I am aware of the difficulties being faced by employers, particularly small and medium enterprises, in obtaining insurance cover in respect of public liability. These difficulties were apparent in the latter part of last year, but are becoming even more acute this year to date. I am aware that the problem is twofold: first, there have been large increases in renewal premiums; and, second, companies are not able to obtain cover at any price, in some cases. Various reasons have been put forward for the large increases in insurance premiums now taking place and also for the particular difficulties being experienced by those seeking public liability cover.
Insurance costs are mainly determined by the number and level of awards to policyholders. In this country the incidence of claims – to which Deputy Ring referred in his wide-ranging contribution – has been relatively high and we all know that the cost of settling those claims is also high by any standards. It is estimated that the delivery cost of settlements, made up almost entirely of legal costs, now runs at approximately 40% of the cost of claims and in some cases may even be higher.
Additional factors have impacted negatively on the cost and availability of insurance cover, including public liability cover, in the recent past. Insurance is a cyclical business and, following several years of a "soft market" involving technical losses for insurance companies, the cycle changed and prices, therefore, went on an upward trend.
The tragic events of 11 September last in the United States of America have had a huge impact on the international insurance market. Following those events, losses being incurred by international reinsurers are resulting in very large increases in the cost of reinsurance cover bought by insurance companies here in Ireland and elsewhere. In that regard, on 1 November we were informed that the liability relating to the tragedies in New York, Washington and Pennsylvania was $60 billion. On 1 March we were informed that this had increased to $115 billion and that the insurers providing the cover and the reinsurers providing the reinsurance cover on the insurance risks had total technical reserves of $15 billion, leaving a net shortfall of $100 billion and rising. It is against that background that I speak tonight.
Furthermore, there has been a reduction in reinsurance capacity in the marketplace, including in the London market, where insurers and brokers here had been able to place some of the risk. A number of serious collapses occurred in the UK insurance industry in the past year. On 17 June Independent Insurers Limited ceased trading and, prior to this, a number of syndicates went out of business. This has aggravated the situation going forward.
Insurers are also reassessing the risk in relation to certain types of cover. The area of liability cover seems to be particularly badly affected by this reassessment. Investment income gains, which were relatively high in the past and could be used to offset insurance losses, are now greatly reduced. This is causing further upward pressure on premiums. If interest rates on borrowing are high, those charged on deposits will also be high. Investment income is high when deposit interest is high and if interest rates are low across the board, investment income on liquidity drops immeasurably. Recent High Court judgments in two cases have the potential to increase greatly awards in personal injury cases, necessitating a strengthening of reserves by insurers in respect of outstanding cases.
When considering what action my Department and the Government can take to address the problem I must, first, point out that the pricing and underwriting of insurance are matters for individual insurance companies and European Union law prevents us from intervening in relation to the matter of premium levels or in respect of the risks that insurance companies are prepared to underwrite. In other words, we cannot control the price they charge for particular risks, neither can we say what risks they should cover. That is a matter for the market and Governments across the Union are prevented from interfering in this area. However, in view of the seriousness of the situation, especially for small businesses, I am making arrangements to meet once again with representatives from the Irish Insurance Federation and the major insurance companies in the Irish marketplace. I will be encouraging them to develop, in consultation with their clients, innovative strategies for controlling risk. It is my hope such strategies will contribute to a moderation of prices.
We are pursuing initiatives aimed at reducing the delivery cost of compensation. With regard to delivery costs, the Government has decided to establish the Personal Injuries Assessment Board. An interdepartmental implementation group is now considering how best it can be established. I await its final report in order that the board can be established as quickly as possible. I expect significant savings in the current high delivery costs of personal injury compensation can be achieved, thus permitting a reduction in insurance premiums in the years ahead.
The Motor Insurance Advisory Board has completed a considerable amount of work, including an examination of premiums charged and claims incurred by various categories of drivers – a matter to which Deputy Ring referred. The board has ratified the text of its report and its printing is now being arranged. As a result of the research carried out by the board, there will be greater transparency in relation to the Irish motor insurance market. One of the benefits of this should be to encourage more insurers in other EU countries to enter our market to provide not just motor insurance cover, but also other types of cover. While the Irish market is open to competition from providers in other EU member states since the transposition into Irish law of the third directives in 1994, there has, in fact, been a low level of entry by such providers. I hope the situation will improve following the work of the MIAB and through the establishment of the PIAB.
I commend Deputy Ring for his wide-ranging address on this very serious issue which is dear to the hearts of Members of this House and Seanad Éireann. It is a serious issue, nationally and globally, and I will require the full support of all Members of this House if we are to make any progress on resolving it.