI, resulting in an onerous annual levy on insurance premiums for the general public which has only recently seen the losses paid off.
There will now be a continuation of this levy, for at least another 20 years, to pay for the latest insurance crash, courtesy of Sean Quinn.
Had there been no banking collapse, the Quinn Insurance debacle would have been a major financial scandal in its own right. The losses incurred by Sean Quinn in unsuccessful share and property speculations have resulted in long-running battles with the Irish Bank Resolution Corporation, a state body charged with recovering amounts borrowed from the former Anglo Irish Bank and the Irish Nationwide Building Society.
Quite separately, it is abundantly clear that while Quinn was losing billions of borrowed money on Anglo shares and other ventures, the Quinn Insurance company was also incurring enormous losses under their stewardship. The protestations of Mr Sean Quinn that the company was soundly managed and that the problems arose since the company was placed in administration in March of 2010 are simply preposterous. Quinn Insurance was placed in administration because it had been run into the ground, had inadequate reserves and was unable to meet its obligations to policyholders.
The Quinn public relations strategy seeks to portray the family as double victims. Victims of Anglo Irish, to which they seek to avoid surrender of assets sought by the IBRC in lieu of loans which they are unable or unwilling to repay, and victims of the Central Bank, since they contend that the Quinn Insurance company was profitable when it was placed in administration by the High Court, on the application of the Central Bank, in March 2010.
The courts have been unsympathetic: Sean Quinn Snr, Sean Quinn Jnr and Peter Quinn have been censured for seeking to avoid surrender of assets which the High Court has deemed to be legitimately the property of the bank to which they have failed to repay their borrowings. It also was open to Mr Sean Quinn to contest the application for the appointment of administrators to Quinn Insurance and he expressed regret last week that he had not done so. He would have been wasting his time. The revised accounts for 2009 have been published by the Central Bank and show losses in that year alone of €788m. In the High Court last week, Central Bank official Domhnall Cullinan informed the court's president, Mr Justice Nicholas Kearns, that the ultimate bill for the Quinn Insurance insolvency could cost the Irish public even more than the €1.65bn upper estimate which had shocked Justice Kearns when revealed to him the previous week.
When the administrators took over because of its failure to meet capital adequacy standards, they were informed by the outgoing management and their professional advisers that there would be no deficiency and no need for a levy on insurance premiums.
The administrators subsequently commissioned a review from a UK actuarial firm which indicated a €400m hole in the accounts arising from UK losses and the deficiency figure has been rising ever since.
A substantial portion of the overall Quinn losses appears to have arisen in the UK, where the company had built a large exposure to claims over a relatively short period. Insurance companies which grow their business rapidly in a mature market are usually doing so by under-pricing the cover they are providing. The chickens eventually come home to roost in the form of claims which they are unable to meet, since the premiums were too low.
This seems to have been the principal explanation for the Quinn collapse, as it was in the case of Joe Moore's PMPA back in the Eighties. Since insurance companies are always liquid (they get the premiums up front), insolvency takes time to emerge. But rapid growth alone should be a red flag in the insurance business and there were several others, including corporate governance mishaps, in the case of Quinn.
The newly appointed financial regulator, Matthew Elderfield, acted promptly and entirely correctly in March 2010, in seeking the removal of the Quinn management and the appointment of administrators to the company. The writing of unprofitable insurance business was discontinued, without which additional losses would have been incurred. But the entire episode raises serious questions about the insurance regulatory regime prior to Mr Elderfield's appointment and the excessive forbearance shown to Quinn Insurance as the enormous losses were being incurred. When the Dail eventually gets around to conducting a proper inquiry into the banking debacle, there should be a module dealing with Quinn Insurance and the regulatory indulgence shown to the company over many years. If the figures revealed to the High Court are correct, this company had been losing enormous sums long before the appointment of administrators.
An insurance company can appear to be profitable and to have adequate reserves provided premium income is rising faster than claims are being paid. But the day of reckoning eventually arrives, as it did with PMPA. The problem is usually the inadequacy of claims reserves: claims do not have to be paid for several years after the premium income is received, so an insurer can be liquid but insolvent when it under-provides for claims.
It is the firm's directors and management who bear the primary obligation under company law to ensure that there are adequate claims reserves. The auditors and actuarial advisers have the responsibility to check that correct procedures have been followed. Finally the regulator, who licenses insurance companies, has the ultimate responsibility to protect the public from the damage that can be wrought by insolvent insurers.
In June 2001, the apparently successful Independent Insurance company in the United Kingdom went bust. It had grown rapidly through writing liability business in the mature UK market and had even cultivated a reputation for innovation. In 2007, its former managing director, Michael Bright, was sentenced to seven years imprisonment, convicted of withholding key information about the firm's claims reserves and re-insurance arrangements from the company's actuarial advisers. The company had in reality been losing money for years, the losses concealed from shareholders, auditors and regulators through under-disclosure of liabilities.
Independent operated in the same market chosen by Quinn for its foray into the UK. It is clear that the claims reserves provided for Quinn's UK business were hopelessly inadequate. There has apparently been a foreign exchange loss, since sterling assets were not maintained at a level to match sterling liabilities. This is not a piece of bad luck; it is further evidence of the mismanagement.
Insurers hold premium income in a fiduciary relationship to customers, to which most of the premiums inevitably return as claims come to be paid. There has also been, it would appear, a deficiency arising from poor returns on investments. Well-run insurers invest premium income in low-risk short-dated securities on which losses should never arise. Precisely how responsibility for this disaster should be allocated between the board and management of the company, the auditors and actuarial advisers and the then regulators is a matter which should pre-occupy Dail deputies when they return in September.
They might also devote some attention to the extent of liability for overseas losses which will now fall on the Irish public through the levy on premiums. When Independent went bust in the UK, British policyholders were bailed out, but about €120m was lost by Irish firms which had claims against Independent. The UK legislation did not cover them. It appears that the Irish 1983 Act extends cover to foreign customers of Irish insurance firm, even though those customers do not pay the levy to the Irish Insurance Compensation Fund.
If Quinn had been based in the UK and had written loss-making Irish business, the Irish claims would not have been met from the UK compensation fund. In a nice irony, the Irish policyholders left high and dry when Independent collapsed had been paying the levy on premiums to the Irish fund to cover losses from the PMPA and ICI insurance collapses!
When Irish-based insurance companies write business in foreign countries, the Irish public, it would appear, are on the hook to pay foreign claims if the companies go bust. But the reverse arrangement does not apply. This is truly a most generous-hearted country!