Thank you, Chairman. As members know, ISME is the independent voice of owner managers of SMEs in Ireland. I am here to present their case on the crisis in SMEs brought about by the insurance industry's mismanagement of the insurance sector in recent years. I do not use the word "crisis" lightly. Since the turn of the century insurance premiums have increased at a rate well beyond inflation.
In March 2001, a full six months before the 11 September debacle, ISME was drawing attention to the increases being suffered by its members and in the years since the average premiums have increased as follows: in 2001 a 51% increase on average, in 2002 a 72% increase and in 2003 already we are suffering a 52% increase in premiums. This gives a total cumulative increase in the past three years of a massive 290%. To put that another way, an owner manager who was paying €10,000 in 2000 is currently being asked to pay €39,000 for the same or probably reduced cover.
We have shown a number of case studies in our submission. The company referred to in case study C was hit with an increase of 600%, which led to one-third of its staff being let go. In case study B there was an increase of 409%, which resulted in four out of 11 staff being made redundant to pay for the insurance premium and keep the company in business. These and many other examples are mentioned here to illustrate the costs and impact this crisis is having on small and medium business which form the backbone of the economy.
The association has previously outlined that the impact of insurance costs through the ISME surveys of March 2001, August 2002 and April 2003, which contain the empirical data, confirm that rising insurance premiums are one of the greatest threats to competitiveness of Irish business and have remained the number one concern of small businesses in the past three years.
Increasing and unsustainable insurance costs have a real impact on business in particular and on the economy in general. The only way for many businesses to absorb the increases is to make cutbacks in other areas. This is leading to a growing number of redundancies as well as curtailment of any future growth plans. Exorbitant and prohibitive insurance costs are also acting as a barrier to new start-ups and would-be entrepreneurs are choosing to stay in the shelter of employment rather than setting up new businesses thereby stifling any new wealth or job creation.
ISME surveys have found that the cost of insurance represents an average of 2.5% of turnover; it is not unusual to find companies that are spending more than 10% of their turnover on insurance premiums. The payment of ever increasing insurance premiums is far greater in most cases than the moneys being invested in training or research and development in small and medium businesses. The alternative to paying these premiums is to operate without insurance. As an economy based on asset ownership, doing that is fraught with danger and completely unsustainable.
Members of the committee will no doubt have heard from various quarters of the probable causes of this crisis. The insurance industry will have blamed the events of 11 September 2001, the legal profession - both solicitors and barristers - the Judiciary, the medical profession, the business community - both large and small - the compo culture, the Government and even the weather. The insurance industry has tried to pass the blame along the line like pass the parcel until the music stops. We are here today to say that the greatest blame must lie with the insurance companies themselves which have allowed a crisis to develop in the insurance sector in Ireland in recent years far greater than in any other area of the globe.
The insurance business model in the past was based on investment returns subsidising loss making insurance products. The products were loss making because there was a cosy arrangement between insurance companies and the legal profession, on the basis of dragging out cases and thereby allowing insurance companies to earn two or three years' returns on the premiums before eventually settling the case. At that stage, solicitors pocketed fat fees. The losses brought about by those high costs were easily covered by the high returns on investments in those days and both insurance companies and solicitors were happy.
Legal fees have not increased as a proportion of awards in recent years - they were always high. It was only when the return on equities collapsed that the insurance companies were hit with a double whammy of equity losses and insurance underwriting losses. They and the legal profession, like a pack of hyenas at a stripped carcase, turned on each other, with blame and counter-blame - a classic falling out among, let us say, professions. It is no wonder we have a low trust, litigious society which breeds a climate of distrust, dishonesty and naked opportunism which is affecting wealth, job creation, new business start-ups and SME competitiveness.
We in the business sector entrust our money to insurance companies to cover our insurable risks. I would have thought it reasonable to expect those highly paid, so-called experts in the insurance industry to manage those funds to at least achieve a break even return. However, the reality is that insurance companies have taken their eyes off the ball, allowing this shambles to grow to crisis proportions, following which they blithely throw their hands in the air and blame everybody from Osama bin Laden to Willie Wonka. One can hear them singing "It wasn't me" as one walks out the door.
How did they set about recouping their losses and recovering their expected 15% return? They increased premiums, cherry picked riskless business and refused cover to some existing clients. ISME surveys show that 15% of our members have had such refusals. The insurance companies act in cartel-like fashion, threaten to pull out if regulated and have to be dragged kicking and screaming to the MIAB. They displayed a decided lack of co-operation at the Motor Industry Insurance Board - those are not my words but those of the chairperson of the MIAB, Ms Dorothea Dowling. They are less than forthright with their figures - again, not my words - and they blame everybody but themselves. In so doing, they have put a minimum of 100 SME companies out of business in the last three and a half years and approximately 3,000 people have joined the dole queues. Those are conservative estimates. Some of those involved had been bailed out by the Government and the taxpayer in the events of St. Patrick's weekend of 1985, when ICI and AIB went belly-up, to the tune of IR£226 million.
ISME acknowledges that there are many problems with the insurance system in Ireland which have increased the cost of delivery of insurance. The committee will have already heard that it takes four times longer to deal with cases, awards are 12 times higher and litigation fees are running at between 40% and 60% of awards, there is a lack of competition, the compo culture is fuelled by ambulance chasing solicitors offering no foal, no fee terms, there is uncertainty of awards and claims are settled without recourse to the insured.
We also acknowledge that certain reforms are being introduced, however slowly, in order to reduce the delivery costs. The report of the Motor Industry Advisory Board is helpful, with 35 of its 67 recommendations being acted on currently: we welcome the introduction of the personal injuries assessment board by the Tánaiste; solicitors' advertising has been regulated and the no foal, no fee system has been banned; the book of quantum will, it is hoped, be part of the personal injuries assessment board; the affidavit of claims issue is being addressed through a recent Bill published by the Minister for Justice, Equality and Law Reform; the points system has been introduced and there is a reduction in the number of cases going through the courts, with a 14% reduction in High Court cases between 2001 and 2002.
I wish to refer to IBEC's presentation on the health and safety issue, notably the point that an Irish worker is one-third less likely to be injured. This evidence is totally at variance with recent pronouncements from insurance industry spokespersons, not for the first time. Those spokespersons are constantly pouring cold water on reforms of the insurance industry and rubbishing our expectations of premium reductions. Even with the initial reforms I have mentioned, we are still suffering premium increases of 52% this year alone. The insurance industry is once again on the prowl for profits and will pass on the benefit to the insured only if compelled to do so through regulation or, if necessary, legislation. ISME acknowledges the right of insurance companies to make a profit - we are the enterprise organisation. However, we cannot condone naked greed and opportunism on the part of the insurance industry while small and medium businesses are going to the wall.
ISME believes that the insurance companies, the Government to a certain extent and the legal profession must be held accountable for the damaging impact of high insurance on Irish business. By turning a blind eye to consolidation in the sector over the last eight to nine years, resulting in only four major players remaining in the Irish market compared to over 30 in the UK, the Government has allowed a cartel-like situation to develop in the insurance industry. As a result, insurance companies are cherry-picking business and only taking risk free premiums. The legal profession, which has always fed off the insurance industry like leeches, excessively charging for its services, has exacerbated this crisis and fuelled the compensation culture which is endemic in our society.
ISME urges the introduction of a number of initiatives without delay. We are anxious that the personal injuries assessment board be set up on a statutory basis as soon as possible. We request that all legislation in that regard be given priority status. We advocate the immediate implementation of a court reform programme, to be overseen by the Department of Justice, Equality and Law Reform, with a realistic timetable and assessment procedure. We urge the immediate introduction of a book of quantum, which will come about through the personal injuries assessment board and will alleviate the present uncertainty.
An affidavit of claims system is essential. It is estimated that fraudulent and spurious claims have cost Irish policyholders more than €65 million in 2001 and up to €100 million in 2002. While ISME guardedly welcomes the establishment of a fraudulent claim hotline by the Insurance Federation, that sector must play its own part by being less eager to settle claims until all the required investigative work is undertaken and discussed with the insured. We recommend the introduction of legislation obliging insurance companies to notify business in advance of premium renewals. This has been a major problem for many small and medium businesses which received their renewal notice either on the day of renewal or, in some cases, two to seven days after that date. That represents a shotgun-to-the-head approach.
We would welcome the introduction of a system similar to the 15 day requirement introduced last year on motor insurance. We would expect a ten week requirement for business insurance. We recommend that the Government levy be available to companies experiencing economic difficulties as a result of the insurance issue. Funding from that levy has been used in the past to bail out the PMPA and ICI and should be available to help companies, especially those stricken by the collapse of the Independent Insurance Company in the UK, which has left many Irish businesses exposed. Their counterparts in the UK have been compensated.
We recommend that a matrix of costs be put in place by the Irish Insurance Federation to provide figures for industry sectors and size of firms by numbers employed and turnover. That would enable firms to benchmark their insurance renewal quotes against similar type companies and international industry standards. Barristers should not be employed to settle cases unless proven to be required. Barristers are involved in 48% of cases in Ireland whereas the UK figure is as low as 3%. The onus should be on solicitors to settle cases between themselves rather than enlisting the help of barristers. In the UK, 71% of cases can be sorted out through correspondence or over the phone compared to 1% in Ireland. I doubt that solicitors in the UK are 71 times better at dealing with matters by correspondence or over the phone than their Irish counterparts.
