I move: "That the Bill be now read a Second Time."
I welcome the opportunity to address Dáil Éireann today on the Insurance (Amendment) Bill 2011, which was published on Tuesday, 13 September 2011. At the outset, I wish to outline the main reason it is necessary to have the Bill passed speedily by the Oireachtas. The joint administrators of Quinn Insurance Limited, QIL, hope to conclude the sale to Liberty Mutual Direct Insurance Company Limited, a joint venture between Liberty Mutual and Anglo Irish Bank on 4 October and they are to report to the High Court that day to give effect to this.
A key requirement which will have to be demonstrated to the court by the joint administrators is that there is a commitment in place from me, as Minister for Finance, to advance the necessary funds to the insurance compensation fund in the following weeks. A precondition of such an advance is a recommendation from the Central Bank that such funding is required. At present, there is €40 million in the fund, and the Central Bank has advised that in order for the joint administrators to be able to meet their financial obligations in the last quarter of this year, €280 million will have to be provided to the fund and has accordingly recommended that I make the necessary advance. However, as Deputies will appreciate, before I can make such an advance the proper legal basis has to be in place, thus explaining the urgency of the Bill. Approval from the High Court for the deal will complete an important milestone in the administration process, which will see the sale of QIL completed and ensure the future of the workforce is secure.
The main reason for amending the legislation is changes in EU law in the non-life insurance sector since the fund was last used. The Attorney General advised that our existing legislation was not compatible with EU law and should be amended. Accordingly, the Bill proposes to amend the Insurance Act 1964.
The Bill comprises ten sections, the main elements of which are set out as follows. Section 1 is the definitions section, and the purpose of this provision is to acknowledge that the principal Act is the Insurance Act 1964. Section 2 amends section 1 of the principal Act, which is the definitions section of that Act. The purpose of this provision is to introduce a number of new definitions to section 1 of the Insurance Act 1964 and update the existing definitions for "authorisation", "policy" and "insurer". These will allow the scope of the scheme to be extended to cover all insured risk in the State, except specific excluded risks.
Section 3 amends section 2 of the principal Act, which deals with the insurance compensation fund. This a technical provision and its purpose is to make a number of minor cross-referencing changes to section 2 of the Insurance Act 1964, consequential on the amendments made in this Bill.
Section 4 deals with payments out of the fund in respect of insolvent insurers. The purpose of this provision is to replace section 3 of the Insurance Act 1964 and to introduce a number of new sections. These provisions are designed to facilitate payments out of the fund to policyholders with regard to risks in the State where an Irish authorised or an EU authorised insurer goes into liquidation and the approval of the High Court has been obtained for such payments.
In more detail, section 3 provides context for sections 3A and 3B and also sets out the limitations to the payments which can be made from the fund. These limitations replicate what is contained in the existing legislation, the most important of which is that payment from the fund under a policy shall not exceed 65% of that sum or €825,000, whichever is the less, in the event of payments being made to policyholders after the liquidation of an insurer.
Under the new scheme, policyholders will be covered by the fund in respect of "risks in the State." The principal factors which will determine whether a risk is a "risk in the State" will be whether insured buildings are located in the State; whether insured vehicles are registered in the State; in the case of short-term travel insurance — whether the insurance was taken out in the State; and in most other cases whether the habitual residence of the policyholder is in the State or, in the case of legal persons, whether the establishment of the policyholder is in the State.
Section 3A provides for the liquidator to make payments from the fund to policyholders of Irish authorised firms.
Section 3B provides that if an insurance undertaking in another member state goes into liquidation and policyholders in relation to risk in the State are affected, that the accountant of the High Court can make an application to the High Court on their behalf and can distribute any sums due to such policyholders.
Section 3C provides for the continuation of the administration provision as set out in the Insurance Act 1964, but prospectively intends confining the availability of funding from the ICF to firms under administration which conduct a large percentage of their overall business in Ireland, that being, 70% averaged over the three years before the appointment of the administrator.
Section 5 is the repeal of section 4, grant to fund by Minister, of principal Act. The purpose of this provision is to repeal section 4 of the Insurance Act 1964 which the Office of the Attorney General has advised is obsolete as it relates to a specific insolvency in 1964, namely the Equitable Insurance Company Limited.
Section 6 is an amendment of section 5, advances to the fund by Minister, of principal Act. This is a technical amendment designed to make a cross-referencing change to section 5 of the Insurance Act 1964.
Section 7 deals with contributions to the fund. The purpose of this provision is to replace section 6 of the Insurance Act 1964. The section sets out the conditions for the levying of insurance companies in relation to the ICF. The key elements of this provision are: the Central Bank continues to be responsible for assessing the fund to determine if it needs financial support; the bank determines the levy to be placed on insurers where funding is required and notifies them; and it requires all insurance companies to be levied in respect of risks in the State under the new scheme.
Section 8 repeals section 31, the insurance compensation fund of the Insurance Act 1989. Section 8 of this Bill is a technical amendment and the purpose is to repeal section 31 of the Insurance Act 1989, which made amendments to section 3 of the 1964 Act. Those amendments are now obsolete as they are superseded by section 4 in this Bill.
Section 9 relates to saving. The purpose of this provision is to provide a saving mechanism and to ensure that any liquidations or administrations commenced before this Act comes into effect will continue to be subject to the old rules. This is the standard convention that a company under administration is protected under the rules that applied when the company went into administration. The effect of this is to ensure that Quinn Insurance Limited remains under administration as if this Bill had not been introduced.
Section 10 is a standard provision, which provides for the Short Title of the Act. I would like now to elaborate on the main reasons for the Bill. When the administrators were appointed their main task was to carry on the business of Quinn Insurance Limited as a going concern with a view to placing it on a sound commercial and financial footing by carrying out the necessary restructuring and setting in motion a process to sell the business. During this time they were also required to establish what the underlying financial position of the company was and in particular whether sufficient reserves had been put aside to meet its future liabilities. Consequently, by the time the announcement of the sale of Quinn Insurance Limited to Liberty Mutual Direct Insurance Company Limited, LMDI, was made on 28 April, the joint administrators were in a position to indicate that Quinn Insurance Limited had suffered losses of €905 million in 2009 due largely to operating losses in the UK market and a write down in the value of assets. Further related losses in 2010 are expected to be €160 million. At the same time the joint administrators indicated that there was likely to be a call on the insurance compensation fund in the region of €600 million. This figure has however been revised upwards to €738 million in recent weeks, because of an increase in the outstanding claims reserve which was required after the finalisation of the 2010 actuarial review by Quinn Insurance Limited actuaries.
Deputies should note that the increased call upon the insurance compensation fund concerned me in case the company's eligibility for insurance compensation fund funding might be leading to a less rigorous approach being adopted to the settlement and payment of claims. It was important that I be satisfied that the appropriate systems and processes were sufficiently robust to ensure that the call upon the fund is kept to an absolute minimum. In that light, I asked the State Claims Agency, which has specialist skills in the area of claims management and reserving, to undertake a review of the processes at Quinn Insurance Limited and in particular to have a look at the claims management process. The State Claims Agency has almost completed its review and in its interim report has reassured me that the claims management process is operating effectively. It indicated that reserving had improved considerably since the joint administrators took over the running of the business, but there was potential for improvement in some other areas. In summary, it felt that the increased call upon the fund, as a result of various actuarial reserving reviews, was appropriate.
Currently, under the Insurance Act 1964, all policyholders of Irish authorised firms are covered by the insurance compensation fund whether they are located in Ireland or in other EU member states. The legislation also provides that all such companies are required to be levied whenever there are insufficient funds in the insurance compensation fund to meet a particular demand such as the Quinn Insurance Limited deficit.
However, because of changes in EU law since the fund was last used, it was necessary to get legal advice on this legislation, in particular the application of the insurance compensation fund levy on insurance companies. The primary issue we wanted clarified was whether Article 46 of the Third Non-Life Insurance Directive, 92/49/EEC, which precludes a member state from applying an indirect tax or parafiscal charge on insurance risks outside of its jurisdiction was relevant to the application of the insurance compensation fund levy. The Attorney General concluded that it was relevant, and that any levy which was applied on insurance companies in terms of risks outside of the State in the context of an administration or a liquidation would appear to infringe Article 46.2 of the directive. In light of this she advised that a levy can only be applied in respect of those risks located in the State. The outcome of this advice is that we cannot apply the insurance compensation fund levy to international risks, and as a result our legislation must be changed thus explaining the amendments being made to Article 6 of the 1964 Insurance Act in this Bill.
I have also decided to amend the scheme so that, as far as possible, risks outside of the State are no longer covered by the fund. Failure to do this could result in Irish policyholders having to fund a deficit resulting from the failure of an Irish authorised insurance company which conducts the bulk or all of its business outside the State. In addition, I have decided to use this legislative opportunity to broaden the scope of the insurance compensation fund to cover all insured risk in the State. That will protect policyholders in this country who take out cover with companies authorised in other EU member states and who are not currently covered by the existing scheme and therefore ensures that all domestic policyholders have the same level of protection in a liquidation situation, whether the policy is taken out with an Irish authorised firm, or a firm authorised elsewhere in the EU.
For the moment, I have decided to exclude health insurance from the scope of the scheme, because the main player in the market, VHI, is not authorised by the Central Bank and is therefore outside the scope of the general body of insurance legislation. In addition, the placing of an additional 2% on health insurance premiums at a time when there has been a significant increase in people not renewing their policies because of the difficult economic climate concerns me.
It should be noted that I propose to maintain the administration provision as set out in the Insurance Act 1964, but prospectively intend confining the availability of funding from the insurance compensation fund to firms under administration which conduct a large percentage of their overall business in Ireland, that being 70% averaged over the three years before the appointment of the administrator. The purpose of the restriction is to prevent Irish policyholders being burdened with paying for the administration of an insurance business which conducts all or the bulk of its business outside of the State, in circumstances where it is not possible to levy the premiums of foreign policyholders because of Article 46 of the third non-life directive.
In conclusion, I reiterate the importance of the swift passage of this amending Bill, in order to ensure that I can advance the necessary funds to the insurance compensation fund in the next couple of weeks. It is important to keep in mind that any advance by the Exchequer to the fund will be classified as a financial transaction and as such is not seen as expenditure, and therefore does not affect the general Government deficit and our targets under the EU-IMF framework. Indeed, an appropriate market rate of interest will be applied to this advance which means it will marginally improve the general Government balance. I commend the Bill to the House.