It is only right that I as Minister of State with responsibility for the supervision of insurance should deal factually and clearly with the system of supervision of insurance undertakings under the relevant Acts and regulations, and the statutory powers which the Minister has under those instruments. It is particularly appropriate and desirable that I should do so in view of some sweeping comments made over the past ten days and a certain amount of unease which has been expressed. I am also very conscious of the statement by Deputy Mac Giolla — a statement which I accept was made by him in good faith — to this House yesterday that the British Department of Trade and Industry had no responsibility in relation to supervising the UK branch business of ICI. Deputy Mac Giolla's statement is nevertheless factually incorrect. I would like that to be noted very clearly.
The first thing that must be stressed is that insurance companies operating here are, like any other companies, subject to the Companies Acts and the attendant requirements involving the presentation of statutory returns and the responsibilities of directors and managers. They are also, however, subject to much more specific financial and other requirements laid down by EC Directives which harmonise basic insurance supervision throughout the Community.
To be more precise the supervision of non-life insurance undertakings authorised to operate in Ireland is grounded on an EC Directive of 24 July 1973, introduced into Irish law by the European Communities (Non-Life Insurance) Regulations, 1976.
The first non-life directive, as it is known, recognised the different considerations which arise in dealing with the head office and branch office activities of insurance undertakings and it established the respective competences of the supervisory authorities of the member states in dealing with insurance undertakings. In the case of head office companies, the supervisory authority of the member state in which the head office is located is responsible for the global activities and overall solvency of the company concerned, while the operations of EC branches are supervised by the authority of the member state in which the branch is located.
In addition to defining the respective competences of supervisory authorities, the first non-life directive also specified the mechanisms by which supervision was to be carried out. It addressed the question of reserving for the underwriting liabilities incurred in different territories by providing in Article 15 that each member state in whose territory business is carried on must require an undertaking to establish sufficient technical reserves. Such reserves are required to be covered by equivalent and matching assets localised in each country where business is carried on.
In summary, therefore, each member state supervises the branch operations of an insurance undertaking, and the returns and accounts furnished by the branch office to its supervisory authority feed into the head office accounts. The supervisory authority of the member state in whose territory the head office of that undertaking is situated then verifies the state of solvency of the undertaking with respect to its entire business. The solvency margin of an insurer is essentially a cushion of free reserves to guard against either the over-estimation of assets or the under-estimation of its liabilities.
The general approach adopted by each supervisory authority in examining accounts submitted to it is to assess the nature and acceptability of assets to cover liabilities, and to test the reasonableness of the reserves set up by each insurer in respect of the business written in the member state concerned. Supervisory authorities are not entitled to impinge on one another's supervisory competences, nor is the head office supervisory authority responsible for resolving any operational uncertainties at branch level in another member state.
It can be seen therefore that the supervisory authority of a branch has only to look after the proper running of that part of an undertaking's business in their own territory. The supervisory authority of the head office, which is responsible for the global activities and overall solvency of a company, may require collaborative evidence from supervisory authorities of branches in order to verify the value of an undertaking's actual solvency margin. The supervisory authorities of branches are required to take the initiative towards the supervisory authority of a head office in pointing out differences which they note between branch accounts and the particulars supplied to the supervisory authority of the head office, and pointing out shortcomings in the management of the branches of which they are aware.
With regard to the latter type of information, it is made clear that supervisory authorities of branches may judge freely what information is sent to the supervisory authority of the head office, and when to send it. Under the formal EC Protocol of Collaboration between insurance supervisory authorities, each supervisory authority may make requests to and receive from other supervisory authorities information which it needs in order to carry out the responsibility for supervision which is laid upon it, provided that the requests made do not detract from the division of competences between supervisory authorities as provided for by the directive. As I have already made clear, the Department of Trade and Industry in the United Kingdom were required to ensure that the London branch of ICI established sufficient technical reserves covering the business carried on by the London branch office. In other words, this was not within the competence of my Department as the supervisor of the head office operations of ICI.
Furthermore, I would point out that my Department, in relation to its supervisory functions covering branches of EC undertakings established in Ireland, have had occasion from time to time to insist that remedial measures be taken at branch level in Ireland to ensure that the Irish technical reserves are fully covered by branch assets, in the interests of protecting the Irish policy holders concerned. This has arisen in those instances where, arising out of its analysis of the branch accounts submitted to it, my Department have concluded that the assets put forward in the branch accounts to cover the branch technical reserves are insufficient to meet the eventual liabilities of the branch operation in Ireland. I emphasise this point particularly for the benefit of Deputy Mac Giolla.
The basic requirement imposed on insurers by the first non-life directive relates to the maintenance of solvency. The Minister has specific powers to take action in cases where the technical reserves provisions or, in the case of head offices, the solvency margin are not being met. These powers envisage a direct intervention in the activities of the insurer through the issue of directions to suspend business, the furnishing of deposits to the Minister, or such other measures as are deemed necessary, including the disposal of assets. In the case of failure to meet the solvency margin requirements, the Minister may as an initial step require a scheme to be submitted to him for restoration of the financial position. If the solvency margin falls below the guarantee fund amount, which is one-third of the full solvency margin, the submission of a short term finance scheme would be required. The ultimate sanction under the 1976 regulations, if an insurer fails to filfil its obligations, is the withdrawal of authorisation.
That, then, is an outline of the system of supervision as set down in EC directives. I will now deal with the practicalities of checking on the financial state of authorised insurers.
The compiling and presentation of insurance accounts requires the exercise by the company — its underwriters, its claims estimators, statisticians and in some cases actuaries — of a high degree of professional judgment which is the product of very considerable specialised expertise. Approval by the board of directors and certification by the statutory auditors add the final seal of approval.
The examination of accounts by my Department, while essentially a test of the reasonableness of what the insurer produces, is quite detailed and searching. Starting with the company's revenue account, it is possible to identify the underwriting result per category of business, and we examine the individual factors contributing to these results. Close attention is paid to the loss ratio arising in each category of business, to the cost of claims incurred, average claims cost and, very importantly, by reference to the claims settlement analysis it is possible to trace the accuracy of initial provisions for outstanding claims as reflected in the final settlement costs. This analysis provides basic indicators from which decisions can be taken on the need to pursue reserving procedures with the company concerned.
It is not at all unusual to request more detailed reports on particular aspects of an insurer's business activities or to require the early submission of financial data. This does not mean that the insurer is insolvent and unable to meets its liabilities; not does the fact that insurers are called in to the Department to discuss their accounts have any significant connotations. The investigation of such matters is a normal part of the supervisory function. After all, the requirement to meet the solvency and reserving criteria is ongoing and the task of supervision is not simply the checking-off of forms received once a year, although the analysis of the information provided in this way is essential to the process.
In addition, the Department for a number of years have engaged expert consultants to carry out in-depth examinations of a particular company or of certain aspects of a particular company's business. Such examinations can be directed at clarifying particular features of a company's activity or it may be part of our ongoing system of random checks which is applied as a back-up to normal supervisory procedures. In doing this we seek to pursue a balanced approach by dividing our attention between the newly-established companies and those which are longer established in the market. The information gained from these examinations can also provide useful indicators in areas to be watched more closely in the future.
By and large, our experience is that the affairs of insurance undertakings are managed by responsible people who are fully aware of both their duties under the law and their professional responsibility to the insuring public. They co-operate fully with the Department in filing the returns legally required of them and in supplying any further information which may be requested in connection with these.
In relation to the London branch office of the ICI, where the bulk of the losses arose, supervision is reposed by the statutory measures of the EC in the UK Department of Trade and Industry, and the Irish supervisory authority had every reason to be satisfied with what had been cleared by that supervisory authority. In respect of the head office, as the Minister mentioned in his Second Stage speech, we proceeded to ask questions of the company some two years ago and, despite what might be termed as reasonable answers, in the absence of a marked improvement in performance it was decided that the 1983 year-end accounts would be given priority examination and a more thorough analysis of areas which we had identified as rather worrying.
Arising from its examination of ICI's 1983 accounts, which were forwarded to the Department at the end of June 1984, my Department arranged a meeting for 17 August 1984 with representatives of the company to discuss matters of concern, concentrating particularly on the adequacy or otherwise of the outstanding claims provisions struck in the 1983 accounts. Very detailed questions were put to the visitors at that meeting and the company was requested to respond as soon as possible.
The Department made it clear that, having examined the Irish claims reserves of the company in the 1983 accounts, it appeared that the provisioning of the company in this respect was inadequate. The company had been striking its claims reserves on an individual case estimate basis and the Department stressed that there appeared to be reserving problems resulting from this procedure. The company was advised strongly that the case estimating procedures should accordingly be supplemented by statistical and actuarial techniques to ensure that the reserves would be adequate at the end of the day when all claims were settled.
At the time of the meeting with ICI representatives on 17 August 1984, the Department had already decided to enlist the aid of an actuarial consultant to examine the Irish claims reserves of the company's affairs. It was while that exercise was in progress that the company's own internal examination, which the bank is understood to have initiated, revealed the £23 million under-reserving for outstanding claims announced on 14 November 1984. That led to a strengthening of reserves and an injection of £30 million paid-up share capital by the bank in early December. The Department's consultancy exercise confirmed that the reserves of the Irish business of ICI, as strengthened by the injection of £30 million were reasonable.
A further meeting took place between my Department and representatives of Allied Irish Banks and ICI on 14 November 1984. The purpose of that meeting was to discuss the ICI results contained in the half-year results of AIB for the period ended 30 September 1984, which were being released to the media at that time. My Department raised questions at that meeting in relation to the financial and trading position of the London branch business of ICI. We were advised that there was no under-reserving in the London branch and that a deliberate policy had been pursued to cut back on gross premium growth in London to bring matters fully under control. It is also relevant that the Department of Trade and Industry in the UK, who were responsible for supervising the branch activities of ICI in London, had not communicated any concerns to my Department. Accordingly, my Department had no reason to pursue matters further at that stage.
There were allegations by both Deputy Haughey and Deputy Flynn during the debate yesterday to the effect that I deliberately misled the House when answering questions at the end of January 1985. That is a serious allegation. I emphatically refute those allegations. At the time I was answering questions about whether any insurer had refused business or indicated that it was not open for business during 1984 and if I accepted that there was a crisis existing in the writing of non-life insurance business in this country. In reply I indicated that I was not aware of any insurer intending to pull out of the Irish market, and furthermore that I did not accept the latter proposition that there was a crisis in the industry.
Both Deputies seem to be inferring now that because of what has come to light in relation to ICI, that I was deliberately misleading the House when I made those statements. I was not. In the particular case of ICI, my Department had identified a problem in relation to its Irish business and AIB had injected £30 million into ICI during December 1984. The consultant actuary employed by my Department had confirmed that the corrective measures were adequate in relation to ICI's Irish business.
No problems had arisen at that stage in relation to the UK branch business of the company, which was under the supervision of the Department of Trade and Industry in the United Kingdom. My reply at the end of January was, therefore, based on the information available to my Department at that time, which indicated that the Irish business of ICI was adequately provided for.
I resent the allegations made by Deputy Haughey and by Deputy Flynn. On a number of occasions, particularly at Question Time, I have heard wild supplementary questions from Deputy Flynn which, to my mind, are geared to cause unease to the public in relation to the insurance industry. Deputy Flynn should be more responsible in his questioning. As a former Minister in the Department he knows full well the conditions in the Irish insurance industry in general. His attitude at Question Time leaves something to be desired.
In his contribution to this debate yesterday Deputy Prendergast referred to the "no fault" scheme of compensation in respect of occupational injuries in operation in New Zealand and indicated that the scheme had been abandoned due to its uneconomic cost. Deputy Prendergast considered that the costly experience in New Zealand of "no fault" cover represented a good case for the retention of the jury trial system in Ireland.
While I appreciate that Deputy Prendergast put this view in good faith, I must beg to disagree with this statement regarding the alleged abolition of the New Zealand scheme. The system referred to operates under the Accident Compensation Act, 1972, and provides compensation for personal injuries to victims of accidents at work, or in the home, and of motor accidents.
Although the scheme has recently been tightened up to discourage claims of a questionable nature, the levels of compensation for injuries of a minor nature have been revised and certain administrative changes have been made. My Department have been advised by the New Zealand Embassy in London that the scheme is still in operation and, to the best of their knowledge, there is no question of the operation of the scheme being suspended or discontinued.
With regard to the insurance market in general, it is recognised that the increasing incidence of claims and the growth in size of claims, and the degree of competition from outside companies which have come in and established in the Irish market, together with the recession itself, have put considerable strain on what is by European or world standards a relatively small industry built up carefully since the thirties. That policy of building up an Irish insurance industry brought enormous benefit to the economy as a whole and in the welter of recent exchanges of a depressing nature, that should not be lost sight of. It is important to the nation generally that our insurance industry is maintained and developed to face competition.
Apart from the claims problems which I have just mentioned and which are largely associated with a period of high and continuing inflation, I think it only fair to mention some of the other difficulties under which we operate.
First, there is the inevitable time-lag involved in the filing and examination of statutory returns with the result that where remedial action is called for a certain amount of ground may need to be made up. I do not consider this matter is a serious one because generally we are dealing with companies on an on-going year in year out basis. While it seems to be a problem I would not consider it a major problem.
Secondly, there is the fine line which must be drawn between too much and too little enabling statutory powers — in other words, the continuing need to strike the correct balance between, on the one hand, the outright protection of the man in the street in his dealings with the institutions and, on the other, the normal commercial freedom and professional competence of these institutions in carrying on their business on a day to day basis. Put another way, too little supervision would mean that a supervisory authority did not exercise intelligent judgment and apply yardsticks devised from its experience and its knowledge of the industry as a whole and, in particular, that it failed to call on any company or branch of a company to explain trends which looked unusual or abnormal; while too much supervision borders on taking the management responsibilities out of the hands of the underwriters, claims estimators, etc., whereas they, together with the directors of the company, must always carry that responsibility.
Clearly, now, there is a necessity for careful stocktaking of the economic climate in which the industry is functioning and of the legal procedures which put pressures on claims. Such an exercise is as much the responsibility of the industry as of the Minister. Also, admittedly, we will have to look at how much further supervision can be strengthened and improved, but always consistent with the primary responsibility of management and the supporting experts within the insurance companies for — and I would stress this — it must always be remembered that supervision does not amount to doing those people's jobs.
In the area of motor insurance the Government have pressed forward with the implementation of the measures announced in October 1983 on foot of the recommendations made by the Prices Advisory Committee. In regard to the further implementation of the Government's measures on motor insurance, the Government set up in February of this year a working group of Ministers of State to monitor and ensure the earliest possible implementation of the measures announced in October 1983.
I have tried in the course of my speech to deal a bit more technically than I normally would in a contribution in this House with the technical workings of my Department in relation to the insurance industry. It was necessary for me to do so on this occasion. I wanted to paint the picture of how my Department exercise their responsibility for the insurance industry. I am satisfied that the officials of my Department are of a high calibre and that they carry out their duties in an excellent way. Where necessary, we bring in outside consultants. That is as it should be. We may need to strengthen some aspects of our work. That would be a normal on-going and positive thing to do in any organisation.
Finally, the crisis which came upon the ICI was most unfortunate. An explanation will, I am sure, be forthcoming in the weeks ahead. The Opposition should not express an opinion that there is confusion about the relative contributions of AIB and of the banking system generally. The Minister for Industry, Trade, Commerce and Tourism yesterday dealt clearly with the contributions coming from the AIB and with the view of the Central Bank. He said the contribution mentioned was the limit which the bank could prudently be expected to accept at that time.
What the Minister for Finance has now dealt with is the role of the Central Bank following the decision of the bank's board yesterday. That decision opens the way for the contribution from the banking sector in general to which the Minister for Industry, Trade, Commerce and Tourism referred yesterday. This is, of course, quite separate from the AIB contribution. As both Ministers have indicated, the steps which have been taken are a measure of the Government's resolve that the taxpayer should not have to shoulder the burden of these very necessary steps to protect our financial sectors. I comment on the speed, firmness and preciseness of the Government's actions in this matter. It is clearly necessary, because we must have confidence in our financial, insurance and banking sectors. The Government's move firmly to take control of the situation was the correct one and will result in the continuation of full confidence, both at home and abroad, in our financial sector.
