I welcome Mr. Joe Grogan, Mr. John Deegan, Mr. Kieran McHugh and Mr. Peter Lyons from Marsh Ireland Limited. They are here to assist the committee in its deliberations on the insurance industry. Before we begin, I remind our visitors that while the comments of members are protected by parliamentary privilege, unfortunately, those of our visitors are not so protected. We are coming close to the end of hearing submissions for the second interim report of our inquiry into the insurance industry. We are delighted that representatives of Marsh Ireland Limited are here today to assist the committee and I ask Mr. Grogan to make his submission.
Reform of the Irish Insurance Market: Presentations.
Mr. Joe Grogan
We are pleased to be here and we thank the committee for inviting us. It is a rare privilege for us to have the opportunity to represent ourselves in any forum. I am CEO of Marsh in Ireland. I have brought some colleagues with me - Mr. John Deegan, who runs the financial services practice, Mr. Kieran McHugh, who, broadly speaking, has responsibility for what one would refer to as general insurance, that is, the commercial client practice, and Mr. Peter Lyons, who is head of compliance in the operation but also has responsibility for our specialties, which would include financial and professional and marine. We have brought a broad representation and we hope to be able to assist the committee in its deliberations.
We recognise a significant change in the market. The market is cyclical and has changed dramatically in the past couple of years and even in the past six months. There have been significant reductions in premiums. It is a volatile market and many of the capacity issues, which I would not say have gone away, have materially changed. We will talk about that as we go through the presentation.
We also genuinely believe that further and better risk management at all levels to reduce the total cost of risk for clients is absolutely critical to the reduction in premiums and hence the cost to the economy. Many steps still need to be taken to achieve that and we will address some of them. We have provided the committee with a presentation which we structured around key issues we believe address all of the questions put by the committee, but we will happily take questions if there is a need for further clarification.
Marsh is the largest insurance broker in Ireland. It is a risk and insurance service provider - it is not just an insurance broker - and is the largest broker globally. Our main service offerings are important to differentiate between because there are a number of divisions within the firm. These main service offerings comprise the following. Insurance broking and placement, which is what the committee would understand as insurance broking, forms the core of our business. However, some of the major components of our business which have developed over the past decade are risk management and consultancy services. These services engage in understanding the businesses, predominately of large clients and financial institutions, doing risk modelling, administering self-insured programmes, helping to set up and establish captives, and, at the high end of the business, helping insurers manage risk and cashflow because such business has less to do with premium and more to do with how one manages risk and cashflow.
We also have claims consultancy, advocacy and assessment of business, which effectively helps our clients independently of the broking process. Much of that business is for a fee and we do some of that work on behalf of insurers also. We have a financial services business which includes both pensions and personal financial services for clients; affinity schemes for associations, which would predominantly be based in our Galway operation in Spiddal; and some specialist practices which would include financial and professional credit security and aviation, which are very specialist risks.
The reason for mentioning this is to give the committee a fairly comprehensive view of our position in the world of broking. I shall provide a quick overview of Marsh in Ireland and will not read through the slides. It was established in 1944 and is a major firm now, predominantly through acquisition, employing in excess of 400 people. Most of our acquisition occurred during the consolidation of the late 1990s, and names like Sedgwick, Johnson and Higgins and local firms like BRW in Dublin would effectively form the cornerstone of that development.
We are owned by Marsh Inc. We employ 400 people, and we do not say that lightly. These are 400 quality, sustainable jobs which are critical to the economy. We have six offices throughout the country and, in addition, two offices in Northern Ireland which report to me but which were not included for the purposes of this submission.
We opened a state of the art facility in Spiddal recently that created 75 jobs, 50 currently and moving to 75, which is a commitment to the Gaeltacht area. That was predominantly based around delivering a new business model for affinity business and personal lines and, ultimately, to reduce the cost to the consumer. We spent a lot of time delivering that model, which is heavily based around technology. Our turnover there is about €47 million.
We are part of Marsh Inc. globally. The Marsh global franchise is very strong and has a very significant global matrix. The value to our customers and to the business is the sharing of knowledge and the benchmarking and the bringing of information from around the globe, particularly on a pan-European basis, into the Irish economy. We are a sister company of Mercer, which employs probably an additional 400 people on the island and predominantly deals with human resources consulting. The main point we want to make is that we are a professional services firm. We are fully committed to the development of our people and the securing of highly skilled professionals in this business. That is where we start from as a business.
Part of the reason we are pleased to be here is to discuss the role of the broker. We are very disappointed and sometimes very concerned about the perception of the broker in the market. It has been undervalued and misrepresented in many cases. For us, the role of the broker is predominantly a creation of value, which means delivering solutions to the business needs of our clients.
The role of the broker is to work only in the best interests of the clients by providing them with a number of things, the first of which is independent advice regarding insurance and their risk management needs. The primary role is understanding the business and matching the business needs with markets and also ultimately getting the pricing. However, while pricing is a predominant feature it is not everything. We will talk about that in a moment.
The whole idea of putting our client first is part of the culture, fabric and ethos of the Marsh firm and it disappoints us greatly when we see a lot of suggestions that we are driven by other agendas. This is untrue. We advise our clients on where they can place their business, how to do so and what the best markets are for their business. The best markets do not always necessarily mean the cheapest, although we will tell them where the cheapest markets are located. It is part of our obligation as an authorised adviser. We also bring the whole issue of security and claims adequacy into that process.
We basically believe that we primarily influence choice. We definitely give choice to the customer by driving the markets to produce quality products, service and pricing for our customers. We also influence the ultimate pricing by understanding the market itself and the leverage that we bring in books of business. This applies more to the small and medium enterprises than the larger accounts but, nonetheless, operating such accounts independently would be much tougher.
We reduce uncertainty by matching customers and customer profiles with what the market expects. We bring quality in terms of understanding the risk, and taking time to understand and marshall the facts regarding the claims experience on behalf of insurance companies benefits the customers. It is not widely understood that if we do not do this somebody will have to do it and the insurers would have to hire more people, thus raising their costs, which will be passed on to the consumer.
One other aspect regarding the role of the broker that is probably peculiar to larger brokers is our policy on how we view markets. We have a security committee, as do many other large brokers, where we assess the quality of the insurers. We are obliged to ensure that an insurer has at least €50 million of unencumbered assets before we can transact business with them. They must have a rating with one of the rating agencies and that is administered by an independent security committee based in London and New York. Effectively, this is to ensure that we can tell the customers, in so far as it is possible, that the markets are sound and secure and can match their claims. It is fair to say that we cannot and do not guarantee the solvency of any insurance company which is an independent entity.
In regard to the insurance market the committee had many questions. We definitively believe, and it has been demonstrated conclusively even in the last two years, that it is a cyclical market. If one looks at the market over the last 12 to 15 years one will see that for the ten years pre-2001, there were reductions in premiums year on year. There was not a single year where premiums were not reducing by some percentage amount, and the reductions were very significant. We are not here to speak for the insurers but it is well established that operating losses for the insurers were in excess of 120% and investment revenue and reserving policy was effectively the way they managed their profitability.
Ultimately, in 2001 we began to see a change that was accelerated after 11 September 2001. As we are a global firm and had some personal experience of the event itself, this was a seminal event in the whole insurance world because capacity was reduced by a minimum of $50 billion in that period. There was a very significant capacity shortage post 11 September. This accelerated the increases in premiums and there is no doubt that it caused significant problems here. Limited competition due to the size of the market at the time and the number of carriers exacerbated the issue of pricing but it was not the sole determinant. The reality was that global pricing was increasing dramatically.
Business moves offshore but it is a misconception that it did so for price. It moved offshore post 11 September because there was no capacity in the Irish market. Interestingly, some of that business is beginning to come back. When it did move offshore it was a question of take it or leave it with the pricing. This was very traumatic for some clients but, again, the global market had a major impact on what was happening here.
The collapse of Independent Insurance Company in June 2001 was a significant event. It left many businesses desperately seeking alternative markets and for the first time there was no Government cover. Nobody was covering the issue. The IBA did a survey, and we have personal experience, whereby up to €30 million of losses effectively had to be covered by clients as there were financial liabilities for which in some cases they had no reserves. There was no protection to match that under the policy holders' protection legislation in Britain. That was a big event and related to the whole issue of security, although the Independent Insurance Company was a rated firm at the time and there was no suggestion that security was not good.
The significant changes outlined in the MIAB report are necessary if we want to clearly reduce claims costs. So what has happened since? In mid-2003 there was a sign of moderation in ratings. In the last quarter of 2003 and first quarter of 2004 there were significant premium reductions and increased competition. Business is beginning to move back on-shore and we are seeing some significant price reductions. We have included some samples in our presentation. Some of these reductions are of the order of magnitude of 50% in respect of the food sector clients. A large retailing client yesterday said for the first time in some years that it was looking forward to renewal of insurance, which is an interesting thought. That insurers' retention rates are dropping effectively means some insurers in this market are losing market share to self-insurance, which has become a predominant feature of the past four years because many large companies have decided to take the risk themselves and re-insure, and to other markets, especially Lloyds and offshore markets. We feel there has been a significant change and the pace of change has accelerated in the past six months.
To address the issue of remuneration of brokers, Marsh receives remuneration for its services in several ways because of the size and complexity of the firm. This reflects the type of service we offer and the buying style of the customer, whether it is a small, medium or large client. We clearly state our remuneration policy in our terms of business - in fact, this is done in several places. We like to think it is fairly straightforward. As a result, any charges are stated on invoices.
Commission is our predominant basis of remuneration, as it is in the industry and globally. It is interesting to note - especially for us, because we work in a global environment - that commission rates in Ireland are the lowest in Europe and, in our view, sometimes globally. For motor and employer's liability we estimate they are at least 50%, in some cases 30%, of what is available in continental Europe. This is pretty well established and was mentioned in the IBA documentation. This is not a driver, particularly in the employer's liability and motor classes, in insurance and insurance placement - quite the contrary.
Are double brokerage fees commonplace worldwide or does this happen only in Ireland? Double brokerage fees mean fees for a small broker as well as the company itself.
Mr. Grogan
I am sorry, I do not understand the question.
I am sorry for interrupting Mr. Grogan, but I want to clarify this point because we are homing in on this issue in our second interim report. We have evidence of double brokerage fees being charged to a client for a small broker in rural Ireland and a large broker in Dublin. When the client places business with the large broker, both of them charge commission or a fee.
Mr. Grogan
We have no evidence of that. We only do business for ourselves.
So the company is not involved in that?
Mr. Grogan
No.
Mr. Kieran McHugh
Some large, wholesale-type brokers may have a network of brokers around the regions to do business on their behalf. We do not engage in that activity; we deal directly with the clients.
Mr. Grogan
Fee-based business is widely misunderstood. It is not a substitute for commission - it is a different business model. We tend to charge fees in the circumstances I have outlined. The primary areas are for large clients, where we net back all commission and agree a fee for services. It is a fairly sophisticated approach, involving time recording and a pricing of service initiative, in which we outline the variety of services. It is a pay-as-you-go service, so nothing is aggregated. That suits larger clients because they can pick and choose the range of services.
Other areas in which we provide consultancy services include risk management, in which we deal with strategic risk assessment, risk evaluations, loss control, health and safety and so on, clinical risk management in the health care industry, and a range of business continuity planning. Typically, these are single, non-recurring events or projects which are non-renewable. They are characterised by a different business skill set, not just insurance brokering.
In certain business areas in our company we have limited schemes that are based in Galway. We charge a separate administration fee, particularly in the area of motor insurance. This is in addition to the premium. It is fully explained to our client and is separately noted on the invoice. In order that we do not lose perspective, the fee is of the order of €30. It covers the additional administration costs because 5% of a small premium does not cover administration costs.
We are very supportive of the regulatory regime introduced by IFSRA, as is demonstrated by the fact that we have an established compliance function which is very significant. We have four full-time people in this area reporting to an executive director, Peter Lyons. We believe this is excellent and necessary for the business. However, we must acknowledge that it is costly and costs must be balanced against value. We are not suggesting we do that, but the issue does need to be addressed.
We have collaborated with the IBA in the submission to the Competition Authority; the company was a full partner in putting that together. We submit to all its proposals and fully support them, and we are happy to discuss any of them if required. Ultimately, a balance is required in regulation. We like the fact that, as Liam O'Reilly said, it is a principles-based rather than a rules-based approach. However, a large amount of information and documentation is required from us and we provide it. That is why the compliance function has developed into such a significant part of our business.
The key point to be made is that capacity is no longer an issue for clients in Ireland. I defy anyone to suggest it is. By "capacity", I mean the ability to find a market for a client at a reasonable price not the ability to find the cheapest insurance. Prices are dropping - this is quite evident and dramatic in the commercial sector and evident but not as dramatic in the personal and household sector.
Currently, we are heavily regulated by comparison with our European counterparts. That is not a criticism but a statement of fact. We hope the IMD directive will provide a level playing field from 2005. I was in Madrid the other day and got no sense that there would be any significant change for the Europeans for some time, which is interesting.
International comparisons show that the Irish market is a sensitive one. We often forget that it is small and very open. It reacts quickly to change in two ways. When pricing was going up after the terrorist attacks of 11 September 2001, it reacted very quickly and more significantly than our European and UK counterparts. On the other hand, it comes down as dramatically and quickly. For example, in the UK at the moment rate moderation is being considered rather than significant rate reduction. We are probably several months ahead when prices rise and fall, which can create problems.
We have already mentioned commission rates; I will not go over them again. Implementation of the MIAB recommendations, execution of establishment of the PIAB and a reduction in claims costs are critical if we want long-term sustainable reduction in the total cost of risk. We can help drive change in the brokerage area but ultimately it will be the insurers who make the call on the cost of claims and of risk.
I wanted to mention the issue of availability of markets. Marsh is a global firm and we use a global market strategy. This means anyone in Ireland can access any market globally within two days of making a submission. We use this for the larger risks because it is more appropriate. The reality for motor and employer's liability business is that it is not generally attractive to carriers outside the Republic of Ireland except Lloyds. This because of the rate of return to insurers, but another reason is that 400 companies are licensed to transact business in Ireland and very few choose to do so. We must ask why this is so but we do not have all the answers. It is partly due to the barriers to entry but much of it is due to the rate of return. We have seen significant awards to plaintiffs in the past and Ireland is not particularly strategic given its size, so a large block of business cannot necessarily be brought to one of these markets. Within Marsh, however, we can access markets whatever their capability, particularly in the area of access placements. This does not tend to be demonstrated at a consumer level in the personal alliance business, which has a big impact.
We hope we have addressed most of the issues raised, but will happily answer individual questions and provide clarification.
I thank Mr. Grogan. We welcome the statement that the cost of liability cover in the construction sector is down 40% and down 50% in the motor and property sectors. We do not have the evidence of this before the committee yet but as the leading broker in Ireland, Marsh is well placed to give the good news to the committee this morning. We look forward to receiving this evidence from consumers and from anyone who is still to give evidence before the committee. Representatives from Lloyds, along with the Irish Insurance Federation, are coming in this afternoon.
I welcome the delegation from Marsh Ireland to the committee. First, on the area of competition among the insurance companies, Mr. Grogan rightly pointed out that there are 400 licence undertakings in this jurisdiction and five or six players who are prepared to quote. I suppose some cherry-picking will go on from time to time if market conditions are favourable in that people will dip in and out of the market. Notwithstanding his company's international reputation and worldwide contacts, how does Mr. Grogan believe we can address the major issue of the lack of competition from his perspective, where he is trying to get as many undertakings as possible to quote business from the Republic of Ireland on behalf of the Irish consumers? I realise it can be easier in some respects for particular types of business but how can we generate more competition here? Does Mr. Grogan see a role for the extension of the Single Market of the European Union? Does he believe that is feasible, and how can it be achieved as quickly as possible to allow Marsh Ireland, on behalf of Irish customers, impress on the European Union the need for a common system of compensation drawn up in respect of any claims that may arise in any jurisdiction throughout the Union? My concern here is with the implementation of the Single Market of the European Union in respect of insurance products.
Second, the Competition Authority report appeared to blame brokers rather than insurance companies for the increases in insurance premiums. I realise I will be taken up on that by the authority but it is the perception that the easy players, the intermediaries, have been picked out while the people who underwrite the insurance appear to be coming under less scrutiny by the authority, notwithstanding €500 million in profits last year.
In the area of fees, does Mr. Grogan have a difficulty about reverting to a flat fee versus a commission based approach to the remuneration of intermediaries and professional people, such as the representatives, who are doing a good job? As premiums have increased, there is a perception that commissions have substantially increased from the point of view of intermediaries and that this is not contributing to the downward trend in insurance premia to the customers. That would be a view expressed by the Competition Authority. Does Mr. Grogan have any difficulty about his company's income being generated from a flat fee rather than a commission based approach?
Mr. Grogan
The Deputy asked several questions. I will try to start at the beginning and then my colleagues may wish to contribute.
On the insurance market and how we generate more competition within that market, first, as we have stated, the reality is that there is a limited number of markets in Ireland but if Lloyds and some of the other markets that are available in Europe are included, that expands the number. I could not put a specific number on it but we are not talking about six; it is more like 20 or 26 when we include individual Lloyds syndicates.
The key issue is that the barrier to entries for insurers needs to be reviewed and this centres on the issue of solvency, which has been fairly well documented. That needs to be addressed but it is not within our remit. Ultimately, we will never get away from the fact that to attract any competition into this country in a meaningful way for large numbers of consumers or clients, it would have to be demonstrated to the company that it would be able to make an acceptable rate of return. We are then back to where we started with issues like the MIAB and the PIAB and reducing the total cost of claims. One is a perceptual issue in helping educate other insurers outside of Ireland, and it is worth doing. That has to be a key.
Second, and more importantly, there would have to be some ability to guarantee these companies some chunks of business, in other words, that they would be able to get a fair crack of the whip. We could help in that. A number of issues arise in that regard. One is that we have to get on with what we are doing to reduce the total cost of risk. We have to encourage the companies to enter the market. This means lowering the barriers to entry. Whether they will come in will always be a commercial decision for them. We have to distinguish between what we would call the personal alliance business and the commercial risk. With Marsh and a commercial business, predominantly of a larger type, there is a good deal of choice and many of those markets are writing business. They may not be writing the primary business but they are writing excess lines and taking some of the lines. For instance, they might be taking a percentage of the risk and the property. That is our view.
On the Single Market, I am not sure about its effectiveness and whether that would make it easier for us. Unless my colleagues have anything to add that is a question the insurers would have to answer because, ultimately, it is about the total cost of a claim, how that claim will be settled, the time it takes to settle a claim, the legal costs, etc. We would not influence——
I know it is a matter for the insurers but I am asking Mr. Grogan if he has an opinion on it.
Mr. Grogan
Our opinion would be that if we could have it put in place and it reduced the cost of risk, the answer is yes but we seem to be having significant difficulty getting something in place in Ireland without trying to extend it to a pan-European format. The answer is yes, if it is possible.
Mr. McHugh
There is a fundamental difference between the insurance marketplace in mainland Europe and Ireland and Great Britain in that in most mainland countries employers' liability, which is one of the major costs all Irish employers have to bear, is state controlled whereas in the UK it is controlled by the insurance market but it is compulsory whereas in this country it is not compulsory; it is a voluntary buy by most employers. The basis of comparison and the legal systems throughout Europe differ, particularly on mainland Europe, and it is difficult to get a like for like comparison.
The reason there are 400 companies licensed to transact business here is as a result of the Single European Market but the fact that only five or six of them have chosen to stay in the marketplace in a big way reflects the lack of appetite for coming into the Irish litigation scene, so to speak.
If it was compulsory here, would that make much difference in the premiums?
Mr. McHugh
It would certainly add to the premium volume but as brokers we believe that most reasonable employers purchase employers' liability insurance. There is little non-observance of that, even though it is not compulsory, but it would certainly tighten it up in terms of regulatory control on employers because some employers can choose not to buy it.
Notwithstanding what Mr. McHugh has said, that we can bring the horse to the water but we cannot necessarily make it drink, that is what is happening in Ireland. There is no significant barriers to entry here. If companies want to trade, they can do so but they have chosen not to trade because they do not find the various lines of business in which they are involved profitable. This House is trying to push an insurance reform agenda. Some companies are responding but the new entrants are not yet doing so. I do not believe any new entrants have come into the market since we began to implement the insurance reform package. In that respect I suppose they are voting with their feet, which is disappointing from our point of view.
Is it possible to draw up common legal systems throughout the European Union? Efforts are being made to try to do that and one can now trade significantly in various ways in common systems of legality. Consumers of banks cannot trade with each other but banks can trade with other banks. Surely we can extend the remit on behalf of consumers through the insurance intermediaries to shop around the European Union for various products, if we have the political will to implement it and deal with all of the issues of compensation, legal systems and whether we should compensate them through the state system or otherwise. How far down the road is that? It will take time, but do the representatives have a view from their contacts abroad that this proposition would receive any level of support? It should receive some level of support from the intermediaries who would have a wider choice of representing the Irish consumer and getting business abroad at the cheapest possible price.
Mr. McHugh
Mr. Grogan may want to speak on this but essentially it is a chicken and egg situation. We, as intermediaries, would gladly welcome them. The more potential purchasers we can talk to on behalf of our client, the better the deal we can do for our client, the more clients we keep happy and the more clients we will win. From our point of view the more companies which are prepared to transact business here, the better. We will try to exploit those markets where we can, particularly at the top end of the marketplace. Somebody mentioned cherry-picking, but to try to bring them to the table on a mandatory basis will require more political will than we can exert as intermediaries although we would welcome it.
Mr. Peter Lyons
Can I add something to what Mr. Grogan and Mr. McHugh have already said? We would certainly welcome additional companies coming in here. Primarily the main business that is written and is of major concern to this committee centres on liability business, and liability business immediately triggers back to the court system and the level of awards. The perception in Britain and throughout Europe is that we are a very well educated population. We are also very litigious, second only to North America. We have a pro-plaintiff bias in our court proceedings and when the award is made, it is higher than anywhere else.
Insurance companies have come and gone in this market over the years. In my view, until such time as the MIAB recommendations have been implemented, the PIAB introduced, the new courts Bill passed and so on, and there is empirical evidence that costs are coming down and that not everyone who makes a claim gets satisfaction in court, the major players throughout Europe will see Ireland as a very expensive place to do business. It is no big deal to them because we are small. The major players already have a foothold, and I do not envisage their ganging up to come in here in the immediate future.
Does Mr. Lyons agree that a start has been made?
Mr. Lyons
Absolutely.
It is the function of our committee to listen to the professionals and convince and assist the Government as a whole and the three Ministers in charge to introduce legislation to regulate to make Ireland a safer place to conduct business. The committee can take a great deal of credit for the four Bills being introduced. The one setting up the PIAB has already gone before the House. The Civil Liability Bill 2002 deals with the "compo" culture, and if any part of a claim is found to be fraudulent, the whole claim is thrown out and the costs paid by the litigant. The Minister for Transport, Deputy Brennan, has introduced a Bill dealing with penalty points to address the Fine Gael Private Members' motion in the Dáil last night and will come before the committee tomorrow morning to update us on it. Some 240,000 people are driving on provisional licences. The Minister of State, Deputy Fahey, will come before the committee next week to outline the heads of the Bill regarding health and safety, which will come before the two Houses and, one hopes, be passed by the summer recess. That is all that has been asked of this committee by all the professionals that have come before us in the best part of the last two years.
We are listening to what the representatives have to say this morning. We have heard much of it before, but Marsh Ireland is the biggest broker in the country. There was a reference in Mr. Grogan's submission to there still being barriers stopping people entering the marketplace. When Mr. Grogan has finished answering Deputy Hogan's questions, perhaps he might elaborate on those barriers stopping companies coming in to do business. First, Mr. Grogan can answer Deputy Hogan's questions.
Mr. Grogan
I may have to be reminded in case I missed one. The reference was to the Competition Authority, fees and commissions. I will give our view on that. As we mentioned in our submission, we believe that commission in businesses generally is not material, given that it is significantly lower than in any other European country. We charge fees, but fee income is a different business model and not a substitute for commission. It is does not help in aggregating the services. In other words, one picks and chooses. Effectively, that would not necessarily reduce costs for the consumer. It only applies at the upper end of the business. Commission has to do with bias and transparency. As we state in the IBA report, we are comfortable with transparency in personal lines or small and medium-sized enterprises. If the clients so wish, we will tell them. However, we do not believe that adopting a fee based approach on a general basis or becoming transparent on commissions would help the situation, the reason being that, ultimately, because it is so low, the focus will be on the wrong thing when it should be on the overall cost of the insurance product, which is in the domain of the insurers and not the broking community.
It has been a very effective side-show to start talking about commissions but it is looking at the wrong problem. We have reached agreement on transparency, made suggestions in the IBA report and have fee structures for large clients who need and demand them. Overall, once one moves into other areas of business, one has difficulty aggregating services which would not necessarily result in a reduction to customers. We would not have a problem moving to fees if everyone and everything were transparent right across the industry from top to bottom, including direct carriers. However, I can assure members that it would have a major impact on the industry, since it would be more expensive, and the industry is not ready. It would not benefit the consumer.
I asked about the barriers.
Mr. Grogan
The predominant barriers are the claims culture of the country and the cost of doing business here. However, regarding the Competition Authority and even the IBA, there is a belief that the solvency requirements for entry may need to be reviewed.
I welcome the delegation from Marsh Ireland. It was said that the role of the brokers is to get the best deal for their clients. We have heard evidence from people using brokers whose insurance cost a certain amount, but who were able to get a reduction of perhaps 50% by shopping around. When they returned to their broker, he was able to undercut that again. What is the role of the brokers in that? They do not seem to be doing the best for their clients. How has it arisen that the same broker with the same insurance company can reduce the price by perhaps 50%, as we have been told in some cases? Is Marsh Ireland tied to certain insurance companies? In other words, must it have a certain volume of business with them before they will deal with it? Can it work independently to provide choice and get the best deal for its clients, or is something inhibiting that?
The Order of Business is coming up in both Houses.
I have two questions. In the presentation, a 40% reduction in insurance costs for construction industry clients and one of 50% for a food industry client were mentioned. Were there peculiar circumstances relating to those two clients which led to the reductions? Is it a trend, or were those isolated incidents? When Marsh Ireland places business with international companies operating outside Ireland, is there any kind of impediment because of the business originating here? What is Ireland's standing in the eyes of international companies not based here? Do they find that it is a riskier market to become involved in?
Mr. Grogan
Shall we address the questions in order?
Yes, please.
Mr. Grogan
I will start with the issue of independence and whether we are tied to particular markets or can use them all. Marsh Ireland is completely independent, and we are not tied to any markets. Our business ethic and the fundamentals of our business are based on finding the best deal for the clients once we have understood their requirements. We use all the markets in Ireland and globally, where appropriate. There is nothing in our relationship with insurers that suggests otherwise, and we always end up with the best deal for the client as far as possible. On the cost differential, insurance is ultimately decided by the presentation and negotiation with the carrier. Therefore, there may be two different quotes on a piece of business from two different carriers or even from the same carrier arising from a submission made by two brokers. There are various reasons, one being that the terms and conditions two brokers seek from a carrier, having evaluated a client's needs, may be different, meaning that the pricing may also differ. We have no definitive experience of having clients come back to us saying that they have a cheaper quote and inviting us to match it. What I mean by that is a type of horse trading. It happens from time to time with different markets, where an insurer may make a decision that, for commercial reasons, he or she will keep the business. The premium will be reduced by another 10%. Why was this not done in the first instance? Because the underwriting criteria, in our view, probably suggested that the rate was right at a particular price. Then a commercial decision was made subsequently by the insurer to keep the business. That is one reason. I cannot give all the reasons because each is peculiar to the individual case. Am I answering the Deputy's question?
Mr. Grogan is answering the question.
Mr. Grogan
One needs to be careful about the selection and to ensure that one gets what one is paying for. Our experience, in competition, is that what the client ultimately ends up with is not apples for apples. That is always an issue because there have been different deductibles, terms and conditions etc. The claims experience in use may not have been similar to that provided by the prior broker. That concerns the robustness and integrity of the placement. It will only become an issue once there is a claim, which is something clients should be careful of. That is why it is important to deal with a broker one can trust.
Will Mr. Grogan deal with Deputy McHugh's question?
Mr. Grogan
Trends——
It is about the 40% cover on the construction and the 50% cover on the food sector.
Mr. Grogan
If I may I will pass that question to Mr. Kieran McHugh.
Mr. McHugh
The answer is yes, there is a trend. These are not isolated cases, but there has been a trend, certainly, over the last three months of 2003 and the four months of 2004 indicating that pricing is continuing to fall. In the presentation, members would have seen that the insurance market is cyclical. It goes quickly from a hard cycle to a soft cycle. In Ireland in particular, it tends to go hard quickly followed very quickly by soft.
We issue a quarterly client publication newsletter and in August 2003 the placement director, Mr. John Finnegan, wrote an article on market conditions, which would have predicted the trend over the next three months and into 2004. We would still tell our clients, in effect: "When talking to you this year, we are highlighting minimum savings in the order of 25% to 30% on what you were paying last year." That is, all things being equal. Obviously, if there have been a couple of fatalities or a major fire, that will not emerge in terms of savings. However, generally speaking, if one is looking at the same risk this year as last, one can expect the same level of saving. It is not isolated and it is a trend. That would be the view.
The strict enforcement of regulations in improving the conditions in those two sectors is to be complimented.
Could Mr. Grogan tell the committee about the international companies, and when they are placing business?
Mr. Grogan
On the international issue, we have broadly covered some of that. I will just summarise it. The way Ireland is viewed is a feature of some of the issues the committee is dealing with, namely, the high cost of claims and the fact that we are seen as a litigious society and that in the past claims costs have been significant. The combined operating ratios for insurers have been high. That may not be altogether due to claims costs. It may be due to some efficiencies also. Nonetheless, that is the perception. That is what one is faced with when dealing with markets outside the State. However, it depends largely on the class of business one is talking about. That is germane in particularly to liability insurance.
When one is dealing with property insurance that is not an issue. Usually one will find many carriers outside the State who are prepared to take a line of a piece of business. The way property business is placed is that predominately it tends to be scheduled, for the larger risks in particular. If one examines the schedule for some clients there will be many insurers outside the State, for example in the UK or in Europe, on the schedule. However, they would not be the primary or lead insurers.
The question is whether we could get more competitive lead insurers into Ireland to reduce the primary price, then all the scheduled insurers would follow. I do not believe so because the property market is pretty global in its approach. One tends to get the best rating. In fact the rating outside the State during the hard market was much higher than that inside, which is why much of the business moved offshore. That is not well recognised. However, this is peculiar to property, not casualty.
Does that clarify matters for the Deputy?
Yes.
I welcome Marsh & Company. It is nice to see such a turnout of the co'pany's senior executives. It has done tremendous work as regards 400 jobs. It has decentralised right through Sligo, Limerick and Galway, up to the north. I would also like to congratulate the company on its decision to locate 75 jobs in Spiddal.
Its submission has been so widespread and detailed that all I want to add is that it has been noted by the committee. Mr. Lyons outlined the developing situation as regards the PIAB and the current position. The reductions have been outlined by Mr. McHugh. We should bear in mind that there was a large increase. Therefore, it was actually only a reduction of the increase, not a reduction per se.
Has the Senator a question after all his lovely compliments?
The company has provided a comprehensive response to questions. It has covered all the questions I wanted to ask. I am delighted it has appeared before the committee because it is endorsing the work being done here in trying to bring about a reduction in the cost of insurance.
I am also delighted Marsh & Company is in contact with so many companies around the world. We were concerned that there was not really an outlet, but it has access to all the major players in the world. Therefore it can place insurance anywhere that it feels may be beneficial for its clients. That is encouraging and interesting. It is something that was not brought to the comm'ttee's attention before. Thank you.
The witnesses have passed the test with Senator Leyden, who has been extremely critical of many companies that have come before the committee to give evidence.
I welcome the presentation. I might not be as complimentary as Senator Leyden. I welcome the suggested drop in insurance premiums. However, we need to be conscious of what has happened over the past two or three years. Marsh & Company referred in its opening remarks to the change that has taken place in insurance. I am aware of construction companies whose insurance premiums have trebled or even quintupled on what they were originally, with no claims in the past. While I welcome the 40% reduction, I have no evidence personally of such cases. We will look for that. I hope it is the start of a trend, but we would not want to get carried away with the 40%, bearing in mind what has happened in the past.
I have just one question about the broker's role. In the future, will the broker operate on a percentage or a fee basis and what does the company think of that?
Mr. Grogan
I will make two points. One is clarification. It is important to recognise and state clearly that the reason for including the reference to the cases is just to give an example. I do not believe one could extrapolate from that to say that it is relevant to every construction case. That is a good point and we did not set out to give that impression. It is underpinning the fact that significant change is going on. It could be 15%, 20% or 30%. The fact is a significant change has come about in the last six months. That is the issue.
I addressed the issue of fees. The fee model is a different construct from the commission one. The commission model has been in use for over 200 years. It is used primarily in all countries throughout the globe at present with the exception of Norway. It is a good robust model.
The debate has shifted the goalposts slightly in respect of commission. When one looks at the 5% and 6% commissions or more on employers' liability, they are not germane to the pricing of insurance. In fact they will not change the pricing of insurance if the system was to move to a fee basis. That is my view and that is what is said in the IBA report. The issue of transparency has become important and we are happy, as indicated in the IBA report, where clients request it, to tell them what the commissions are. The whole issue of transparency is in danger of shifting the focus, I believe, to the wrong goalposts. I genuinely believe this because ultimately one will end up focusing on a small piece, when the insurers control the other 95%, and that is where the cost is.
The other thing about competition is that the client tends to look at it in terms of the overall pricing and to ask, in effect: "What is it I am paying for?" If it is €1,000, that is what it is. Whether €50 of that is going on commission is not, broadly speaking, relevant to the client. When one looks at the way the market operates in the broking world, competition is widespread. If we did not compete we would not stay in business long, because clients are sensitive to pricing.
The fee model does apply and is appropriate to the larger accounts, and we use it. It is a model that has intrinsic to it things like pricing of services, which is understanding the range of services being provided and time recording, as per some of the other professional services firms like lawyers and accountants. It tends to increase, not reduce costs because one buys on the hoof so every time one picks up the phone there is a charge for it etc. Insurance broking does not operate like that. The costs tend to be aggregated, so in many cases, in essence, we are making a loss on the 5%, although, overall, we are making a profit.
Would we be prepared to move to a different system? I think I already said, one would fundamentally need to review the entire construct of how remuneration happens in the business, including in the direct insurance market. If one could get everybody on to the same level playing field to ensure that the competition would drive value for the consumer then one could start to think about that, but given where we stand today it would not be very progressive.
Coyle Hamilton, a reputable Irish company, appeared before the committee last week. We put a question to it which we will also put to other groups like Allianz, the IFF and Lloyds who are coming before us. A two months notice of renewal of premium has been requested by many consumers. Would Mr. Grogan have any objection to that?
Mr. Grogan
We do not have any objection to it, we would support it. We start the renewal process 90 days before the renewal date. The renewal process means we start talking about the client, gathering information etc. It would be fantastic if we could get terms 60 days before the renewal date. We could start the process 90 days before the renewal date and still not have terms ten days before the renewal date. That is not our doing. We would be supportive of anything that smoothes the way in that regard.
Mr. Grogan stated in his submission that at one stage a few years ago it was a take-it-or leave-it situation for many policyholders who could not get cover and, as a consequence, held on to existing cover. Thankfully, that has all changed. The various efforts by those appearing before the committee are combining to assist the committee in advising the Government in regard to the challenge that exists for small to medium businesses, particularly small family businesses.
On behalf of the committee I thank Mr. Grogan for coming here. I look forward to his continued support for the next three years - the lifetime of the Government. We will continue to keep a watching brief on behalf of the Minister for Enterprise, Trade and Employment who has the major responsibility in this regard, in addition to the Minister for Justice, Equality and Law Reform and the Minister for Transport.
The committee will suspend until 2.30 p.m. when the IIF, Lloyds and Allianz will make presentations. The meeting will resume in committee room No. 1.
Sitting suspended at 10.50 a.m. and resumed at 2.30 p.m.
Deputy C. Lenihan took the Chair.
I welcome Mr. Michael Kemp and Mr. Michael Horan from the Irish Insurance Federation, Mr. Julian James, Mr. John Murphy and Mr. Ray McGovern from Lloyds and Mr. Brendan Murphy and Mr. Sean Maher from Allianz. I note that there are no women among our guests and some of our Deputies will have words with them about that.
I remind our visitors that while the comments of Members are protected by parliamentary privilege, theirs are not so protected. At this point, I ask anyone who has a mobile phone to switch it off. Mr. Kemp from the Irish Insurance Federation will address the committee, followed by Mr. James from Lloyds and we will conclude with Mr. Brendan Murphy from Allianz. I appeal to them to keep their presentations short. Members are reasonably well educated and they like to get to the cut and thrust of questions. If there are any issues about which our guests are concerned, they should not be afraid to confer with us before making any comments.
Mr. Michael Kemp
I thank the Acting Chairman for the opportunity to make a further presentation to the joint committee. We have not provided a written submission on this occasion because most of the issues of substance we want to raise were covered in the submissions we made prior to the hearings held in April and November 2003.
We have been asked to provide a general update on developments, as we see them, since we last appeared before the joint committee in November and, in particular, to address three issues, namely, the statistical outturn for the market in 2003, our view of progress on implementation of the MIAB recommendations and any views we wish to express on the Competition Authority's preliminary report on its study of the liability and motor insurance markets.
As regards statistics, we do not yet have details, premiums, claims, investment or profit data for the market as a whole. We are collecting them at present and, as usual, we will be publishing them in our annual factfile. We hope to publish somewhat earlier this year - July or August - but we will not have them within the next few weeks. We have some headline market premium income figures, by class of business, in which the joint committee may be interested. For our members, overall growth written premium in non-life insurance increased by 5.6% last year. That masks a number of variations between the classes. In motor insurance there was a slight decline in total premium. We estimate that it is down 0.4%, whereas liability premium income increased by over 20%.
A number of individual companies have published their 2003 results and provided details to the committee on previous occasions. It appears that overall market profitability increased in 2003. I would caution about extrapolating market figures - from one or a few companies' figures - based on market share alone because profits are not necessarily in proportion. One newspaper recently noted that the four largest insurers had reported combined profits of approximately €500 million and speculated as to how much more the market result might be. The previous year the same companies made €250 million but the market operating profit was less. It will vary and is not necessarily in proportion.
In respect of recent trends in rates and claims costs, I have a copy of a survey which was carried out for us by Tillinghast Towers-Perrin, the actuarial consultants on motor insurance rates which I can supply to Members. In the 12 months to January of this year, there was a drop of approximately 11% on average in private motor insurance premiums. That seems to be borne out by the CSO figures and also by information the committee received from the Department of Enterprise, Trade and Employment, to which reference was made in the transcripts of the hearing held on 1 April in respect of the cost of transport insurance.
We are concerned at the potential for some reversal in that as a result of the recent significant increases in fatalities on the roads, which are up by approximately 30% in the year to date compared to last year. If that is reflected in insurers overall claims frequency, there will be a substantial break on the potential for further rate reductions. We would, therefore, continue to place great emphasis on the importance of road traffic law enforcement. In that context, we were encouraged by what the Minister for Justice, Equality and Law Reform, Deputy McDowell, said to the committee in respect of progress on implementing systems changes within the Garda and the matter, which he is exploring with the Minister for Transport, of the numbers in the Garda traffic units. We are following up on those and other issues regarding road traffic law enforcement with both Ministers. We would also like to see the national road safety strategy, for which we are still waiting, to be published as soon as possible.
The position regarding liability insurance is much more difficult to gauge. Members have received information from individual companies which probably gives a better indication of what is happening. There are examples of fairly significant rate reductions on commercial cases - liability, property and combined. There have been substantial reductions in premiums in the past six to nine months and there has certainly been an increase in underwriting capacity.
In our November submission we noted that only 22 of the 67 MIAB recommendations had been implemented and that few, if any, of the 13 we had identified as the most important, namely, those which would cut costs, had been put into practice. The position has improved in the interim. Approximately 50% of the recommendations have been fully or, in one or two cases, partially implemented. Two of the most important are the opening for business of the Personal Injuries Assessment Board and the Civil Liability and Courts Bill. Although we are still waiting for the PIAB to open its doors, since November the legislation has been passed and most of the practical establishment issues have been dealt with. We understand that the PIAB will be taking employer's liability cases for assessment in the near future. Good progress has been in respect of the board.
The Civil Liability and Courts Bill has been published. It addresses a number of the priority MIAB recommendations. We understand that there may be some difficulties in ensuring the Bill's passage through the Oireachtas before the summer recess and we encourage Members to seek to prioritise it in the scheduling of business. The legislation has significant potential to cut fraudulent claims and reduce the associated costs of litigation. The sooner it is enacted, the better for all concerned.
A number of the points the Minister for Justice, Equality and Law Reform, Deputy McDowell, made to the committee on 1 April are interesting. We noted that he is going to consider establishing an inquiry into the system for the adjudication of legal costs. That would be welcome because it would address another important recommendation of the MIAB and we would seek to participate in any consultation process undertaken in that regard.
The Minister also stated that he will be re-examining the proposed reduction in the Statute of Limitations period from three years to one. We supported the original proposal, we believe it is a reasonable measure and it would be a retrograde step to abandon it.
The Minister indicated that he is considering holding seminars on personal injuries damage assessment under the auspices of the Judicial Studies Institute. We would support him in that because it is a good idea. If there is a greater degree of consistency as a result of exchange of experiences among members of the Judiciary, in respect of both damages and levels of costs, then that is to be encouraged.
The IIF welcomes the Competition Authority's preliminary report. The report established several facts on which we have always insisted. There appears to be little or no evidence of any cartel among suppliers of either motor or liability insurance in this country. There is also little or no evidence of price co-ordination. The report also noted that there are no significant barriers to entry to the market or restrictions on the number of suppliers therein. There are cases of recent entrants to both the motor and liability insurance markets and cases of successful growth on the part of such entrants. This bears out much of what we have said in the past. The authority's study focuses on barriers to entry and the degree of rivalry between the players in the motor and liability markets. It is not principally concerned with either levels of variations in price or with profitability.
As far as we are concerned, of the potential obstacles to competition identified in the preliminary report, most are for the regulators, IFSRA, and/or the intermediary sector to respond to rather than companies. I wish to comment briefly on three points in this regard. The report states: "The operation of the Declined Cases Agreement appears to be unusual and, in some member states (e.g. UK), there is no such scheme." It is difficult to see how the declined cases agreement can be regarded as a significant barrier to new entrants. It is operated on a transparent, level playing field basis. Cases underwritten unwillingly by any insurer under the rules of the scheme would never exceed a small proportion of any company's normal motor business. It is also worth noting that the agreement is a State-instituted scheme which happens to be administered by the industry via the IIF. It is not a market initiative.
The report also expressed some concern about the operation of the Motor Insurers' Bureau of Ireland. That is principally for the MIBI to address. The concern seems to rest on the potential for abuse of the handling office and handling fee system of the MIBI but there is no evidence stated that this has ever happened. In addition, as with the declined cases agreement, there is question of perspective. The potential scope for inefficient conduct of cases or overcharging is limited. The maximum impact would be insignificant compared to the overall cost of MIBI claims to any insurer.
The report expressed some concern about asymmetry of market information. Contrary to what intuition would indicate, it was encouraging greater sharing of information between insurers. In fact, in our view very little market data is collected either by the industry itself or by the regulator that is not published in the blue book, the report on statutory returns, our own fact file or the MIAB reports. We know that IFSRA is considering collecting and publishing a more detailed breakdown of premium claims data, partly on foot of the MIAB recommendations. The issue will probably be addressed in that context.
Before I invite Mr. McGovern from the Lloyds group to come in, should we allow all three groups to make their presentations and then have questions?
I would not be in favour of that. There are two separate presentations this afternoon.
Are there any other views? Shall we proceed one delegation after the other or take them together?
Both presentations should be taken together, followed by questions.
What is the majority view of the committee members?
It might be confusing to take questions after one big presentation. It would be more effective to hear what a group has to say and then question them.
I am sorry, Deputy Lynch, but we are overruling you.
I am sorry, Chairman, but that is not what Deputy Dempsey said. This man is from Wexford and will probably need an interpreter. He agreed with me.
I am seeking a consensus from the committee.
We will take the presentations individually.
All right, if nobody is too put out about that. We will put our questions to the IIF.
I am somewhat concerned that we were wrong-footed when the IIF discussed the increase in the number of accidents and fatalities and the number of recommendations that had been implemented. The legislation that has been implemented has been somewhat slow from our point of view. Mr. Kemp predicts that the decrease that has been occurring in motor taxation may not continue along the same lines as a result of these trends. However, to a certain extent the other sectors, such as employer's liability, public liability and general insurance, are more important. Despite the fact that there has been a recent trend that might affect motor insurance, can we still expect substantial reductions in the other areas of insurance?
Mr. Kemp
As I mentioned, there have been substantial reductions in many commercial sectors, particularly over the last three to six months. I am not aware of any contrary trend. The point I was making about fatalities was purely to do with motor insurance and road safety. There has not been any negative trend in workplace accidents, for example. As far as I am aware, that trend is continuing.
The cycles of the two markets are not necessarily in sync. We started to see improvements in the motor insurance environment and reductions in premiums from the beginning of the second quarter last year. It was later in the year when the liability market started to turn. That trend is continuing.
Up to now there has been a general trend towards reduced rates in all areas of insurance. If the industry finds excuses to stop decreasing motor insurance, will there be a psychological effect across the board resulting in a fall in the pace of decreases in other areas, or will it be completely separate?
Mr. Kemp
They are very different products and markets so there is no reason a factor that is peculiar to the motor insurance environment should have any effect on rates of liability insurance.
My question is along the same lines. We have put many measures in place to try to bring down the cost of insurance in Ireland, which everyone accepts is incredibly high. I also have a difficulty with the type of reduction I keep hearing about. We have seen no evidence of that reduction. Perhaps this is because all our motor insurance renewal is due around July. I am not certain - we might all be in for a pleasant surprise. We have not seen the reductions Mr. Kemp is talking about. The cost of house insurance has come down, but motor insurance premiums have not fallen.
We have put in place a package of measures agreed with the insurance industry but we now hear that the death rate on our roads has not fallen so that will have an effect on motor insurance, which may not fall. Should we not now expect a little more concrete evidence from the insurance industry that it appreciates what we are doing and that it is having an effect on the market?
Mr. Kemp can decline to answer my next question if he wishes. I accept he may not be able to answer it. After this package of measures has been put in place, including control of costs, control of awards and penalty points for traffic offences - it is like catching fish in a barrel at the end of every motorway - if the insurance industry does nothing, what does Mr. Kemp suggest we do about it? We are putting together a report and we have asked the IIF numerous times what we should do to help. What does Mr. Kemp think the IIF can do to help us? What should we do about insurance brokers or providers that do not respond, despite our package of measures?
Mr. Kemp
I must take issue with the suggestion that there has not been a reduction in motor insurance rates. The survey to which I referred, borne out by the CSO figures, indicates that on average there was a reduction in motor insurance of double-figure percentages in the 12 months up to January. From the information we have and surveys we have done for the MIAB since then, one can tell that the rolling 12-month reduction is higher than that. In the 12 months to March or April it was higher.
While I am sounding a note of caution about the recent deterioration in road safety, it has not yet put a major brake on the rate of reduction in premiums. I am sorry if individual members have not seen the results of this in their own policies, but, on average, there has been a reduction of that magnitude over the last year or so.
In my view, which is borne out by the comments of the Competition Authority in its preliminary report, there is no evidence of price fixing or cartel-like behaviour and the market is open to new entrants. As costs come down, premiums inevitably come down so that companies may compete with one another. If they do not they will be undercut by new entrants or existing market players which realise they can continue to do business viably at a reduced premium.
The question of what needs to be done if, on delivery of all the reform package measures——
I do not mean to interrupt Mr. Kemp but I know he is going to say that we should not interfere with the market. However, we have interfered with the market, in his interest. Is he now going to tell me that the market must be left to its own devices on his side whereas we have interfered with it quite dramatically on our side?
Mr. Kemp
The market is highly regulated and a number of measures have been introduced, or are about to be introduced, which will affect the underlying conditions in which we operate. I am not saying it has to be a pure, free market, free for all. There is a reasonable, legitimate public interest in this whole area in trying to control costs and bring prices down as a result of improving the cost environment.
Although there has been progress in implementing the MIAB recommendations, the reductions we have seen in the past year are more to do with other factors. While the PIAB is about to start business and the legislative process to pass the Civil Liability and Courts Bill is about to begin, we hope, those real measures which will affect costs have not yet impacted. It is improvements in frequency under the programme in the previous national road safety strategy, in terms of road safety, and a reduction in awards in the courts that has driven the reductions we have seen in the past few months. I am optimistic in the sense that I accept there are more important cost-cutting measures to come and as they impact I am hopeful that individual companies will be able to put through further reductions, but proof of the pudding is in the eating and we will have to await the effect of those measures. I am not suggesting anything will change. We are in a phase where prices are coming down and there is every hope that that can continue.
Can you make any predictions? We like to nail people down in terms of figures. You talked about the other factors but if the legislative platform is right in terms of your industry, can you predict falls of the same amount in motor insurance and whatever?
Mr. Kemp
It is difficult to get a like for like comparison, particularly in the commercial cases, but I have not seen anything that would alter the predictions we made at the request of the Department when the reform package was being put together. These indicated that if all the cost-cutting measures in the MIAB recommendations were implemented, there was the potential, in regard to motor insurance, for savings in costs in excess of 30%. That will depend on all the measures being implemented and realising their full potential, and in some cases that is a gradual build-up. It takes some time to get to that point but we have examined it from time to time and we see no reason to alter that suggestion.
I still believe it is 30% of an exaggerated, inflated figure. I would like to see the figures for the base rate in 1999 as opposed to the current rate, and then the reduction on that. I still believe it is extraordinarily high.
I welcome the delegations. We have been over so many of these questions and presentations over the past number of months. I am concerned about the development of a type of fall-back position from the insurance companies. I accept there has been a drop in the cost of motor insurance. I am not sure how strong or good that is, and I do not know whether it is a percentage of the increase or of the total premium, but we are losing sight of what happened over the past three or four years in the insurance industry when premiums increased in some cases three, four and even five times their original cost. I am talking about the construction industry, public liability and so on. Car insurance was fairly high also. I am disappointed to hear that already the insurance companies are on the defensive.
I listened this morning to other people talking about a 40% drop in insurance premiums in the construction and food industries but it is only after that happens that the premium payer will see any decent reduction because of what happened over the past three or four years, when some of the premiums increased by four and five times their original cost, and many of the companies and small businesses were operating in a no-claims situation. That was wrong, and we are losing track of that. I do not have a question to ask but I would like to register my concern at the hint of a fall-back position.
I am sure Mr. Kemp would agree that his interests are on behalf of insurance companies and that we are at cross-purposes here because our interests are on behalf of the consumers and the public. Recognising that, is there not a danger that he will continue to come in here and put the case on behalf of his company clients that reductions of a real nature cannot happen because the climate is not right, or this or that is not right? Perhaps it is time for the committee members to realise that Mr. Kemp is being paid to put up this defence on behalf of the insurance companies rather than trying to assist us and the public in arriving at a situation where we have half decent levels of insurance premiums.
It is recognised now, and Mr. Kemp will admit this also, that insurance companies are making large profits again but reductions are not being passed on to the consumers. From his point of view, Mr. Kemp is worried about his clients but as long as his company is making super profits, members of the public can doddle along or survive if they are able. That is not good enough coming from the IIF. It is time that they took into account the interest of the public as well.
It is not good enough either that Mr. Kemp is trying to put across the case that real reductions are taking place. There are no real reductions. Three or four years ago we had a decent level of insurance premiums. Members of the public were able to afford them but they cannot afford them now. This committee has got evidence of people borrowing to pay their insurance premia. In the past three or four years the cost of insurance went through the roof, so if Mr. Kemp is talking about reductions, he is talking about reductions on premia that have gone beyond reality. That is not a real reduction but a small pull-back on an inflated figure. I would like Mr. Kemp to take a baseline figure from a time when insurance premiums were decent and tell us where we are at now in terms of that baseline. He should tell us where we are now in regard to something that is totally out of control because that does not give us any reading of the situation.
Mr. Kemp said the recommendations of the MIAB have not been implemented yet, although he acknowledged that some have been. Which of the recommendations that will bring about further reductions have not been implemented and which of these is it critical that we introduce now so that reductions happen?
The Deputy raised interesting questions. What does Mr. Kemp consider the normal base year? I know that that is a pejorative question to ask anyone. What is his best effort at a base year against which we can benchmark the various increases that have happened in recent years?
Mr. Kemp
One can take any year and work backwards or forwards from it. It is important to distinguish the different classes of business.
I want Mr. Kemp to select his own year.
Mr. Kemp
In the period from 1999 or 2000 up to the beginning of last year, there were very significant increases in liability insurance. Motor insurance is in a different category in which there were not the same dramatic increases. If one considers any period extending over three, five, ten years or even longer, one will find that there have been periods of both decreasing and increasing prices in motor insurance, but none on the scale of the increases that we have seen in liability insurance over the three years or so up to the beginning of last year.
I do not accept that there is a conflict between the interests of my members - I clearly represent insurance companies - and their customers. Ultimately, my members live or die by the service that they give to their customers, for which they must be answerable. As we said in our submission before the last hearing in November, the return of profitability in the liability market is good for customers, since it has enabled the market to attract more underwriting capacity and increased competition. It has certainly contributed to the reductions in premiums that we have seen. It is worth bearing in mind that, when one has a significant increase in premiums - of perhaps 100% - and then a 20% or 40% decrease on the inflated figure, it almost brings one back to where one started. It is important to get that perspective. Although the levels of reduction may seem relatively low compared with the increases, they are bringing premiums back down quite close to where they were.
We identified 12 or 13 of the important cost-cutting MIAB recommendations. I can read out the list and give the numbers of those that we think most important. Four or five of them, including a review of court procedures, depriving people of compensation entitlement in cases of fraud, supporting loss of earnings claims with tax certificates and social welfare documentation, and the automatic award of costs to successful defendants, will be implemented by the Civil Liability and Courts Bill 2004. The PIAB and the book of quantum which it will publish address another two recommendations. The review of the cost effectiveness of the system of taxation of legal costs which I mentioned earlier and about which the Minister for Justice, Equality and Law Reform, Deputy McDowell, spoke to members, is another. However, those things have all yet to happen. The legislation for the PIAB has been passed, but it has not yet opened for business. The cost savings that it realises will build up gradually, since it will apply only to new cases arising after its establishment date. The measures in the Civil Liability and Courts Bill 2004 will be more immediate, since I understand that they will apply to every case in the system, even those already in litigation.
Twelve of the 13 recommendations that we identified as priorities likely to have the biggest effect on costs are in the pipeline but yet to be realised. The other one is achieving the road safety objectives. Those were done under the first five-year national road safety strategy, but we await publication of the new one, and in that context, the concern that I expressed about the level and efficient deployment of resources and road traffic law enforcement is relevant. As I say, there is much more to do, but if it is done, there is every prospect of our continuing on our present path.
On that point, I will ask Mr. McGovern, whom, I should point out, I have known for several years as the Lloyds agent in Dublin, to introduce his group, which I presume is largely visiting from London, and explain their function within the great company. Perhaps he might introduce his delegation.
Does the Acting Chairman have an interest to declare?
I have no interest. I never got burnt in Lloyds and was never a "name" or anything of that kind.
Mr. Ray McGovern
Thank you for the opportunity to appear today and make a submission. I will introduce my delegation from Lloyds of London. I am Lloyds Underwriters' sole general representative in Ireland. I act as the contact point for local regulators and fiscal authorities. I accept service of suit and deal with any policyholder complaints. I also assist Lloyds in the approval of its cover holders and correspondents and its promotion in Ireland.
To my left is Mr. Julian James, the director of world wide markets for Lloyds. He is a director of the Corporation of Lloyds and a member of its executive committee. He reports to the chief executive officer of Lloyds and in turn to the chairman. He is responsible for the society's licensing, trading platform and representative position in all countries in which the market transacts insurance. He has worked in the insurance market since 1981.
To his left is Mr. John Murphy of Brit Insurance Holdings Limited. He started his career in 1973 at Janson Green and worked for Michael Payne Syndicates for 16 years. He then moved on to a role as active underwriter for Syndicate 1156. While there, he was appointed director and deputy chairman of the managing agency. In 1998 he worked for Limit PLC where he was also appointed director, from which he moved on to Syndicate 2525 as active underwriter. He joined Brit in October 2002, underwriting the UK and international liability account. Mr. Murphy has insured Irish business for every year since 1975. I will now hand over to Mr. James.
Mr. Julian James
Thank you very much for the opportunity to address the committee. As this is the first time that Lloyds has appeared before this committee, we have prepared a written submission, which has been distributed to members. However, in the very short time available this afternoon, I would like to give a brief presentation of some of the highlights of that document. It is important to set out quite clearly what Lloyds is and its role in Ireland. I will also talk a little about our underwriting and business management philosophy before closing by talking briefly about the reform process that has been under way here for some time.
It is worth stressing from the outset that we are extremely supportive of the process and the work of this committee. We have a common interest in a healthy and vibrant insurance market in Ireland, and we are very pleased that the committee has invited us to share our thoughts with it. Perhaps I might start by talking about the structure of Lloyds. As members will be aware, it has a long history of accepting risks and helping companies insure themselves for over 300 years. Lloyds is an insurance market comprising members of the Society of Lloyds. We are incorporated by the Lloyds Act 1871. Members of Lloyds are the entities that underwrite the direct and reinsurance contracts for their own account. They carry on business in many countries, although the bulk of our income is from the USA and Europe. Those members participate through involvement in one or more syndicates managed by what we call "managing agents". In 2004, there are 66 syndicates operating in the Lloyds market. They all compete with one another and form part of the umbrella of Lloyds and the common financial structure. They are syndicates in their own right and behave like mini-insurance operations. Collectively, Lloyds had assets of over €44 billion on 31 December 2003. It has a central fund of over €1.1 billion available to stand behind the liabilities of the individual and corporate underwriting members.
Most of the business that Lloyds writes is done via brokers. There are currently 168 firms of Lloyds brokers and we set the accreditation standards for them to be able to trade within the market. Provided they meet these accreditation standards, it is important to note the brokers can be located in any country. Hooper Dolan, based in Waterford, is a Lloyds broker. Coyle Hamilton, the Irish broker has a London subsidiary that is a Lloyds broker. Some 90 separate Irish brokers trade within the Lloyds market. In addition, Lloyds gives delegating underwriting authority to 66 cover holders, the approval process of which is governed by its sole general representative. They therefore have the ability to accept underwriting risks and issue documentation on behalf of Lloyds underwriters.
The distribution system for Lloyds is slightly different to that of other insurers. Nonetheless there are many long-established different routes available to policy holders to access the Lloyds market. As regards Lloyds role in the Irish market, it has been active here for at least 100 years. Mr. McGovern was telling me earlier that Lloyds was insuring a railway back in 1880.
Mr. McGovern
It was the Great Northern Railway.
Mr. James
It has a long history doing business here in Ireland. Currently, the association of underwriters known as Lloyds is authorised to carry on business in and from Ireland under the insurance directives, which allow the home state supervision and mutual recognition of insurance supervisors across the European Union. Lloyds solvency and financial supervision and reporting for all EU business is to the Financial Services Authority in the UK. Lloyds members' authorisations as regards Ireland permit them to carry on most classes of non-life insurance business as well as some life assurance on an establishment basis, allowing underwriters to appoint intermediaries in Ireland to write business on their behalf - or on a services basis, permitting them to write business from Ireland in London, on a cross-border basis.
Lloyds has an establishment in Ireland, headed by its sole general representative. In 2003, Lloyds wrote €298 million of direct insurance business. That has grown from around €263 million in 2001. In addition to that Lloyds accepted €65 million of reinsurance business from Ireland in 2003. That is an important point because reinsurance business provides capital and therefore insurance capacity to Irish-domiciled insurance companies.
As regards the underwriting and business management philosophy, for direct business Lloyd's tends to play a particular role in the Irish market. It is commonly regarded as the last resort for difficult risks. Risks which may otherwise be impossible to insure elsewhere may generally find a quote within the Lloyds market. Risk areas where Lloyds has particular strengths in Ireland include liability cover for construction, medical and pharmaceuticals, bloodstock, sports, leisure and entertainment as well as some of the energy risks that exist here. Its role as the home of hard to place risks means that over a long period underwriters have offered liability cover for trades such as roofing contractors and some of the more high hazard risks that exist within the insurance industry. Like most of the London market participants, Lloyds does not tend to write insurance for small businesses or for private individuals, due to economies of scale, unless they come into the market via some form of scheme. Over time Lloyds has insured several Irish bodies including An Post, Bord Gáis, CIE, Bord na Móna and the Homebond scheme.
A high portion of Lloyds direct premiums relates to general liability, over 50% in 2003. The most important single component of this business is employers' liability, making up 46% of total liability premiums. Professional indemnity, which is also classed as a liability risk, makes up 14% of the total. Although comparison is somewhat difficult, it is estimated that Lloyds has about an 8% market share in Ireland. In the liability market, it is estimated that Lloyds market premium accounted for around 20% of the market share in 2002. As Lloyds business tends to concentrate on larger premium categories it is probable that the number of actual risks written by Lloyds is lower than this.
For many of the Lloyds underwriters in London, Ireland is regarded as challenging territory. Some underwriters are not prepared to accept liability business from Ireland. Lloyds Irish liability business therefore tends to be written by a relatively small number of syndicates, which have good knowledge and experience of the business. Each risk is rated carefully, looking at individual case factors. As Lloyds syndicates' capacity to enter insurance contracts is not limitless, there are times when they are not prepared to cover a particular risk, or are prepared to cover it only at a premium that the insured is not willing to pay.
This committee is only too well aware of the special features of the Irish legal environment which requires a special approach to the underwriting of Irish liability business. The key to profitable trading for us in any jurisdiction around the world is to ensure that the premiums truly reflect the risks presented. In other words, a high level or increased frequency of court awards must be matched by higher premiums. A failure to ensure that this is the case will mean the insurer makes losses, leading in time to its withdrawal from the market with the ultimate possibility that it becomes insolvent, threatening the ability to meet liabilities to policy holders.
I will close by touching on some of the reforms that have been under way for some time, which Lloyds is monitoring and of which it is extremely supportive. More recently rates have tended to fall or stabilise, reflecting recent developments in the Irish legal environment, in our experience. Clearly, Lloyds welcomes the initiatives delivered in Ireland to improve the health and safety of work, which has led to a real sea change in this environment. Lloyds is also supportive of the PIAB and in particular the work of its chairperson, Ms Dorothea Dowling, who has invested time and visited with underwriters in London. We look forward to the impact this will have in terms of creating a more predictable level of personal injury awards based on the book of quantum. Lloyds also believes that if these initiatives are successful in controlling claims costs, there is a prospect this will be taken into consideration when setting premium rates. It considers the returns made on aggregate by Lloyds capital providers suggests that rates in recent years have not been self-sustaining. We therefore expect our underwriters in London will wish to continue their long-term presence in the Irish market.
Lloyds believes it plays a useful role in the Irish insurance market as a home for hard to place risks and that the relationships established over many years are mutually beneficial. We hope they continue for many years in the future.
A survey was recently carried out on a major retailer in which it was clearly established that everything in its Irish retail outlets was more expensive than in similar retail outlets in the UK. Is there a direct comparison in terms of employer's liability or public liability as to how much more expensive Lloyds' premiums are here compared to the UK?
Mr. John Murphy
I will answer the question in a general way, as I do not have much experience of retail insurance in Ireland. Rates in the United Kingdom went up following serious losses sustained by the market due primarily to severe competition. Many people think we increase prices willy-nilly; we increase prices because of our experience. Our experience is dictated primarily by our internal experience but also external experience, which creates competition and sometimes artificially pushes down the price of our product. There are times when our capital providers decide they will exit the market - in other words, ask us to stop trading in that arena unless we can correct the pricing.
In the area of employer's liability, how much dearer are policies in Ireland than in the UK?
Mr. J. Murphy
It can be between two and three times more expensive in Ireland than in the United Kingdom. One has to take into account the accident rate and the buying population - in other words, the size of both environments.
Does Mr. Murphy believe the reforms being implemented will bring Irish prices in line with UK prices?
Mr. J. Murphy
They will certainly lead to substantial reductions. As has already been said by the gentleman to the far right of me, that is already starting to happen. We have recently seen much good work by the health and safety executive and the putting in place of risk management programmes which have created a better environment for the Irish insurance market. Many people are very hopeful that the initiatives that have been set in train by the committee in the drive towards the implementation of the PIAB will further allow people to relax pricing.
Mr. James
It is very difficult to make comparisons. If one looks at the experience of insurers writing employer's liability business in the UK, there have also been many challenges in that arena. A recent study from the Association of British Insurers demonstrated that in the late 1990s most insurers had lost 40 cent in the euro for writing employer's liability business in the UK and, therefore, a degree of correction is going on within the UK market. There is a fundamental difference between what is happening in Ireland and what is happening in the UK. Some measures and reforms in health and safety, as referred to by Mr. John Murphy, have been addressed in a way that has not happened in the UK. Ultimately, that is beneficial and, assuming they are successful, will lead to a long-term reduction in employer's liability rates here.
Did Mr. James say that Ireland is ahead of the UK in regard to health and safety?
Mr. James
Yes, in many ways, in terms of some of the reforms that are going ahead.
Are the changes reflected in a changed attitude by insurance industry members to participation in the Irish market?
Mr. James
Generally, the Lloyds market has thrived over the years on naked competition. Our underwriters tend to focus on areas where they can add value, either through their expertise or because there is the ability to see a potential economic return. If there is a more stable environment here that will ultimately attract more insurers into it and will tempt more syndicates to get involved in writing not just liability business but also all classes of insurance. If a degree of stability is injected into the legal environment, that ultimately is beneficial and will cause people to——
When Mr. James refers to challenging territory, is he essentially referring to the legal profession and the courts system as it applies in Ireland? Is the operation of the legal system the material factor in making a decision to come into the Irish market?
Mr. James
The main point in that regard is its unpredictability.
What does Mr. James mean by "unpredictability"? Is he referring to the level of awards?
Mr. James
The main difference is in terms of trying to quantify exactly how much and when losses are finally settled.
Mr. James is effectively saying that the main reason people might feel inhibited about coming into this market is the sheer unpredictability of the courts system.
Mr. James
That is one of the reasons, but as I mentioned earlier, Ireland is regarded as a challenging territory. Mr. Murphy's experience of underwriting risks here demonstrates that one needs a degree of expertise to participate in the market. It is not a market people will come into without a degree of knowledge and understanding of the issues.
My question follows on from that of the acting Chairman. Given all the reform that is taking place, is Ireland now an attractive place for companies to expand into all classes of insurance, or is the market here too small?
Mr. J. Murphy
It is not too small. In my world it is an important part of our trading position. Going back to what I said earlier, we have already seen improvements in how people operate their businesses in regard to health and safety. That has been shown in the claims experience I have witnessed in the past couple of years. Taking into account what we hope will come through with the PIAB, it should open up a greater opportunity for people. Insurance companies tend to wait to see results, in other words, the proof of the pudding. We have seen the mix, which we know is very attractive, but we have not yet seen the pudding. The answer to the question is that there is more interest. As to other lines of business outside the liability arena, yes, people continue to look to write property insurance.
If all the reforms are implemented and are successful, Lloyds would be anxious to come in.
Mr. J. Murphy
Very much so.
What percentage of Lloyds' overall business is represented by the Irish market?
Mr. James
I think it is 1.8%. The figure is in our written submission.
The company is aware of reforms that have been implemented here and others that are in the pipeline. From Lloyds' international experience and observations, have measures been implemented in other countries which could lead to a reduction in insurance premiums here?
Mr. J. Murphy
To be fair, Ireland is ahead of the posse in the sense that the work which was done prior to the creation of the PIAB and all that comes with it was done by researching what occurs in other jurisdictions to discover what might be of benefit to the Irish market. It appears that what was done was to take the best of what was observed elsewhere and push it forward. People will be interested in seeing how successful that will be.
I take it that from the perspective of Lloyds, nothing further arises that its representatives wish to share with us. I thank them for their presentation and the representatives of the Insurance Industry Federation for their presentation. I invite Mr. Brendan Murphy from Allianz to make his presentation.
Mr. Brendan Murphy
I thank the Chairman. I refer the committee to our previous presentation on 12 November 2003 and to our initial letter to the committee of 21 March 2003. Our presentation is in a question and answer format. In it we deal specifically with the questions raised in the committee's letter to us of 2 April 2004.
The first question the committee posed was, "Does your company plan reductions in premiums in the foreseeable future?" The answer to that is yes. Allianz is committed to phased premium reductions in line with claims cost improvements. Page 3 of our presentation sets out premium rate reductions on a year on year basis from March 2003 to March 2004. Members will note significant premium rate reductions of 25% in commercial motor insurance, 25% in private motor insurance, 16% on commercial liability insurance, 23% on commercial property insurance and 5% on home insurance. Although these rates are the average reductions, individual commercial performance has in some cases merited reductions in excess of 30%.
However, I caution that insurance premiums are a response to the cost of claims. They are set before the cost of claims is known. The rating is continuously motored. Allianz bases its premium on past claims history and its assessment of future exposure, taking account of relevant environmental and legislative developments.
I wish to deal with the reductions in detail and will commence with the reductions in motor premium rates. Since early 2003 Allianz has progressively reduced rates. Future reductions will follow if the improving claims trend can be sustained and improved upon. The upsurge in road fatalities in 2004 to date is a cause for serious concern. One road death is one too many, but this trend may well indicate an increase in motor accidents generally which, in turn, could have premium implications. Having regard to the some of the earlier discussion, we are not backtracking but highlighting an issue, namely, that an increase in road fatalities may indicate a worsening position in terms of motor accidents generally.
With regard to liability insurance, the numbers of reported accidents declined in 2003. Claims costs stabilised in 2003. Since mid-2003 rates have been reducing. Individual reductions of more than 30% have applied. Reductions will be sustained for as long as the current environment prevails.
Property values continue to rise. The number of property units continues to increase and many properties have also been extended. The quality of finish and fit-out values of properties in increasing. Rebuild and repair costs remain high. As a consequence, average claims costs also remain high. Property losses will remain volatile over time as windstorm, flood and widespread freeze-ups will inevitably recur. Investment in risk improvement measures is assisting in lowering rates on commercial property.
Further reductions in premiums can be anticipated if traffic enforcement is improved and driver testing delays are cleared. One in six drivers is a provisional driver, one in two fails the driving test and one in 12 is technically unfit to drive. Further reductions in premiums are anticipated if the PIAB is a success; if or when the civil liability and courts Bill is introduced; if health and safety regulations governing the workplace are effectively implemented; if we experience a continuation of benign weather conditions; and if there is a continuation of current claims trends.
The next question the committee asked was, "What has been your company's experience in relation to 2003 profit levels?" Allianz, similarly to its peers, reports an exceptional €118 million net profit for the group in 2003. However, the result must be seen within the context of a return on capital employed over the past five years, including the 2003 result of 6.3%; a return on capital employed over the past ten years of 7.3%; and the risk adjusted cost of capital, which is 8% to 9%. The latter figure is significant because it is below the cost of doing business. Members of the committee might ask why we continued to stay in such a market. I remind them that we have been serving members of the public in Ireland for more than 100 years and it is our desire to continue to serve them for 100 years to come.
The next question we were asked to address was as follows: "The Government legislative programme, in relation to the insurance market, has yet to take effect. To what does your company attribute its 2003 profit ... ?" The answer is that an improved motor result, greater client application of risk management techniques, heightened public debate on claims settlement issues, reduction in fraud, especially in exaggerated claims, and benign weather conditions have all contributed to the profit performance in 2003. I will deal with each of the insurance areas in detail.
With regard to motor insurance, the authorities took action in regard to penalty points in October 2003. Frequency reductions on motor had a positive impact as these were not anticipated when prices were set. The immediate impact of the penalty points system on traffic accidents led to a 10% price reduction from Allianz. Motor rates have been reduced by a cumulative 20% to date as benefits are passed back to our customers.
Risk management also contributed to our profit performance. Allianz clients acting on risk management advice contributed to a turnaround in the number and severity of claims. Claims settlements also had an impact. Alllianz believes that the public debate, including the work of this committee, has focused attention on who pays the claims. This has led to more objectivity in making and settling claims, but I emphasise that follow through with reform is necessary to sustain this trend.
Reduction in fraud has also had an impact. The IIF sponsored anti-fraud campaign has played an important part. Fraud, exaggerated claims and their impact on insurance costs may be greater than what was believed to be the case. Benign weather conditions also contributed significantly to our overall results in 2003. The main impact of that was on the property side. Motor insurance also benefited with better driving conditions.
The next question posed by the committee was, "Does your company have any comment on the Competition Authority's report into the insurance market?" The answer to that is yes. Allianz welcomes the preliminary report of the Competition Authority and its findings that there is no evidence of cartels or concerted practices, which is similar to the findings of the MIAB and IFSRA.
The next question the committee asked us to address was as follows: "As part of the Competition Authority's study of the insurance market, Ms Dorothea Dowling examined in detail the "blue book" ... [and the comparison of the form 8s] ...?" The answer is that Ms Dorothea Dowling's study addresses aggregate market data and Allianz is not in a position to address the actions of its competitors. However, Allianz regularly reviews its potential liabilities with regard to emerging market information and adjusts its provisions as appropriate.
The next question posed was, "If the numbers of personal injury claims are reduced, would your company not experience significant once off profits because of excessive provisions?" The answer is no. A reduction in the number of personal injury claims would not cause excessive provisions. However, it could lead to once off profits if not anticipated in premium rates as the number of claims would be lower than anticipated.
I refer the committee to page 3 of my presentation, which shows the extent of the premium rate reductions implemented by Allianz. On page 18, I outline the basis on which Allianz determines its premium levels, to which I referred earlier.
The next question posed was, "Has your company's ability to compete been constrained by capacity over the last two-three years?" The answer is yes. Every business, including Allianz, is constrained by the amount of capital it has. The constraints, particular to the Irish insurance market, were reflected in a squeeze on capital post the collapse of the Independent Insurance Company and by the fall in the equity market. In 2001 to 2002, transient capital left the market. In order to reward capital invested, capital will move to where it is best rewarded. We are in a global market. Capital will move unless it attracts a reasonable return on investment, which is only now beginning to happen.
The next question we were asked was, "Are Irish solvency requirements excessive when compared with the requirements in other EU countries?" The answer is "No". Solvency requirements protect consumers, particularly commercial consumers. It is very expensive to pay one's premium and not have the insurer pay the claim.
The future requirements for liability in motor insurance will be higher from 2007 and we believe, with the implementation of solvency ll, that the standards across Europe will be equalised. The implementation of solvency ll will not occur before 2007.
The next question we were asked was "What, in your company's experience, is the current trend in reinsurance costs?" It is the Allianz experience that both treaty and facultative reinsurance costs are, at best, stabilising or trending upwards. There are two broad forms of reinsurance utilises, namely, treaty and facultative. If it suits the committee, I will deal briefly with the background to treaty insurance and, in turn, facultative insurance.
Treaty insurance is an annual reinsurance contract which protects the typical classes of business taken by an insurer. Rates are fixed for the year. Our experience recently in respect of property is that treaty prices were generally unchanged in 2004, where there was a good claims experience. On liability and motor, the treaty market remained hard and prices increased by between 10% and 15%, tending towards the higher. This was despite the fact that prices were coming down in the retail market locally. This is because reinsurers have concerns about the sustainability of the positive trends we have seen so far in the Irish market and about the reduction in the number of large claims which specifically hit their reinsurance treaties.
Facultative reinsurance is where reinsurance is placed on a case by case basis. Insurers write high hazard and very high value risks with exposure levels in excess of the treaty limits. The reinsurance prices are set at the time the business is written. In the year to date, prices have been generally stable or improving for higher quality risks, while still increasing for hazardous risks.
We cannot look at reinsurance without considering the broader context. Our experience has been stable to rising reinsurance costs. This is influenced by a number of general issues. Reinsurance is a world market and it is sensitive to worldwide losses. Most major reinsurers have had their security ratings downgraded due to weaker capital bases. The world leader in reinsurance, Munich-Re, recently announced its first loss since 1906.
The next question posed by the committee was "Does your company believe Irish personal injury award levels should be reduced?" Allianz believes that appropriate levels of award, rather than increased or reduced values, must be the objective. Our objective is to pay 100% of valid claims. More effort is required to reduce the number of accidents, namely, through better enforcement of the road traffic laws and support for health and safety initiatives in the workplace.
The final question posed relates to the previous question and asks "If so, how does your company believe this should be done?" We believe that the implementation of promised reform to streamline costs should be implemented. This will hopefully lead to lower legal and other costs and squeeze out fraud and exaggerated claims. We should then focus on debating whether the residual cost of genuine compensation is too high. However, the level of awards is a matter for society and it also directly impacts on the level of premiums. If Irish awards are a multiple of EU levels, then Irish premiums will be higher.
I thank Mr. Murphy for his brisk presentation.
I thank the representatives from Allianz and the other groups for their presentations. Mr. Brendan Murphy is, like me, from Wexford and I welcome him. The reductions outlined are fantastic. I have not had personal experience of them because I am not insured by Allianz. There was a reduction of approximately 6% in my insurance. I am glad that the cost of commercial motor insurance is down by 25% and that the costs of other insurances have also decreased. This represents progression and it is probably due to some of the factors to which Mr. Murphy referred on page 9 of his presentation.
The factors to which Mr. Murphy referred are: improvements in traffic enforcement inspired by the Government and the committee has also played a role in that regard; clearing driver testing delays; the introduction of the Civil Liability and Courts Bill; health and safety measures in the workplace have been effectively implemented; continuation of benign weather conditions. I suppose our guests would call this an act of God and I do not know whether we are to start praying for the continued depletion of the ozone layer so that the weather might improve, although this might create a conflict of interests for us; and the continuation of current claim trends. What does Mr. Murphy, as an insurer, believe should happen? That question has been asked in various forms and on the many occasions it has been put to insurers, but they have never told us what should happen.
The cost of insurance is the second largest factor in the Irish production industry. This is a challenge to our guests and to us as enterprises have gone out of business because they could not afford to pay their insurance costs. Will our guests indicate if there is a need for brokers? I do not want to put words into their mouth. However, will they indicate to the committee what should happen?
Our guests referred to the PIAB. In the past, when the safety of the country was threatened by subversive groups, we introduce the Special Criminal Court. I would have gone further than establishing the PIAB, which is not a court. Even had it not been required, I would have held a referendum to put in place special insurance courts. There has been discussion about claim-friendly judges and lawyers settling cases on the steps of the court having previously squabbled with each other, at the expense of taxpayers and insurers, for three or four months. Do our guests believe we should have taken that route?
Deputy D. Cassidy took the Chair.
I apologise that I was not here earlier. I have missed a number of the contributions.
Mr. B. Murphy
Our obligation is to pay 100% of all valid claims. However, there are then delivery costs which must be paid. At 40% plus, legal and other costs are too high in terms of delivery. There is, however, the question of the quantum of the claim. It is difficult for an insurer, who is obligated to pay 100% of valid claims, to state that claims should be lower. We do not yet have a book of quantum in Ireland but we are aware that the levels here are higher than, for example, the UK. There is a direct comparison between Northern Ireland and the UK. For example, there are 39 types of injuries for the two and, in the case of each, payouts in Northern Ireland are higher than those in the UK, by as much as 100% or 200% in some instances. It is for society to set the level and it is difficult for us to say that it should be higher or lower. We believe that, based on the quantum, not the cost of delivery, it should be valid and we should pay it. We would welcome a situation where there was a book of quantum. We will see that coming into play, to a certain extent, in respect of uncontested claims to the PIAB. We hope that, in time, something similar will come into force in the area of more serious claims which are contested and go to court.
Four Bills are being put in place as a result of the request made by the insurance industry at the first interim hearing. The committee is a conduit between the industry and the Government. The first two Bills are, the Civil Liability and Courts Bill and the legislation governing the establishment of the PIAB, which is going to prove of considerable assistance. The other two Bills, which it is hoped to publish before the summer recess, are the health and safety Bill and the provisional licences Bill, which will be dealt with by the Minister of State at the Department of Enterprise, Trade and Employment, Deputy Fahey, and the Minister for Transport, Deputy Brennan, respectively. This committee and the Government have shown their bona fides in dealing with everything that was required of us.
The Deputy asked a question about the second interim report. We only have one other sitting day before we compile this. Was the company satisfied with the response it got from this committee and the Government about the requests it made the last time it was represented here? Mr. Kemp from the Irish Insurance Federation, which had major requests the last time around, is also here. This is the first time Lloyds has assisted us and we are extremely grateful about this. We look forward to everyone's participation over the next two or three years until we come to terms with the problem we have in this country.
We hope we have done 90% of what was required of us, including the recommendation for the establishment of a book of quantum, and that we will have done the rest by the summer recess. That is what the Deputy was asking about. Is there anything else the representatives require of us as a committee? Is there anything we should convince the Government to do?
Our view on certain activities and lines of business was commented on this morning by Marsh. Premiums have fallen by 40% in the construction industry and 50% in the food processing industry. In the hotel industry, with which I am associated, there has been an increase of 350% in premiums over the last three years. A 40% reduction on a 350% increase over three years is not enough. We are trying to ensure that premiums revert to 2000 levels. We appreciate all the co-operation we have received from Mr. Murphy. Is there anything further he would like to add?
Mr. B. Murphy
I refer the committee to the last page of my presentation. Award levels are still a multiple of what they are in other jurisdictions. That is what drives up premiums. Premiums will not be reduced unless this is addressed. The Bills mentioned by the Chairman are all excellent and I wish the committee fair weather in their implementation, but ultimately, aware levels is the issue. A simple whiplash injury in Northern Ireland receives four times the reward that applies in the UK. There are no similar figures for the Republic of Ireland, but we can tell the committee from experience that award levels are as high as if not higher than this.
That problem is being addressed this year through the book of quantum.
Mr. B. Murphy
Only for PIAB claims. It does not apply in the courts.
We had Mr. Fitzpatrick from the Courts Service to assist the committee in this phase of the interim report, although not for the previous phase. There are about 20 different angles from which we are addressing this problem. As I said, however, the representatives are the professionals in this industry. We are totally relying on the expertise they deliver. We will enhance this and do whatever we can to assist in making this an attractive destination for getting more underwriters to do business. That is the wish of this committee and of the Government.
Mr. B. Murphy
That is something we would welcome. We believe that competition is healthy and the more players there are in the market the better.
Are there any further questions?
The answers to our questions were comprehensive. Does Mr. Murphy's company have any comment on the Competition Authority report into the insurance market? While I broadly accept what the Competition Authority said, there is a problem somewhere along the line. It may be in the area of transparency in how quotes are made. We have had numerous examples of people who received a quote from their own companies, got a substantially smaller quote from other companies and whose companies then reduced the amount of the original quote to match. We are not sure that people who accept the quote they originally receive from their insurance companies are getting the best value.
Whatever the Competition Authority and the insurance companies say, there is a problem. The general public and business people are experiencing that problem. The committee will need to address this in the long term. We hope the insurance companies will facilitate these developments with more transparency in how they transact their business.
Mr. B. Murphy
We are talking about two different markets, one of which is private insurance. We must distinguish between the educated and the uneducated consumer. I trust the experiences about which the committee has heard have not been with Allianz. This practice is known as matching discounts and we abhor it. If any individuals have had that experience with our company I would be delighted to hear about it.
With regard to commercial insurance, the reality is that there is much discussion with brokers regarding the determination of the premium, which goes on for some time. It is difficult because the larger commercial risks, as the committee understands, are individually rated so their own experience is borne out. In other words, if a business's claim situation improves, its premium comes down because it is effectively receiving a rebate on claims. There are many other issues in this area. I fully support total transparency.
The representatives of Lloyds mentioned a more predictable market. Are all the representatives convinced that over the last six months Ireland has become a more predicable market?
Mr. B. Murphy
There is no doubt the market is improving, for the various reasons I have mentioned rather than because of the reforms that are about to come to fruition. The reforms are extremely important and it is crucial that they are seen through to the end.
Mr. Kemp
I would like to clarify a point that was raised earlier about the level of quantum. There are two separate issues. The book of quantum which is being produced under the auspices of the PIAB will help to add to the consistency mentioned by the Chairman. That in itself makes the market more predictable and potentially more attractive to new entrants.
However, Mr. Murphy's point earlier was about the absolute level of damages. It is not intended that the PIAB process or the establishment of the book of quantum will alter the average level of damages. Even if we sort out all the ancillary issues of legal and procedural costs and address the issue of safety on the road and in the workplace, as long as we have damages for personal injury that are significantly greater than those of other countries in Europe we are likely to have higher insurance premiums than those countries. It is a separate issue but it may need to be addressed in the future.
That is a fair comment.
I was not being ill-mannered; I was absent because I had a long-standing arrangement to meet the Minister of State at the Department of Foreign Affairs.
Is it still believed that the level of compensation awards is above the average in Ireland? In my experience, not as a claimant but through newspaper articles and so on, the introduction of the euro resulted in prices being raised as the amount in pounds was simply raised to the amount in euro. For example, £30,000 became €30,000.
We have just covered that point.
Mr. Kemp intervened to make the point that levels of compensation remain much higher here than in the rest of Europe. I am simply asking Mr. James if he believes that is the case. Has there not been a levelling off? From hearing stories on the ground and reading newspapers I believe a degree of common sense has come into the courts system over the past few years. The notion that it used to be £30,000 but it is now €30,000 is significant. As a committee we do not want the impression to go abroad that people who are genuinely injured should not be fairly compensated.
An aspect that we will have to take into consideration in our report is that Denmark, Sweden, Germany and other European countries have a system where the state cares for people who are injured, but this country has transferred that responsibility to the representatives and to me in respect of having to pay my insurance premium.
Is this a party political statement or a personal opinion?
No, Chairman.
I take your point.
I make the point as a woman who thinks about these matters. It is a common sense approach, and most people would agree with it.
Will we ask Mr. James to respond to that?
We have to take that into consideration because if we dramatically reduce the number of compensation claims so as to make it impossible for people with a genuine injury to live some kind of reasonable life in comfort, we must surely demand of the Government that it provides those services, which it is not doing. That difference must be taken into account.
Mr. James, do you wish to respond to that point raised by Deputy Lynch?
Mr. James
I am not sure that I am qualified to respond to it. Perhaps Mr. Murphy will respond.
Mr. B. Murphy
On the specific question Deputy Lynch asked about the comparison of damages between jurisdictions, a publication in 2002 by the judicial studies board in Northern Ireland states that there are 39 classes of injury. In every case in Northern Ireland they were higher than the United Kingdom. In fact, 20% of the cases were 200% higher. The three most common types of injury in Northern Ireland are whiplash, back injury and dermatitis. The figure for minor whiplash in the UK was £2,000 maximum; in Northern Ireland it was £8,000 maximum. The figure for serious back injury was £28,000 in England and Wales and £50,000 maximum in Northern Ireland. The figure for minor back injury was an average of £4,000 in England and Wales and £12,500 in Northern Ireland. The figures for dermatitis resulting from industrial disease was £10,000 in England and Wales and £50,000 maximum in Northern Ireland. Those figures are strictly comparable. It would be our view that the award levels in the Republic of Ireland are as high, if not higher, than Northern Ireland.
But does Mr. Murphy not believe——
Mr. B. Murphy
These are the equivalent of the book of quantum, so to speak. There are 39 categories of injury and they have either an average valuein the jurisdiction or a maximum value.
I am sure Mr. Murphy has been in England, Northern Ireland, Scotland and Wales as many times as myself. Will he not agree that people who are injured and can no longer work live in abject poverty?
Mr. B. Murphy
If I can go back to what I said earlier, and I believe Deputy Lynch was not here when I said it——
I am sorry about that.
Mr. B. Murphy
That is okay. We believe people should be compensated 100% for all valid claims. The question of the level of awards is one for society. I agree with the Deputy that people should be fully compensated, but one of the difficulties we have as an insurance industry is that it is difficult to compensate people in financial terms for what is in many cases a serious, emotional experience in terms of going through a claim.
Are the figures for the Republic of Ireland not available?
Mr. B. Murphy
There is no similar type of analysis at this stage.
We will have a very good analysis of what Deputy Lynch and all of us require by the end of the year.
I welcome the reduction of 25% as stated but does Mr. Murphy's company quote for all types of insurance or is he picking out the more profitable and less risky insurers? Does it operate brokers and, if so, what constraints are put on them? Do they have to have a second volume of trade with his company to deal with it? Finally, does Mr. Murphy foresee a greater reduction in premiums if, as Lloyds have said, all the reforms are put in place?
Those are questions from a Galway Deputy whose team could win the two leagues.
Mr. B. Murphy
I think I will pass those questions to my colleague.
Mr. Seán Maher
We are a broad based insurer. It is a very small market, as has been said already, and to have a sustainable business we have to trade right across the spectrum but we seek to support well run risks. We do not quote for every risk but we will quote for risks in every category of business.
So you are being——
Mr. S. Maher
We would select, yes.
Does the company use brokers?
Mr. S. Maher
A total of 95% of our business is done through brokers.
Are there any constraints on them?
Mr. S. Maher
We do not have constraints.
The first two statements on page 4 of the presentation are interesting. They state that insurance premiums are a response to the cost of claims, and insurance premiums are set before the cost of claims is known. That appears to be a rational statement with which everybody can agree but it is not the reality. Deputy Murphy raised this issue before he left and Mr. Murphy from Allianz Ireland said his company did not engage in the practice. I accept that because I have no reason to believe it does, but I have information that some companies engage in a practice that is unacceptable in my view.
I am directing my question to Mr. Kemp, who is here on behalf of the IIF. Would he agree that there is no justification for a situation where a company quotes a client a particular premium, the client shops around and gets a reduction in the premium and then goes back to the company which gave the original quote and gets a reduced quotation from that company? Can Mr. Kemp justify that practice in which some of his members engage? Will he agree that is an unethical way of doing business and that insurance companies which engage in it should be brought to book by his organisation if it is responsible for them? That this practice is engaged in stands that statement on its head that insurance premiums are a response to the cost of claims and that they are set before the cost of claims is known. If that practice is engaged in, and I am aware it is, it indicates that the insurance companies are not honest with their clients and the public in that when they are challenged they reduce their premiums. That indicates that if the client is gullible enough, they will get away with it and make super profits. Can Mr. Kemp stand over that?
Mr. Kemp, we have a lot of evidence to that regard and it is of extreme concern to the members, as Deputy McHugh has just outlined.
Mr. Kemp
I would share the Deputy's view, and the view expressed by Mr. Murphy, that that is not a practice to be encouraged and it is not good practice to do that. I would nuance the reply by saying that it is less widespread than it was because companies have realised it does not lend itself to improving their image with the customers——
You admit that you know this was the practice,
Mr. Kemp
I know it has been the practice. The other point I would make is that some allowance has to be given for the operation of the forces of competition in the market. Companies will set their premiums in the first instance by reference primarily to the cost of claims, the underlying cost they know they will have to meet. There is always some margin by which premiums can be reduced to a limited extent, certainly not to the extent that I know has happened on occasion in the past, and it is good advice to all policy holders, whether they are individuals or commercial policy holders, to shop around.
To some extent, that is the function of the intermediary market, as I believe Mr. Murphy said. A broker will try to establish the best price. There must be a slight margin for competition and the establishment of prices within that market mechanism. However, I agree that it is not good practice deliberately to overquote in the expectation that the policy holder will find a better offer, come back and expect to have the price dropped.
Could we expect the IIF to ensure that the practice in question is eliminated?
Mr. Kemp
We do not have the specific power over our members to direct that they should not engage in that. However, we have certainly let it be known to them that we do not encourage it with regard to the image of the industry as a whole. I believe that it is waning. The Irish Financial Services Regulatory Authority has expressed an interest in the issue and has been considering it. To the extent that it persists, I suspect that there will be action on it from the regulator in due course.
On behalf of the committee, I thank the delegation for coming. I was not present for the Lloyds presentation, though I had been looking forward to it very much. Is Lloyds coming back into the Irish market? What is its plan for it?
Mr. James
Within the written submission to the committee is the detailed history of Lloyds' involvement with the Irish market. It is also relevant to point out that over the last two or three years premium income has grown. There are a handful of syndicates operating within the Lloyds market which have long-term experience. As I said, the view in our market is of great encouragement to this committee regarding the reforms which, if they move forward at the pace at which the committee is pushing them, will encourage greater participation. We look forward to seeing this work progress and the results of the reforms come through. Therefore, I hope that we have another 100 years of being able to trade in Ireland.
We might even see the return of Great Northern.
On behalf of the committee, I thank the Irish Insurance Federation for coming to assist us once again. We appreciate their coming here and look forward to their assisting us over the next three years, the remaining life of this Government, in our efforts to make Ireland a safer and more prosperous place to do business from everyone's point of view.
I thank our friends at Allianz, who are great supporters of our national game. I know that Deputy Callanan has particular interest, since his team is in, or almost in, both finals.
On a serious note, this is the second-last sitting before we put together our second interim report. We will be doing everything possible to highlight the various aspects of the industry with which the delegations have brought us up to date. I thank them for their great help in producing the first interim report, which was received most favourably. I have not seen any condemnation anywhere or evidence of anyone feeling strongly that any of the recommendations should not be examined seriously by the Government. We can enjoy great kudos that we brought pressure to bear on the Government, particularly the majority party, to have these Bills concluded by the summer recess.
I am not certain that the Chairman of a committee may make such remarks. That was a party political statement of the sort that one would never hear from Fianna Fáil.
I did not mention the party. We will have the Minister for Transport, Deputy Brennan, before the committee tomorrow at 9.30 a.m. sharp.
The joint committee adjourned at 4.25 p.m. until 9.30 a.m. on Thursday, 29 April 2004.