James Fitzsimons: Stealth tax is not a cure for this fiasco
Irish citizens are carrying the can for an insurance industry that covets its profits, but doesn't carry its losses, writes James Fitzsimons
The consumer pays for government spending and we borrow the rest. I've no faith in a system that screws the vulnerable. The problem is not uniquely Irish. That is how it works all the world over. But not everywhere creates so many victims as we do here. People are our best resource -- but they get treated like shit.
The latest stealth tax to hit the headlines, and we've known about it for more than a year, is the insurance levy of two per cent to pay for the Quinn fiasco. Like banking, insurance is thought to be necessary to keep the system alive. Without it the fabric of society, as we know it, would fall apart. There wouldn't be enough money to pay lawyers' bills to take your claims to court. Hospital consultants wouldn't get their outrageous fees.
They may be the best in the world, but can we afford to pay what they ask? Without insurance we cannot afford it. Few amongst us have the resources to cover these costs when confronted by the unexpected.
There are two reasons why their charges are so high. They are experts at what they do and they can ask for a lot. But the fees would not be as high as they are if the system did not pander to their every whim. And the middle men add to the cost.
Knowing that few individuals could afford what they demand, we pay insurance to cover what we cannot afford to pay. Not everyone will be put in the predicament where they face these outrageous bills, but the insurance we all pay makes it possible.
Maybe I have oversimplified the problem, but it is at the heart of our dilemma. The only way you can profit from it is to be on the receiving end of the benefits. This doesn't make lawyers and hospital consultants bad people. But the system has gone too far in paying what they demand. Regulators haven't done enough to correct the problem. And the rest of us pay the price.
Last week in the High Court the administrators for Quinn Insurance said it could take €1.65bn to bail out the Quinn Insurance Group.
Whatever it costs will be collected from a 2 per cent levy on certain insurance policies. Two per cent doesn't seen much. But when insurance premiums you cannot afford go up, it is too much to bear. It is paid into the Insurance Compensation Fund which was set up in the Sixties to make sure that policyholders' claims would be met even when the insurance company botched things up and couldn't pay what it promised. Two significant cases already arose in the Eighties when PMPA and AIB Bank's Insurance Corporation of Ireland went wallop.
The payouts then were a lot less, but the levies continued for years. At least we know how the funds were used. They helped protect policyholders who might otherwise have been abandoned. But, in reality, they benefit huge corporations that failed to run their business properly, whether through error or neglect. We already know that there is little prospect of getting more than 12.5 per cent tax from companies, if even that. If we didn't have them, nobody would have a job.
The levy might be one way of protecting policyholders, but it's inefficient. It opens the system to even more abuse. A person who sets up a business and builds it up to be something great has drive, ambition and plans that no regulator, or administrator will ever understand.
When Quinn Insurance was put into administration it was the beginning of the end of something grand. But to let Sean Quinn keep what he had built would be unthinkable. His reckless behaviour helped ruin our economy.
Now a cock-eyed administration thinks it has found the right solution with this 2 per cent levy. The insurance claims that might bring the company down are largely in the UK, but the payment will fall on Irish policyholders and taxpayers. The EU sets the rules, but sovereign states have a good deal of autonomy to regulate their own financial affairs in the industry. Irish citizens will carry the can for ineffective EU financial regulation of an industry that covets its profits, but doesn't carry the losses. The global economy is broken. Banking and financial policy need a complete overhaul before the system will ever work.
When the enabling legislation was debated in Leinster House, the Taoiseach, Enda Kenny, chastised the begrudgers who warned about the mistakes that were made when we blindly bailed out insurance companies that were family, or bank controlled, in the past. We are probably still paying for PMPA (dominated by the Moore family) and the Insurance Corporation of Ireland (aka AIB Bank). Mr Kenny demanded that the legislation be approved to save Irish jobs.
The Minister for Finance, Michael Noonan, later explained that the legislation was not required to save jobs. It was to protect policyholders. Whatever it was for, they are making us pay through the nose and even the Government doesn't understand what it is doing. They are, as usual, being guided by experts who have their own interests at heart. The highly paid administrators at Quinn Insurance will bleed the system dry, if we let them. Like vultures they scavenge what's left of Quinn Insurance, supposedly for our good. Like the banks this was a problem that we could only manage if helped by the EU. Lending us the money to beggar the Irish people is no solution at all.
America had the wealth and resources to bail out AIG, their huge global insurer. We don't have the money to bail out Quinn. The EU systems broke down and they need to foot the bill, just as they should have picked up the tab for the losses of European banks. While the Government is dependent on these financial institutions and their experts to tell them what to do, they will never do what is right by the consumer. It's high time our Government was composed of people who are fit for purpose. And when can we expect those who are cushioned at the top in the public sector to step up and earn their money?
In the Nineties, having learned what a lucrative business this was, the government imposed stamp duty on certain insurance products. The yield peaked in 2003 when it was nearly €90m. Unlike the insurance levy that pays for incompetent management in the insurance industry, the stamp duty was dumped in with general tax revenue. It probably helped let public spending spiral out of control. It is not possible to show any benefit that it produced.
Like the 0.6 per cent pension levy that steals nearly €500m a year from private pension funds, it is so tied up in red tape that nobody can stop it. And like stamp duty on property, it is the easiest tax to collect and the authorities love it. Remember, stamp duty went to 9 per cent at the height of the boom. Imagine if insurance levies go the same way. That's not as unrealistic as you might think. Most companies are only subject to tax of 12.5 per cent on their profits. Start-up companies can be exempt. Why shouldn't companies that abuse the privilege be penalised with higher taxes? And limited liability, and foreign ownership and control, should not provide an excuse. Otherwise the consumer, citizens and taxpayers foot the bill. Can the next Budget change this?
James Fitzsimons is an independent financial adviser specialising in tax and financial planning