I thank the Chairman for the opportunity to address the committee, to give it an overview of the issues and hopefully also to correct some misinformation which I would be concerned might influence the committee's deliberations.
Due to the escalating cost of insurance in Ireland the Motor Insurance Advisory Board was established to conduct a root and branch review of the motor insurance. It was the first such investigation to secure access to insurers' raw data, that is, the millions of records on the money that is coming in and exactly where it is going out. At the risk of abusing the privilege of being here this afternoon I record thanks to the members of the 18 person board, named in the appendices, who gave their services free of charge especially Cyril Connolly, the statistician who undertook the data analysis. In the MIAB we found it unwise to rely on consultants' reports presented by any vested interest, compared to the benefits of working with the raw data - hard facts and figures - upon which our report is based.
It might appear that the 67 recommendations at page 36 of the report relate only to motor insurance but, in fact, the underlying issues apply equally to all classes of liability claims cost. Many previous reports on the economic consequences of the cost of insurance in Ireland seem to have done little more than gather dust on a shelf somewhere. The MIAB report is different. The 67 recommendations are all part of An Agreed Programme for Government and an action plan was published by the Tánaiste in October 2002. I understand a copy of that plan was delivered to members yesterday.
It is not possible in the time allowed to summarise what is widely acknowledged as the most comprehensive study ever undertaken in this country but essentially the focus is on three factors. Members may find these flip charts convenient as we work through the report. Members may also note their questions which I will be happy to take when we have completed this review.
The three factors as reflected in the structure of the report are accidents, the cost of claims and the operation of the insurance market. As stressed in the MIAB report these factors must be tackled together. The reform will not work if the focus is in one direction. I propose to deal with each of the areas in turn, with reference to the board's recommendations, and will then welcome questions from members.
Let me turn to the question of accidents, the index for which is on page 45 of the report. While every incident of injury to a human being is one too many, the picture painted in some quarters that the cost of insurance in Ireland is nothing more than we deserve, our accident rate is simply not true. Over the three years of data examined by the MIAB 90% of policyholders have not been involved in any accident or any claim. Is it any wonder they cannot understand why their insurance premiums continue to rise? Those details are at paragraph A 96 of the report. That is not to say we must ever be complacent about accident prevention but we seem to have a culture problem with obeying laws that are designed for our own safety, unless there is a high chance of getting caught. Also there are undoubtedly deficits in our roads infrastructure. The fact remains, as demonstrated in the MIAB report, that in the previous decade the relative frequency of injury/accidents reduced by 20% while net premium income increased by 132%. Those details are contained at paragraph A 9, page 49, of the report.
On the question of severity, aside from pure property damage there are three broad categories of accidents - fatality, serious injury and minor injury. The death of a loved one has ramifications which extend far beyond financial implications so they must always be our priority as a civilised nation. However, in cold financial terms the highest claims cost is actually for those who survive an accident but with life long serious injuries. The frequency of serious injury is reducing. Less than 1% of cases are valued at €100,000 or over. If all accidents were merely fender-benders we would not be meeting here this afternoon.
Prevention of accidents, even those without implications for the cost of insurance, is the responsibility of the Health and Safety Authority in relation to workplace accidents and in relation to road traffic accidents, the responsibility of the Government's high level group, which is chaired by the Department of the Environment, Heritage and Local Government.
Enforcement of laws, fines and prosecutions as well as new measures, such as the penalty points system, as sought in recommendations Nos. 1 and 2 of the MIAB report, must act as real deterrents to irresponsible behaviour, quite apart from the cost of insurance. One can never buy the right to injure another person. The reality of life worldwide is that accidents do happen. That leads us on to the question of claims.
In the report, page 374 contains the index of the claims issue. One of the greatest challenges we face is the frequency of claims for which there have been a number of motivators in Ireland. Aside from the now banned no foal no fee advertising by solicitors, to which reference was made earlier, I shall give what might be regarded as a surprising example which underlies recommendation No. 45 on hospital bills. A person who would otherwise be entitled to free medical care faces bills from hospitals at over €600 per night if they have been involved in a motor accident solely because of the provisions of the Health (Amendment) Act 1986. Health boards pursue these bills in zealous correspondence which basically says to people, you should be pursuing a claim. Among MIAB members we had three instances of this happening and on two occasions it led to claims which would not otherwise have been made. Similarly, health insurers are writing to their policyholders before they agree to cover medical expenses arising out of accidents asking if the policyholder is making a claim and, if not, why not, and if the person has sought legal advice. Copies of that correspondence is available here for the joint committee.
It is not only the free rider who has been pushing the so-called compo culture. Naturally the Department of Health and Children has rejected out of hand recommendation No. 45 about amending the Health (Amendment) Act 1986, despite the fact that the Supreme Court found that road traffic cases represent less than 1% of the users of hospital services. We must be sure we have joined up thinking in Government. What is the point in health officials chasing accident victims and practically forcing them to make claims when this is having the effect of increasing insurance costs to the extent that they are losing jobs, losing businesses and there will be less tax revenue for health services and everything else? As Dr. Peter Bacon, in his report for the Bar Council, shows at page 5 of his report, in Ireland a lower level of the cost of accidents is paid by the State than in jurisdictions with higher taxes. Any influence the joint committee might consider appropriate on that matter would be greatly appreciated.
After claims frequency we addressed severity. No one, either on this committee or elsewhere, is suggesting that the seriously injured victim of a negligent action should not get any compensation. A fact which is rarely referred to is that of the MIAB recommendations nine are about making the position of the genuinely injured victim better, particularly those who have been the victims of hit and run or uninsured accidents. In reality, it is not the serious accidents which account for the cost trend. As we saw earlier, less than 1% of cases are valued at €100,000 or over. We do not need a cap on compensation for serious injury. The challenge we face is the high volume of low value cases for minor trauma. It seems that people have been given the impression that the mere occurrence of an accident entitles them to compensation. That is not the law of this land.
There are four types of claims - there is the genuine seriously injured victim of someone else's negligence. This is the person whose interests the whole system is supposed to serve and we fail them miserably. Independent research shows that claimants here wait six times longer than in the UK for negotiations to even commence on their claims. The data on that are in the table at paragraph C 159 of the report. This will be tackled through the Personal Injuries Assessment Board delivering a fast track system of compensation in genuine cases where legal issues are not disputed but there is no need for litigation overheads and no need for long delays. Respondents in these cases will be happy to pay reasonable fees to the PIAB which are a fraction of litigation costs which they would otherwise incur. This will enable the PIAB to be a break-even financial operation without any draw on the Exchequer or the taxpayer.
Aside from these assessment only cases, the second type of claim involves people who have been injured but where there has been no negligence. Of course these cases should be fought in the courts but justice is not an affordable option when insurers point out that even when they fight and win these cases, legal costs are rarely if ever awarded. There is currently no real deterrent to mounting a claim no matter how ill-founded. Recommendation No. 49 of the MIAB report calls for automatic awards of defence costs where a court has found that the person who is sued is innocent of any negligence. This recommendation is not reflected in any legislation drafted to date.
Third, there are those claims where the defendant is liable, the plaintiff may have sustained some injury, but they see this as a financial opportunity with better odds than the national lottery. Huge resources are employed in tackling these cases. Even when a judge accepts the evidence that a case has been exaggerated, nobody has ever gone to jail for falsely swearing under oath in an attempt to steal money from their fellow citizens who have contributed to the central insurance fund.
The final type of claim, fraud in the technical sense, is a relatively infrequent occurrence, although the committee will be aware of examples which have been in the media - particularly the "Prime Time" programme - of completely set up accidents, especially those involving rented cars, or of witnesses colluding to pretend there was a slip, trip or fall.
Exaggerated claims are our most frequent challenge and these will be tackled by the McDowell legislation. Until now, insurers have settled lots of these claims because they have made decisions on the basis of short-term economics. What has this done? It has encouraged other chancers to have a go. The committee may have noticed that most of the focus on claims fraud relates to cases fought by the self-insured sector and the two leading Supreme Court actions quoted in the explanatory note, as head 23 of the Civil Liability Bill, similarly do not relate to insurance companies.
Then there is the phenomenon of repeat claimants. The existence since the 1990s of the central claimant database has been a very significant factor in identifying the extent of this problem and in tackling it. However, it must be highlighted that the Data Protection Commissioner is currently reviewing the operation of that system. Depending on the outcome, further legislation may be required to ensure that this valuable investigative tool remains available for defendants. A list of the members of the central claimant database has been supplied to the committee. I would ask the committee to give this its particular consideration.
Litigation overheads are the biggest single aspect of the cost of claims and, on average, add 42% to every euro paid in compensation. The details are at paragraph C 108 in the report. They add 40% to every euro in motor cases, rising to an extra 56% on top of compensation in public liability claims. The details are all on page 416 of the report.
Until now there has been no alternative but to enter into a full blown litigation process, despite the fact that less than 10% of cases ever reach a court trial. In response to the MIAB's recommendation No. 39 on the PIAB, the interim board of the Personal Injuries Assessment Board was appointed on 27 November 2002 and the heads of the Bill were published on 29 May 2003. At this point, it is important in the interests of balance to record the valuable and dedicated services provided by most of the legal profession, without whom many citizens could not secure their constitutional rights. It should also be emphasised, as it is in the MIAB report, that litigation overheads do not relate solely to lawyers; they also cover fees for other experts who produce reports, etc. Equally, however, it must be pointed out that while 4% of injury claims in England involved barristers, in Ireland 70% of cases involved either junior counsel or both junior and senior counsel. The details for this are at paragraph C 153 of the report.
In the 90% of cases that never reached a court trial, most of this delivery overhead on professional fees was spent preparing for an oral hearing that never happened. Remember, that 42% is an average but in lower value claims the total of litigation costs far exceeds the compensation, being a minimum of 102% extra on a €7,500 case apportioned 50:50 in the Circuit Court. This is demonstrated on page 429 of the report at paragraph C 141.
As we saw earlier, our greatest challenge is at the lower value end of the range and there are three times as many personal injury cases in the Circuit Court at the lower end than there are in the High Court. Such overheads lack any sense of proportionality. As members of the committee will be aware, the Competition Authority has already published its preliminary findings on restrictive practices in the professions and lawyers, among others, are to be subjected to more detailed analysis.
There is a complete lack of transparency in the levying of litigation costs. The Personal Injuries Assessment Board had hoped to do a cost benefit analysis of the current system as a benchmark against which our future savings could be measured. However, so far the taxing master in the courts has refused to allow access to bills of cost on which determinations have been made. Other methods are now being explored to secure information on who is earning what and for what service.
Recommendations Nos. 40 to 43 and recommendation 49 relate to control, monitoring and transparency of litigation costs but these have not yet been tackled in any legislation. We must be mindful of the ingeniousness which can be employed once we start to change any system. Take, for example, the Wolff reforms in the UK which have streamlined the courts since 1999, but they have actually increased litigation costs and there is now a growing insurance crisis in the UK. We must ensure that the introduction of sworn affidavits and the other measures outlined are not all simply used as justification for raising litigation overheads even higher than their current unacceptable level.
Finally, we come down to compensation - what the claimant receives - but again there is a need for a caveat. This is because it transpired that in addition to the 42% which the MIAB found insurance companies incurred on litigation costs, claimants were handing over as much as 10% of their compensation to their solicitors. This is in addition to both sets of costs being paid for by the insurer. One could say that this is money which was stolen from accident victims because such activities have been contrary to the law since 1994. It is interesting to note that in the 70 pages of advertisements which appear in the Golden Pages directory just published for 2004, there is an asterix after the words "personal injury claims" which actually quotes from the legislation quoted in recommendation No. 4. How ironic.
Returning to claimants' compensation, this falls into two broad categories: general damages and special damages. Special damages are the easier to calculate as they relate to actual expenses incurred, such as medical bills, or actual losses sustained, such as unpaid wages while off work, but they are easier to calculate only in a mathematical sense because considerable resources are often required to validate the amounts alleged. To give just one example: claimants frequently allege that in addition to the earnings, which they declared to the taxman, they have a little sideline, which was earning them money until they were injured. Subject to proof of the reality of such earnings from the black economy, it has often been the practice of the courts to award such losses. Under the new civil liability legislation, only earnings consistent with records in the Revenue Commissioners and the Department of Social and Family Affairs will be admissible. In addition, the Personal Injuries Assessment Board legislation includes power of direct access to records with the taxman and social welfare to streamline validation of these claims by the board.
Within special damages there are cases where the claimant is paid on the double. For example, where there is no sick pay, the claimant may be in receipt of benefits under an income continuance policy, plus State benefits, which collectively mean that they are getting more money than they would have had in net take home pay while they were at work. Despite that profit, the courts will also award them their wages. Again, this is being tackled in the new legislation. All payments will be stopped in accordance with the recommendations of the Law Reform Commission on the deductibility of collateral benefits, and as sought in MIAB recommendation No. 48.
The purpose of general damages is to compensate for pain and suffering, for example, to put it crudely, the price of a broken leg. However, it is not that simple because individual, personal and medical factors must be taken into account. Currently, this is an area of mystery to the general public. There is no available source of information other than through lawyers. This will be resolved by the PIAB publishing a book of quantum based on today's levels of compensation. This is currently being compiled from defendants' settlement records, including those of the National Treasury Management Agency which handles claims against the State, and details of judges' awards from throughout the country which are being supplied by the Courts Service. To give members of the committee an idea of what a book of quantum might look like, I have brought with me an old one from the United Kingdom. Given copyright issues, I have been unable to photocopy the most recent ones.
Members may also be aware that compensation levels in Ireland are many multiples of those in the UK. This is according to independent research undertaken for the McAuley group. It is detailed on paragraph C 1.5(1), page 427, of the MIAB report. Indeed, other studies indicate that we have the highest level of compensation in Europe. Again, a loud warning must be sounded. Our awards for serious injuries are similar to elsewhere, but in the compensation of minor traumas, our awards are many multiples of our European competitors. It must be stressed that it is not within the remit of the PIAB to reduce current levels of compensation for either serious or minor injuries.
At this point, members of the committee may have noticed that we have identified a number of significant flaws in our system without once mentioning the insurance market. That point bears emphasis because many of the issues, such as exaggerated claims and excessive litigation overheads, apply equally to cases against the State and the self-insured sector to the extent that they are crippling economic activity in this country before we even look at the insurance market, to which we now turn our attention.
The section on the insurance market commences on page 513 of the MIAB report. Many people are tired of hearing of the events of 11 September 2001. They are also tired of hearing the tragic events in New York on that day being blamed for the cost of insurance. However, we must be careful to examine the insurance market prior to those exceptional external events so that underlying issues in the Irish market are not hidden.
As the MIAB rather provocatively postulated at paragraph C 360 of its report, it should not necessarily be assumed that insurers would welcome reduced claims costs. As demonstrated in the report, at paragraph M 14, throughout Europe insurance business has been written on the basis of returning an underwriting loss. It is accepted that claims costs and other outlays will exceed premium income and there is a reliance on investment income to produce a positive bottom line. Let us say claims costs are reduced by 50% and premiums are reduced by half. Now insurers have less cash flow to invest and, as every saver knows, the more money one has the greater the return.
What happens management expenses? If they are currently 11% of premium income and the premiums are halved, they will account for 22%. That is not just optics because most of insurers' costs are fixed, such as staff and buildings, for the volume of business they are doing. The volume will not change but the value of the premium will be halved.
Fear is an acknowledged marketing theory. We all know the terror of businesses throughout the country when faced with exposure to Irish levels of claims costs which could put many of them out of business. Therefore, it could be said that in the days of high investment returns, insurers had no reason to care about increasing claims costs as long as they got their price right.
Now let us deal with the reality of post-11 September. High investment returns are a thing of the past and capital may not be available to the industry because shareholders can get a better rate of return elsewhere, such as from the banks. Combine this with the fact that policyholders are no longer able to pay increasing premiums and many of them are adopting a higher measure of self-insurance because they have full confidence in their own safety record. Now the squeeze is on from all directions. Suddenly the level of claims costs is of critical importance, if even only for an insurer's own solvency. That is the point we are at today.
However, we must not let world events blind us to aspects of the local market which required attention long before 11 September 2001. On the question of competition, the MIAB report found that 17 companies in 1994 have been reduced to five. This is a result of mergers at European Union level. During the same period, the private car population increased by 70%. There were more consumers but less customer choice than ever.
The MIAB also registered unease that over 50% of the market is held by just two players. The committee has received a presentation from the chairman of the Competition Authority on its project to examine all classes liability business, not just motor, as contained in recommendation No. 67. It may sound paradoxical to some members of the committee, but we need insurance companies to make a reasonable level of profit in this country. We will always suffer from the fact that, in relative terms, this is a small market. A single company in the UK can have an annual premium income larger than that for the whole of Ireland. However, we will never attract new players with our negative claims profile unless there is a reasonable rate of return. It is only when we get greater competition in the market, both between existing players and new entrants, that insurers will need to focus on every cent of their outlay. The proposed reform of the personal injuries system will create the environment which has heretofore been lacking for the purposes of tackling claims costs.
The big question is that of payback to policyholders. This will have to be in terms of reduce premium charges. Some commentators have suggested price controls, but that is not an option. Aside from the fact that it is against EU law, there are a number of reasons for this, as discussed in the MIAB report from paragraph M 80 at page 540.
If it is not possible to fix prices, at least we have a right to know if we are being ripped off. This is where national law must produce greater transparency with regard to how premium charges are calculated. Instead of a bill demanding a payment of a certain amount, we have drafted a standardised renewal notice, set out at page 608 of the report. It shows the exact loadings and discounts, many of which the policyholder will be in a position to challenge.
Unfortunately many motor policyholders simply pay their renewals despite the fact that the MIAB report demonstrates price variances between companies of over 200% for identical risks. Tackling consumer inertia has been assisted by the regulation introduced by the Tánaiste last November which requires 15 days minimum notice of renewal terms plus certification of "no claims" history. This country also has the Equal Status Act 2000 which outlaws discrimination on grounds of age, gender, etc., which cannot be justified under the legislation, and it is essential that cases are pursued to the Equality Tribunal so that this law is firmly established.
Ultimately the only sure way to satisfy people that insurance costs are equitable and that savings going forward are passed on to policyholders is to analyse insurers' raw data. This will be a role for the Irish Financial Services Regulatory Authority which, as the committee will be aware, opened its doors on 1 May last. The Authority now has responsibility for implementation of the MIAB recommendations which would previously have been the remit of the Department of Enterprise, Trade and Employment.
Just as we thought we were wholeheartedly moving in the right direction, a cloud looms in from Europe. This could add substantially to the highest level of claims cost we have ever experienced in this country. The Fifth Directive on the Harmonisation of Motor Insurance now proposes no fault compensation for cyclists and pedestrians regardless of the responsibilities of the vehicle driver. While Ireland has raised some objections, the EU seems determined about automatic compensation. That is all very fine if you live in mainland Europe where losses arising from accidents are paid mostly by the state from higher personal taxation and you would not have a compensation culture because in mainland Europe litigation arising from accidents is practically unknown. Aside from the consequences in the cost of insurance for the hard pressed policyholder, surely this is an unacceptable further death knell to the concept of responsibility for one's own safety. In addition to progressing our insurance reform programme, we now face an additional external threat and the committee may also have some views on how that might be resisted.
I conclude with the question many are asking: why was it not all done yesterday? As stated in the MIAB report, the fact is that successive political Administrations in this country have failed to tackle the vested interests which are probably costing us all twice what we need to be paying for insurance. The MIAB proposals may be unpopular in some areas where recommendations are seen as criticism of historical action or inaction, but there is no future in the past. We must now move on to properly tackle what is the Tánaiste's number one priority but there are no quick fixes here. However, more has happened in the past nine months than in the previous nine years.
Thank you for your attention. I would now welcome questions from the committee.
