I welcome Mr. Michael Kemp, chief executive of the Irish Insurance Federation and Mr.Michael Horan, non-life manager, Irish Insurance Federation. I remind the delegates that members of the committee have absolute privilege but this same privilege does not apply to delegates appearing before the committee. I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against any person outside the Houses or an official either by name or in such a way as to make him or her identifiable. Mr. Kemp is aware that this is the usual warning and I invite him to make his opening statement.
Insurance Industry: Discussion with Irish Insurance Federation.
Mr. Michael Kemp
I am glad to be here to assist the joint committee. I understand our brief is to make a presentation on the workings of the insurance industry. I have summarised a few of the important issues and I will comment on the current state of the industry, concentrating on the non-life market rather than on the life and pensions market.
The Irish Insurance Federation is the trade association representing companies established in Ireland in both life and pensions and general or non-life insurance. I understand that members are principally interested in the non-life market and I will concentrate on that. I will comment on current issues, including the recent weather claims, which is of particular concern.
Yes, that is of particular concern.
Mr. Michael Kemp
The domestic insurance market is a very important part of the economy. The annual premium income in 2008 was €134 billion gross, which is approximately 7.5% of GDP. Of this sum, the non-life market, which I will concentrate on, is about 25% of the total. To give committee members an indication of the importance of the sector to the economy as a whole, member companies control about €73 billion in assets which is in respect of claims reserves invested on the non-life side and policy holders funds in life and pensions, and approximately €30 billion of that is invested directly in Ireland. Approximately 15,000 people are employed in insurance companies and in addition there are thousands more involved in ancillary activities such as insurance brokering, loss adjusting claim services and other back up businesses.
There has been quite a significant fall off in the volume of business in recent years, principally as a result of the substantial fall in rates as a result of the insurance reform programme introduced earlier in the decade. We had a considerable reduction in the number of accidents and therefore claims in motor insurance and also in the liability class fell. More recently as a direct result of the economic crisis there has been a reduction in the volume of business, particularly in the commercial side and that has resulted in considerable reductions in premium income in most of the main classes of non-life insurance, that is motor, property and liability. The total number of premiums written in the domestic non-life market was as high as 4.2 billion in 2003, but that has fallen to 3.3 billion in 2008 and while we have not got the figures for 2009, we estimate that there probably has been a further 6% or 7% drop which would take it down to 3.1 billion for 2009.
I will outline how the sector is regulated. We have common rules throughout the EU which are being updated in terms of solvency supervision. Our member companies are authorised and supervised by the Financial Regulator and that applies to companies that are doing business in the domestic market, which is the principal focus of our members' activities and the international markets from a base in the IFSC. The regulator is also responsible for various consumer protection rules, including the consumer protection code, which we understand will be reviewed this year and minimum competency requirements for employees both of insurers and other financial institutions and also intermediaries who interface with the public. Again, we understand that will be reviewed this year. Insurers must make detailed annual financial returns to the regulator and are subject to inspection on an individual and on a themed basis at any time to assess compliance levels with the financial requirements and the consumer rules.
The global financial crisis in the banking sector has had an impact on the insurance sector in Ireland and internationally, but we have come through the worst of the crisis — assuming that we have seen the worst of it — in better condition than other parts of the financial sector. No insurance company here has defaulted on any of its contractual obligations to policy holders or any one else. No one has needed or sought financial or other support from the State and no insurer has failed to meet the minimum solvency requirement imposed by the regulator. We have not seen any significant reduction of capacity in the market and none of the major players has withdrawn from the market, so there does not appear to be any significant loss of competitiveness as a result of the crisis. There has been a significant impact on asset values and that has affected the value of the assets that our members manage. This has been particularly the case in the life and pensions markets where there is more exposure to equities. It is often assumed that non-life insurers have the same level of exposure to falls in equity values but non-life companies have to invest most of their reserves in cash and gilts, which are readily realisable and relatively safe assets, so their exposure to sudden shocks in the equity and property markets is low. The exposure in equities is, typically, no more than about 10% or 15% of non-life insurers' reserves. It also has to be borne in mind that the main source of income for insurance companies is premiums rather than investment income. Investment income is usually between 10% and 12% of total revenue, it varies with the company. Even quite a significant fall in investment income will have a limited impact on the overall income.
I am concentrating on the non-life market and I will give members an idea of the make-up of that market. There are three main classes of business: motor, property and liability. Of those, motor insurance is about 43% of the total market. It used to be more. It has fallen as a proportion of the overall non-life market. Property insurance is about 29% and liability, which includes employer's and public liability as well as things like product liability and professional indemnity insurance, is about 18%. This leaves about 10% for all the other smaller classes such as travel, financial losses, credit and suretyship and personal accident. Within those classes there is a breakdown between the commercial and personal lines. Within motor insurance private motor insurance is about 71% and commercial about 29%. The division is more equal in property, where home insurance, covering buildings and contents, is about 56% of the total market and commercial property insurance is about 44%.
There had been a considerable reduction in the level of rates in motor insurance and other classes, principally liability and commercial insurance, as a result of a number of things connected to the insurance reform programme and to recommendations in reports by the previous Dáil and Seanad and by this committee's predecessor. There has been an improvement in safety standards on the roads and in the workplace. Fewer accidents has resulted in fewer claims. More efficient procedures for the negotiation and settlement of third party injury claims through the injuries board has taken out many wasteful and unnecessary legal and medical costs. There has been an increase in claims costs in recent years, which has pushed prices up again. However, the CSO's sub-indices for motor and household insurance show that as recently as January 2010, motor insurance was still at the same approximate price as in 1999. Over ten years prices have been static compared with other products and services. Household insurance prices have gone up a little but only by about 6% in the past seven years.
The market is marginally profitable. There were some very good years. In 2008 we had an overall profit in the non-life market but there were losses in some classes, including private motor and both types of property insurance, particularly household insurance but also in commercial property. In 2008, which is before the recent weather incidents, the loss in household insurance was €174 million, or 37% of net premiums in that year. There was already a significant problem in that market.
The current weather claims are a major problem. We estimate the insured cost of the November 2009 floods at €245 million. We will revisit that later to make sure the figure is relatively accurate but we have learnt from experience not to be too early with estimates so we are reasonably happy that is an accurate figure. We have yet to finalise a figure for claims arising from the freezing weather in January but it is likely to be in excess of that. The impact of the weather on insurance probably got less media attention at the time but it will be a very serious weather event. The two most serious weather losses ever in the market came within six weeks of one another. Notwithstanding that, the companies have provided a good service to their customers. There has been financial strain as a result of other things but we have been able to absorb these losses and provide the claims service. We are looking at probable claims costs of about 60% of the annual premium income in the property insurance sector. It is putting considerable additional strain on the market, against a background of the operating losses for the previous year. That will put a dampener on the results for 2009 and also 2010, since the freeze event was in the current year.
I will not go into too much detail on the Solvency ll project. The EU is making a major overhaul of the way in which insurers are supervised. At present, there is a relatively straightforward computation for calculating the solvency margin. The Solvency ll project will look at a more comprehensive risk-based approach to calculating individual companies' solvency requirements. The framework directive has already been adopted and the various committees at European level are now looking at the implementing measures. It will apply from 2013. There is considerable lead-in time, which will be necessary because much work remains to be done by the companies in preparing for the new regime and by the regulator, who will have to assess the internal models put together by the companies for identifying, documenting and managing their risks and how they feed into the computation of the solvency margin.
It is intended that Solvency ll will not have an impact on the overall level of regulatory capital required. Unfortunately, as a result of some of the backwash of the financial crisis and some of the structural changes being considered at European level where there have been options the advice from Committee of European Insurance and Occupational Pensions, CEIOPS, to the Commission has been on the conservative side. As things stand, it looks as though there will be quite a significant increase in the amount of regulatory capital required of insurers. From our point of view, this is not necessary as the existing system has generally worked. We should look at moulding it and making it more responsive to true economic risk rather than increasing the overall level of capital required. It would be unfortunate because it would be an economically incorrect allocation of capital requirements. It would make the cost of capital more expensive and is likely to lead to a reduction in capacity in the market if it goes through as is. At present it is only at the advice stage and the Commission may very well pull back from that, but it is a slight concern. This point has been made by us, by other national associations and by our European association to the Commission.
In addition to Solvency ll, significant changes are being contemplated in supervisory structures. This is something we are concerned about. At European level they are reforming the existing committees which oversee the various parts of the financial services sector. They also propose to establish a European systemic risk board, which will co-ordinate the activities of the three main committees. At present, 26 or 27 members are proposed for that. There is one insurance representative, who would be the chairman of the CEIOPS committee. This gives rise to some concern that there will be too much focus on other sectors and that the insurance sector will not be given sufficient attention within that structure. This underlines the importance of ensuring, at European and national level, that new rules and structures which are deemed necessary to address perceived shortcomings, in banking supervision in particular, are not applied willy nilly to other sectors, such as insurance, which did not cause the crisis and where solvency and regulatory supervision have not been called into question. Where possible, the same rules should apply to competing products and institutions, where they deal with the same issues. However, there are sufficient differences between insurance, banking and other parts of the financial services sector to require different rules in many cases.
There have been some changes in the regulatory structure here, with the appointment of a new head of financial regulation and the greater integration of the Financial Regulator and the Central Bank. Several senior posts remains to be filled in the Financial Regulator's office. We would like to see progress made on that as soon as possible and the strategy of the Financial Regulator published for the next year and beyond so that we know the programme.
The question of fraud is, to some extent, associated with the recession. We always see an increase in the level of fraud when there is an economic recession. We know of fabricated and exaggerated claims. Less obvious are misdeclaration of risks on proposal forms and uninsured driving, which comes under this general heading. People who engage in uninsured driving leave a burden to be dealt with by law abiding motorists as claims against uninsured drivers must be met by the industry through the Motor Insurers' Bureau of Ireland.
We have had some success in this area in recent years. There has been legislation, which was recommended by the previous joint committee, the Civil Liabilities and Courts Act, which introduced more effective anti-fraud measures. Our anti-fraud advertising campaign has been quite successful in raising consciousness of the issue, as has our hotline for people to report suspicious claims. A new development involves increased co-operation with the Garda Síochána on matters of general fraud and on the fight against uninsured driving. The Garda Síochána has recently introduced automatic number plate recognition software in a number of Garda cars and we feed it information about insured vehicles. This gives gardaí a much more up-to-date picture of those vehicles which are insured and those which are not, enabling them to take action on the basis of better information at checkpoints. It has been deployed nationwide and some 130 cars now have the technology, which gives us cause for optimism over the issue of compliance with the obligation to have motor insurance.
Thank you for that comprehensive presentation.
Mr. Kemp's presentation was very comprehensive. When people who made weather-related claims try to renew their policy does it give rise to an area-related rating? Is there a specific rate for Cork or Athlone or is the calculation based on the people who make the claims? If I operate on a main street in Cork and do not make a claim because the flooding was minor while my competitor next door makes a substantial claim, does the area come to be regarded as a risk area, impacting on my premium?
Is there a shift in the payment spread in the commercial sector? Are many in that sector paying their premium by means of a one-off payment or retiring completely from taking out insurance policies?
Is there any down side to the Personal Injuries Assessment Board from the point of view of the insurance sector? I have not seen any down side and have not heard anybody complaining about it, though legal people may complain in the background without making it public.
Mr. Michael Kemp
The Deputy asked about rating and other underwriting action relating to flooding. This is one of several of perils in a standard policy, others being fire, theft and storm. There are different rates for different parts of the country and some companies have more regions than others. Rates are usually higher in city areas, particularly so in Dublin, due to the greater theft risks. In the event of a widespread flood no company looks at cases on an area-by-area basis but assesses the individual experience of the customer. Particular action would, therefore, not generally be taken on foot of one claim. However, where there are repeated claims and it becomes apparent that the flood risk has not been adequately defended against — whether by an individual or because of the inadequacy of flood defences in a particular area — it becomes an issue. Insurers will not generally delete flood cover unless it is absolutely unavoidable. They will try to deal with it on an individual basis or by imposing a higher excess but do not tend to look at cases on an area-by-area basis.
There have been very serious flood incidents recently, not necessarily affecting the same areas The more frequent they become, whether due to changes in weather patterns or a failure to address some of the perceived vulnerability in flood defences or in planning policy, the more it becomes possible that flood cover will become unaffordable or unobtainable in the areas affected.
What happens if insurance companies refuse to renew a policy to a person living on a flood plain, meaning the people involved have to scour around for alternative quotations? In the market for car insurance a company eventually has to insure a driver under the declined cases rule. Can insurance companies refuse to renew a policy or might they manage the risk by higher premiums, which would be understandable? Is there a declined cases bureau for people in areas of high flooding risk? It is important to the people in such areas and is currently a cause of concern for them.
Mr. Michael Kemp
There is no declined cases agreement for household or any other class of insurance apart from motor insurance, where it exists because of a statutory requirement and where an authorisation requirement is in place to become part of the declined cases agreement. Household insurance is effectively compulsory as anybody who has a mortgage must have insurance on their house. It has not arisen until now because it has simply not been an issue and there has not been a problem with unavailability of flood insurance on a wide scale. There are concerns that the situation might develop in that direction and it may need to be looked at in the future but I suspect at the moment there is an element of prejudging the situation. I have not seen any significant level of refusals to renew so far, though there may be more on foot of recent weather claims. We run a free information service for members of the public to get in touch with us to sort out problems or for information about insurance. That has been a pretty good barometer of the level of problems and there has not been a significant increase in problems related to the issue.
Is there an obligation on mortgage providers to ensure an appropriate policy is provided for a house in an area susceptible to flooding? There would need to be an appropriate premium as it cannot be done for nothing.
Mr. Michael Kemp
The obligation on the individual householder to have insurance usually derives from a condition in the mortgage loan and is there to protect the lender. It is not very specific and usually requires simply that a policy be in force, without identifying individual perils.
Might there be a change in the terms and conditions of policies henceforward? The situation has changed in the past year or two so might insurers change their terms and conditions to incorporate the new perils emerging?
Mr. Michael Kemp
We are looking at this issue in the context of the flooding and the big freeze. We have set up a working group to look into a number of areas. Prevention is better than cure and a great deal can be done to prevent the loss occurring in the first place. More stringent requirements should be imposed on local development plans and in the guidelines for considering planning applications. Much can be done at a relatively low cost in the maintenance of water courses, drains, culverts and so on to ensure that, with better drainage, the impact of flooding is reduced. Flood defences on a large scale have had an impact, such as those in Kilkenny where there was very little damage from the recent floods. Much can be done to minimise the effect of flooding but we are not at the stage where we need to look at alternative ways of dealing with flood risk. Ireland and the UK are the only European countries to have flood cover as part of the standard household package. In most continental countries it does not come as part of the household package and there are other arrangements in place, usually some kind of state-backed fund to cover flood. I do not think we are at that stage and I hope we never get to it. Certainly, there is concern that we are heading in the wrong direction. Much can be done to alleviate the problem before we need to consider that.
With regard to commercial insurance and greater use of instalment payments, it may be happening but I am not aware of a trend in that direction. It is not something we have been monitoring. I have heard of cases where cover has been cancelled and there is no indication that the insured person has moved to another company. That could be for several reasons. It may be that people are hard-pressed and are giving up on insurance cover.
I was thinking of companies folding. Does the insurance industry have figures which might support anecdotal evidence from other sectors?
Mr. Michael Kemp
I do not think we have any such figures. There has been a reduction in economic activity generally, which is impacting on our premium income. In general, commercial liability is rated on turnover and wage-roll. A reduction in the scale of a business will result in a reduction in premium. It could also be the result of companies ceasing trading and falling out of the insurance system completely. I do not have separate figures for that and I cannot say there is a trend.
We have found the injuries board to be a positive development, overall. It was never intended to reduce the amount of compensation paid and there has been a tendency for compensation levels to drift upwards in recent years. That aspect is still an issue. In an international context, we still pay very high damages. However, the board has been very effective in cutting out unnecessary legal, medical and other ancillary costs of handling claims. It has helped to create an environment in which claims can be settled earlier than before because there is less uncertainty as to the correct level of settlement. Even though there has been a drift upward in levels of damages, we are working within ranges that are much narrower than they used to be before the injuries board published its book of quantum. That has been helpful for everyone involved, and not just the insurers, in negotiating settlements at an earlier stage.
Mr. Kemp mentioned the increase in the level of compliance. Will that have a bearing on the cost of insurance, particularly in the motor business? Mr. Kemp referred to the Financial Regulator and intermediaries. How much regulation do intermediaries have with regard to compliance? How much supervision do they have?
The cost of investigating a small claim sometimes appears to be more than the claim itself. Why are such substantial legal costs necessary?
What level of commission is paid to intermediaries? Is this transparent? Are additional charges applied? Is an agent entitled to add a service charge to the cost of insurance?
Mr. Michael Kemp
When I referred to compliance I was speaking about uninsured driving and the improvements we are seeing and are hoping to see with the introduction of the automatic number plate recognition, ANPR, system. In principle, it will have an effect on the cost of insurance cover. The level of uninsured claims is currently running at about 6% of premium income. Obviously, if we could halve that we would save approximately 3%. The introduction of the insurance disc in the 1980s and the greater attention paid to this matter by the Garda since then has reduced the level of uninsured driving. It is something which must be paid for in the cost everyone else pays for insurance. There is scope for bringing down rates to some degree if we can eliminate uninsured driving. I am sure we will never eliminate it completely but it could be brought down significantly.
We represent insurance companies rather than intermediaries so we do not have direct information on the level of resources which go into ensuring compliance by intermediaries. There are elaborate codes and practices which the regulator imposes on intermediaries in the conduct of their business. The regulator actively inspects and supervises them and is required to make returns just as companies are. It is a significant part of the regulator's business.
There is mandatory disclosure of commissions on life assurance products but not on non-life products. The code of practice requires intermediaries to provide that information to the customer on request. They are entitled to charge an additional service fee but they must disclose that up-front and show that it is separate from the premium the insurance company charges. There are some rules in that area. As a result of draft legislation being considered in Europe, it is possible that we may have a more comprehensive disclosure regime for commissions in the future. At present, it only applies to life assurance products, particularly investment products.
Companies must take an economic view of the amount of effort and cost incurred in investigating claims. They certainly should not spend more investigating a claim than the cost of settling the claim. I am not aware of this problem. If cases go to litigation we find that the ancillary costs of dealing with them in the courts tend to be a higher percentage of small value cases than large value cases. There is, certainly, an in-built incentive to settle cases at an early stage subject to the merits of the case being proved, rather than incur those costs. It depends, to some extent, on the circumstances of the case and whether the versions of events agree. It usually has to do with the factual investigation of what occurred rather than the legal arguments.
I welcome the delegation. In his submission, Mr. Kemp said that in the past five to six years there has been a noticeable downward trend in premium rates. He then said that as a result of claims there has been an increase in motor and home insurance in the past two years. There seems to be inconsistency here. My experience is that insurance premiums have increased significantly in the past two years. My premium has increased by about 19% in the past two years, although I have not made a claim. How do the industry figures match the experience of consumers?
In dealing with brokers, I get the sense that they can offer an attractive rate to new clients to secure their business and then revert to type. I would be interested to hear Mr. Kemp's comments on that.
I will give a family example to illustrate my next point. A family member, who was insured to drive on my policy, had a slight accident in a car park. There was a dispute as to who was at fault and the other party made a claim. The other party's insurance company sent out an investigator who made a report. My insurer was happy to settle on the basis of that report, without sending an investigator. I was not prepared to settle until my insurance company investigated the matter. Reluctantly, they did so and subsequently settled, against my wishes. I argued that they should not have settled. The investigator from my insurance company pointed out that many aspects of the other company's report were wrong. However, my insurance company was prepared to settle against my wishes on the basis of costs to the insurance company. That would not have been in my interests. They are doing things which are not in the interests of consumers but in the interests of their own business. I will be interested to hear the comments of the witness on that issue.
One cannot judge——
I get accused so often of wearing different hats. I invite Mr. Kemp to arbitrate on those issues.
Mr. Michael Kemp
In regard to the trends, it is true that in the past 18 to 24 months private and commercial motor and household rates have gone up. Essentially what I was saying was that during the past six years, or in the case of motor insurance during the past ten years, the trend has been downwards. Four years of a downward trend counteracted by some recent increases is probably the best way to characterise it over the six-year period. I would hope that we may have got near the top of the cycle on the motor side. Obviously the household and commercial property is in a slightly different category given the recent losses.
In terms of a leeway for brokers to change pricing in year one — they should not have done so. A rate would be quoted by the insurer but it is only to the extent that the broker is prepared to waive a service fee that they might otherwise have charged or take lesser commission that they have a certain amount of margin to share with the customer. I am not aware that this is a widespread practice of special deals in year one and then increasing the cost in year two. The bulk of the total amount one pays will be the premium and that comes from the insurer rather than the broker, so they do not have any discretion in regard to that element.
In regard to the case mentioned, it is difficult to comment on an individual case. There are always differences of opinion concerning facts and the interpretation of same in an accident situation. I take the Senator's point that since the other company was prepared to send an investigator to check out the facts, it seems reasonable to suggest that the Senator's company should have taken the same precautions before deciding whether to settle. When one asks for indemnity under a policy, one hands over the conduct of the claim to the insurer who is supposed to act in one's interests and it should be aligned with its own to a large extent. It is its call, given its experience in dealing with claims as to how best to finalise the claim. It is open to one not to ask the insurer to indemnify one in the first place. Some people, in the case of smaller claims, particularly damage only, would take that option so as not to affect their no claims discount. There are options at the outset but once one asks the insurer to deal with the claim, one cedes control of the handling of the case to the insurer. I am not sure I can say very much more in the circumstances of the particular claim.
That the insurer is entitled to settle against one's wishes appears to mean the insurer is working against the consumer.
Mr. Michael Kemp
The insurer takes a view based on the likely outcome. If there are different versions of events leading to different conclusions as default, the insurer could not put it into the injuries board process if there was an injury involved, but would have to go to court to be tried. Depending on the value of the case, it might take an economic view that the chances are that it would go down and there is no point in incurring additional costs to try the issue. Certainly it should be based on a thorough investigation of the circumstances in the first place.
I welcome Mr. Kemp and his staff. He gave us a very comprehensive report on the insurance industry in Ireland. Of course, there are always problems in insurance. How many wholly-owned Irish insurance companies are in place? How many continental insurance companies and how many British-based insurance companies are in place? Motor insurance accounts for 43% of the total market. Property insurance is about 29% and professional indemnity is about 18%. This leaves about 10% for all other smaller classes.
Is the insurance industry self-financing or does it have other investments to increase funds? How effective is the motor insurance industry? Is it self-financing arising from all the measures adopted under the Road Traffic Acts which have resulted in a reduced number of accidents and loss of life? Given that last year proved very successful in the road traffic area, did this result in major savings?
Following the recent frost, has the insurance industry done any work on that issue? Much of the frost damage arose from defective work. Many politicians around this table, and especially those of us in the southern part of the country, would have been called out all over the place during the Christmas period. The difficulties arose mainly in new estates where pipes had not been properly laid and properly protected vis-à-vis older housing estates and terraced housing. Is the industry carrying out a study of that area and, if so, will standards be put in place to ensure this type of hardship will not be imposed on families in the future? Families suffered real hardship, having had to go without water for three and four days and no sanitation facilities, arising from what I regard as defective work. Given all the regulations in the planning area it was a terrible state of affairs in the southern part of the country.
Mr. Kemp raised the issue of uninsured driving and the recently introduced automatic number plate recognition software. This gives gardaí a much more up-to-date photograph of one's number plate which can be relayed back to the traffic bureau. How effective is that system? It is not before time that we had such a measure for identifying uninsured drivers. Uninsured drivers are the greatest scourge on society. I see them as suicide and murder at the same time. Will Mr. Kemp give an estimate of the percentage of uninsured drivers on Irish roads at present? Are those drivers in the younger category or in all categories? People are extremely frightened of an uninsured driver. Perhaps Mr. Kemp can give a few simple answers to my simple questions.
I invite Mr. Kemp to deal with those interesting questions.
Mr. Michael Kemp
I will do the best I can. In terms of ownership of the companies in the industry, we have always had a very open market. A very high proportion of companies have always had branches or subsidiaries of UK and other insurers and that is still the case. There has been increased globalisation of ownership of the industry. There are only one or two entirely Irish companies left. Others are quite important parts of groups and there is much local autonomy in terms of running those companies. However, ultimately the shareholder is, in most cases, a foreign insurer. We have had a tendency recently for foreign companies to set up head offices here for the whole of Europe. I am aware of at least two such cases taking advantage of the facilities in the IFSC. There are many businesses based here and the administration of their entire European portfolio is run from here. In terms of the domestic market there are very few Irish-owned companies.
The figures given in the presentation are the percentage that each class accounts for in terms of overall premium income. Effectively, in terms of results and how the businesses are run, different companies have got different make-ups to their portfolio but they will try to run each class as a separate business. They are aiming for underwriting breakeven or, ideally, a profit in each area to avoid having to cross-subsidise. Motor insurance, in particular, has been running well. In 2008 we had an underwriting loss in private motor insurance but it was made up for by investment income. Costs have been reflected principally in the reduction in premiums in the four years up to 2008. The savings that have been realised by the companies are as a result of improved claims frequency and other reductions in costs effectively being passed on through premium reductions in that period, to the extent that there was a fairly quick reaction when costs started to creep up again. It came through in terms of rate increases in the past 18 months or so.
We are certainly monitoring the causes as well as the costs of the freeze. The claims insurers are dealing with are mostly in regard to burst pipes and tanks within dwelling houses. Many of the problems to which the Deputy referred probably have more to do with the public water supply but there are certainly issues that need to be addressed.
Without wishing to interrupt, they are all interrelated.
Mr. Michael Kemp
We are looking at a number of aspects of the flooding and the freeze. If it requires changes in building standards we would be in favour of that and would publicise it in due course. It is something we would look at.
This issue relates to planning and building regulations. While everyone advocates the placing of pipes two feet below the surface, that is not mandatory. That is how there are pipes only nine or 12 inches below the ground. As a result, half the country was frozen and, as Deputy O'Keeffe has said, people did not have a water supply for toilets, drinking or anything else. The buck stops with us legislators rather than with Mr. Kemp. We should have made it a mandatory planning regulation that connections from the main water supply to houses should be a minimum of two feet below the surface. Deputy O'Keeffe is correct. When I worked on building sites as a student water pipes were always placed three feet under the ground. That is why older houses do not have this problem. The old ways are probably the best ways.
Thank you, Chairman, for assisting me. However, I am comparing terraced houses and old housing estates, which did not have a problem in the freezing weather, and new housing estates. The water supply to new houses froze, and not only at the stop-cock but inside the houses and in the attics.
Mr. Michael Kemp
This is certainly something we will look at. Insofar as it had an impact on the level of losses we must be concerned about it. We must do that work. It is certainly something we will be looking at.
In many cases pipes, tanks and cisterns burst because of lack of water.
Mr. Michael Kemp
There is a knock-on effect.
In many cases empty cylinders broke because water had been drawn off.
Mr. Michael Kemp
The ANPR system has been in place for about six months and we had a pilot study before that. It seems to be much more effective. The problem with the old national vehicle register, which was supposed to include insurance details, was that it was not up to date, particularly when people were given the facility to renew motor tax on-line and there was no visual check of the insurance details which were keyed into the system. The other problem was that there was only an obligation on the insurer to notify the cancellation of cover. The system did not take account of mid-term substitutions or simple expiry of cover without a cancellation. What we have now is a software-based system where vehicles lost or gained by insurers onto their books are notified on a daily basis and updated collectively to the system, which feeds into the Garda system. Gardaí have much more up-to-date real time information about what is and is not insured and can be very certain when they stop someone who is flagged on the system that there is no current insurance policy on the car.
Is the insurance industry making a financial contribution to that system?
Mr. Michael Kemp
We are providing the information. We have built a system at our expense which processes the information and feeds it to the Garda. There is no additional cost to the Garda. It approached us when it was putting the ANPR system into Garda cars to see if it could supplement it with our additional information.
Motor insurance has confused people for many years. Listening to Mr. Kemp's contribution, I find myself even more confused by some of the statistics and facts he has presented. When I renewed my motor insurance this year I was given a quote from the company I have been dealing with for a number of years. I asked if that was the best price they could offer and was told it was. I rang another company and was offered a lower quote. When I went back to the original company it wanted to know the amount of the second quote before it would quote me again. It then reduced its original quote by approximately 15%, without any question or new information being given. There is no transparency in the motor insurance industry.
Mr. Kemp said, "Over the last five to six years there has been a noticeable downward trend in premium rates in motor insurance and other classes as a result of improved road and workplace safety standards". He subsequently told us that premiums have gone up again in the last 18 months. Between 2004 and 2007, there was little or no change in the number of fatalities on Irish roads. In fact, they increased. In 2004, 374 people were killed on our roads and 397 were killed in 2005. There were 365 fatalities in 2006 and 337 in 2007. It is only in the last two years, and particularly last year, that we have seen a significant decline in the number of fatalities on Irish roads. Mr. Kemp told us we have seen a noticeable downward trend in the last five to six years. However, there was little change in the first four of those years. It is only in the last two years that we have seen a decline. Despite the major reduction in the number of fatalities on Irish roads, we have seen an increase in premiums. Can Mr. Kemp explain or justify the increase in insurance premiums? They bear no relation to the facts.
Mr. Michael Kemp
I was talking about the overall period. There was a net reduction in the average cost of motor insurance over the last six years. Within that, there was a significant reduction of between 40% and 50% over the first four years and there has been a correction upward since then as a result of increasing claims costs. The number of fatalities is one element of the mix but is not the only one. Motor insurance covers injuries and damage as well as fatal accidents. Other indicators are at work which may not be moving in the same direction. In addition, there is the question of the level of damages, which has begun to creep up in the last couple of years. All of this must be taken into account.
The Central Statistics Office index figure for January 2010 is 73.3 for motor car insurance. That is approximately the same as it was in mid to late 1999. We are at about the same level of pricing as we were nine and a half years ago.
Does Mr. Kemp accept that the number of road fatalities had little or nothing to do with the insurance premiums being sought from drivers between 2004 and 2007?
Mr. Michael Kemp
No. It has an impact. It is not the only factor but it is one of the ways we measure the frequency of accidents on the roads. We are looking at the total number of claims made. Some are very small claims and some are very costly. Fatalities are just one category.
In support of Deputy Power, in the last five or six years the insurance industry had all the aces in its hand. The Personal Injuries Assessment Board, PIAB, was established and legal, medical and engineering costs were significantly reduced. I am a barrister so I must declare an interest. However, all the aces are in the same hand. For example, if a client declines an assessment made by the PIAB, that is seen by the court as the equivalent of a lodgment. If the client does not beat the amount of the assessment he or she can be penalised in terms of cost. I made this argument when the legislation was amended in 2007 or thereabouts. The equality of arms should be the same if the PIAB puts in an assessment and the client beats it.
Notwithstanding the improvements which have been made, the level of damages has not gone up very much. The maximum level of damages determined by the Supreme Court for someone who has suffered a significant quadriplegic or paraplegic type of injury is €300,000. That has not increased.
Mr. Michael Kemp
The bulk of cases are smaller and not very serious. It is not the maximum damages which determines trends.
With respect, Mr. Kemp, everything is relative to that. That is the maximum. If Mr. Kemp is stating that the level of damages has crept up, where is the evidence of that? According to the Personal Injuries Assessment Board, all claims are being assessed and there is a significant level of acceptance. The insurance industry has had a fantastic run. When the Irish pound changed to the euro, there was a 27% differential; that was a gain. There has been a significant fall in the level of damages, which was another gain. I am out in the field and I know these two things happened.
We are not getting down to the nitty gritty. The Irish Insurance Federation has placed great emphasis on the improved road safety standards and the reduction of fatalities, but the standard did not increase to a great degree during the period 2004 to 2007. What are the factors giving rise to increased insurance premiums in the past 18 months when the number of road fatalities has been considerably reduced?
A question that arises with friends and constituents on a regular basis is the issue of getting an insurance quotation. Would Mr. Kemp support the idea of making the component elements of a premium more transparent, so that people would know how the figure was arrived at. For example, if I were to get a letter stating that the insurance on my car will be €600, I would like to know how that figure was arrived at and understand how one company could quote €600 and another company could quote €450. Will Mr. Kemp explain why that happens.
Mr. Michael Kemp
A number of factors, fatalities, injuries and damage cases as well as the level of costs associated with it and the level of damages, all go into the mix in terms of making up the total claims bill. The most recent year for which we have complete figures for the market is 2008. In that year the cost of motor claims for the industry as a whole went up 24%. That is the reason premiums have been going up in the period since then. If members look at the CSO index, to which I referred, they will see the figure of 73.3. It was at 94 at the beginning of 2004, so notwithstanding that, there has been a decrease during the past six years of more than20%. Prices fluctuate in response to claims costs all the time.
Will Mr. Kemp explain that again.
Mr. Michael Kemp
According to the CSO motor car insurance index, there has been a decrease of approximately 20% in the cost of motor insurance in the six years since January 2004. However, in terms of the claims costs, when the costs in 2008 are compared year on year with those in 2007, there was an increase of 24% in the total claims costs incurred in motor insurance. Admittedly, that was building on a low base, but there had been significant reductions in pricing up to then. That is what has increased costs up to the current CSO index of 73.3 in 2010. It was about 15% less two years ago. There has been an increase in pricing in the past two years, but over a six year period, the price is a great deal less than it was six years ago.
Will Mr. Kemp explain the behaviour of companies providing quotations for motor insurance?
Mr. Michael Kemp
As with every other economic activity, it is a competitive market and companies are free to price the product as they will and to respond to competitors' prices in the way he mentioned. There are some requirements already in place in regard to the format and the information that must appear on a renewal notice in relation to the make-upof the premium. There may be scope for improving that and that is certainly something the federation could look at.
That was my point. Would Mr. Kemp support more transparency in the type of information provided so that the customer has a better understanding of the components of the quotation? It is very difficult for anybody to understand the reason for the figure in the bottom line.
Mr. Michael Kemp
There are different elements to the cover. Some breakdown between the pricing of the third party liability risk and the accidental damage risk are elements we could look at. I am not sure to what extent that sort of information——
What is Mr. Kemp telling us today?
Mr. Michael Kemp
There are existing regulations on the information that has to be disclosed at renewal and the pricing information that goes into the renewal notice. If there is a general feeling that is not transparent enough, it is certainly worth looking at. I am not saying there will be any particular changes, but it is something that we would be prepared to engage with, if the regulator is interested in doing that. I would not rule out making changes to make it more transparent, if that is what is required.
Does Mr. Kemp think this would be helpful?
Mr. Michael Kemp
It could be helpful, if we had a breakdown between the third party liability element of the premium and the other parts of the premium. It would not address the question of getting alternative quotes from another insurer and coming back and trying to do a better deal with your existing insurer. There would still be freedom——
The less information that an insurance company provides the easier it is to have these little top ups. It is indefensible for a company to issue me with a quotation, and with no change in my personal information, it could reduce my premium by 15%. It is an abuse of the system in the sector in which they are operating.
Mr. Michael Kemp
The advice that we give, and the regulator also gives the same advice, is to shop around. It is always worthwhile trying to see if one will get a better quotation. The objective is to get a better quotation.
Would Mr. Kemp agree that insurance companies abuse their position? If the quotation was itemised, that would reduce the opportunities for insurance companies to fleece the public.
Mr. Michael Kemp
I do not accept that insurance companies fleece the public. I accept there may be a case for discussion on what additional information could be provided as part of the renewal process.
It is a question of what is useful and what provides more information that one can act upon. At present, it is a requirement that customers get the renewal notice at least 15 days before the renewal date. The idea is to give people a chance to shop around with a view to getting a better deal. That goes some of the way to addressing the problem.
I apologise for being late. I have a rather gloomy view of the insurance industry, this is not just a personal view but is based on the experience of my constituents.
Trying to gauge insurance premiums, reminds me of the "Spot the Ball" competitions in the newspaper, where one sees the players looking in every direction and one sticks a pin in it in the hope that one will place it where the ball should be. If one telephones an insurance company seeking a quotation for an older car, one is penalised, but if one trades up, one is penalised because the car is too good. Some insurance companies do not insure light commercial vehicles, some other companies do not insure two door light commercial vehicles. Young males face specific difficulties in getting insurance. People with no experience at all in driving have a very high premium, so it is a complete lottery. The individual is either too old or too young, or the vehicle is too old or too fancy. It is very difficult for the consumer.
Constituents contact me with complaints about the insurance industry. They tell me they hold on for hours and the minute somebody talks to them, they know they will not get insurance. Insurance companies should focus more on looking after the consumer. After all, the consumer ensures the insurance company is viable and there is significant conflict and differential in the industry. As Deputy Power has said, I am terribly promiscuous with my motor insurance. I flit from one to the other to ensure that I get the best deal. It is wrong that the company gives a quote on which it is prepared to negotiate downwards if the customer has found insurance cheaper elsewhere. I find that one will never fit into a category. One must be a middle aged white attractive man, driving a modern car with low mileage. One cannot fit into the category and is therefore penalised.
As a Deputy for the Carlow-Kilkenny constituency, I note Mr. Kemp's comments about the flood relief scheme in Kilkenny, which has worked very well. I am glad to say that my colleague, the Minister, Deputy Gormley, has provided €19.4 million to stop the flooding in Carlow. My point is that small commercial businesses in my constituency — we are talking about individual little retailers who are trying to make a few bob, rather than Tesco or any of the other big retail names — cannot get insurance because they have been flooded more than once. It is not their fault that the building is on a flood plain — it is the fault of the local authority. That has been rectified by means of the statutory guidelines on building on flood plains. These people would not drain the coffers of the insurance companies. They are looking for a modest amount to enable them to keep going, but they cannot get it. They might be able to get a small amount of money from the Department of Social and Family Affairs or the local authority. They are willing to pay their premiums and, in the event of a flood, to be entitled to some compensation. Perhaps this matter was discussed before I came to this meeting. I strongly believe we should help small businesses that have been struggling to stay in business since their stock was ruined by water. They cannot get insurance cover and they cannot afford to pay for refurbishment and restocking. I feel strongly about this matter. I understand that during the tough weather, an insurance company advised its customers to keep their taps running in order to prevent pipes from bursting. Is that an apocryphal story, or is it true?
Mr. Michael Kemp
The Deputy's first question related to the rating factors that are brought to bear on motor insurance. I agree, up to a point, that it would be better if there was greater transparency about the categories. The annual statistical report on private motor insurance, which is compiled by the Financial Regulator, is based on the statistics the companies are required to provide. The report gives an indication of the levels of relative risk associated with risk factors in a number of areas. I refer to the vehicle and the driver characteristics, etc. Such objective data gives an indication of the actual level of risk. In any given case, the combination of risk factors obviously has a bearing on the price that is quoted. The system has a logic of its own, although it might not always be apparent to the customer. The underlying statistics which are compiled at market level should bear that out. It may be a question of communicating that in some way, perhaps by revising the information that is provided as a matter of course as part of the renewal notice.
It is very important because risk factors are associated with every category, including gender and age. I agree that the federation should circulate that information so that one does not have to spend as much time on the telephone trying to access it.
Mr. Michael Kemp
The system is not illogical. There is no conscious effort to place people into certain categories in order to discriminate against them. The Deputy appeared to be suggesting that it was impossible to get into the right group or cell. The system is based on objective statistics which are drawn from past experience.
What is the perfect fit?
Mr. Michael Kemp
It is impossible to say because so many risk factors are statistically relevant. In the case of motor insurance, young people with no driving experience who are starting to learn to drive are generally advised to try to get qualified as soon as possible, as that is certainly a factor. If one can pass one's test as a named driver on the policy of a family member before one applies for cover in one's own name, that will help to reduce one's premium. It is obvious that the type of vehicle is relevant. More powerful and higher value vehicles will attract a higher premium. Smaller vehicles are generally rated lower. Most people understand such obvious factors. If one has made previous claims, or if one has previous convictions, that will have an impact on one's rating. Such characteristics will cause one to be considered to have a higher risk. Insurers will always take that into account. Information is available to support this approach.
What is the safest category? What is the best bet?
Mr. Michael Kemp
If the Deputy wants me to specify——
I would like Mr. Kemp to do that.
Mr. Michael Kemp
Female drivers generally attract a lower rating than male drivers. A woman with a full licence who is between the ages of 30 and 65, drives a relatively small car and lives in a rural location will generally pay less than an urban male under the age of 30.
There is hope for me.
We have to move on.
Mr. Michael Kemp
On the flood risk issue, I made the point that when flood defences are improved in an area, it makes a difference to the underwriting attitude of an insurance company. If such a company is assured that the risk of flooding has reduced, that will lower the rating of the provision of flood cover which was an issue previously.
The point about insurance in this area, whether it is small business, an individual householder or a large company, is that insurance is there to provide cover against the financial consequences of a risk. If something has become so frequent or inevitable that it is no longer a risk, insurance is not the vehicle for dealing with it. If one knows that there will be another serious incident, and if the cost of the claim will be a multiple of the premium paid by the person in question, it will not be possible for one to provide cover to that person on a commercial or any other basis. In some cases, it is not economically viable to provide cover. As I stressed earlier in the presentation, flood cover is completely withdrawn in very few cases. Each case is considered on its own merits. The withdrawal of flood cover from a policy holder is very much a last resort. We consider other ways of dealing with the problem before we take such action. It is really only where there has been a string of flood claims that it becomes necessary to withdraw cover.
I want Mr. Kemp to look at the declined cases bureau system for cases that might arise in the future. I know it is not mandatory. I appreciate that road traffic is governed by the 1961 Act, as amended in 1978. I would like the insurance industry to consider those who live on flood plains and cannot avail of cover. I refer to the cases of those who have been declined by three or four companies. The Department used to have a declined cases bureau. Somebody, perhaps the insurance federation, should say that "Penrose Limited" has to take on Mr. Kemp's insurance in Mullingar or Athlone. We need to ensure that somebody provides it. I would like such a system to be introduced so that nobody in that situation is left to his or her own devices. It would be a help. Obviously, we appreciate that there will be an extra little premium if someone has been declined by three or four companies. That is something Mr. Kemp and his colleagues might consider.
Mr. Michael Kemp
It is certainly worth considering. There might have to be some kind of co-operative system between the industry and the State. It depends on what can be done to alleviate the problem.
I absolutely agree. This was done in Florida or somewhere else in the United States. If it can be done out there, it can be done here. As a State, we have an obligation to work with the federation to ensure nobody is left without insurance. That is the bottom line. Small businesses and the people we saw in Gort, Athlone, Cork and everywhere else throughout the country should not be left in such a situation again. That is the reason for having today's useful discussion. Mr. Kemp might take that suggestion away with him. Did Deputy White want to ask another question?
I would like to know whether an insurance company advised consumers to leave their taps on.
Mr. Michael Kemp
One company did so, unfortunately, and regretted it afterwards when it realised that it was wrong.
I thank the Chairman. I will be brief. I apologise for missing the start of the meeting. I thank Mr. Kemp and his colleagues from the Irish Insurance Federation. I would like to follow up on Deputy White's point. Following some very bad flooding in my constituency a number of years ago, a number of insurance companies refused to give quotes or increased their premiums substantially, even though considerable flood protection measures had been implemented by the local authority. As a result of a process of negotiation involving the federation, and in light of the spending of State money on improvements in the area, it was possible to ensure that people were adequately covered at a reasonable price. I mention that to be positive.
Mr. Kemp also spoke about the financial crisis in his presentation. I apologise if it has been discussed already. He mentioned the various financial measures that are being taken in the industry. Many families are experiencing severe financial difficulties. The unfortunate reality of life is that insurance is probably one of the first things to suffer as a result. Are efforts made to encourage people to maintain insurance? It is not really a problem with the older generation but more with young families who are in severe financial difficulties. If one becomes unemployed, the first expenditure to go is usually the life or house insurance. It is becoming a significant issue. Has the federation launched a campaign to ensure people continue to insure both their properties and persons?
Mr. Michael Kemp
Different considerations arise with different types of cover. Motor insurance is obviously a statutory requirement and that is the one people will always maintain. Household insurance is usually a legal requirement of the mortgage lender. That can usually be left to itself. There is a danger, however, that while people continue to insure the buildings, they may drop the contents cover. It has more to do with savings, investments and, particularly, pensions that this issue arises.
Some of the proposals mooted in reducing tax relief on pension contributions have caused us concern. We have a meeting with the Minister for Social and Family Affairs tomorrow at which we will urge those incentives to be left in place. At a time like this when asset values have fallen, it is important to encourage people to make provision for their retirement, especially given the closing down and uncertainty of many final salary schemes and that the State pension will not be enough for many people. It is important to provide those incentives. This policy needs to be reinforced now rather than cut back. In that context, we are certainly lobbying for continued support in this area.
It is inevitable that when people are hard-pressed some of the peripheral covers will be dropped. However, I am not sure there is a great deal we can do about that. Motor insurance, household insurance, savings and pensions are important.
I thank Mr. Kemp and Mr. Horan for addressing the various points raised during the committee's deliberations. Insurance costs are an issue that exercise people. The cost of insurance is one of the heaviest and most significant burdens borne by businesses, especially in this current economic climate. All I can do on behalf of the committee, as it has indicated, is encourage the insurance industry to do everything it can to keep premia at the lowest possible level. I trust that is an objective with which the industry will concur. I also acknowledge insurance companies need to make a profit but they must, in the committee's view, subject themselves to the rigour of surviving in a more competitive market to ensure premia are reasonable, particularly in mandatory areas such as motor insurance, for those struggling to make ends meet.
This has been a useful meeting with significant robust exchanges. Admirably, Mr. Kemp did not back off from any of them. I thank the delegation for attending the committee.
The joint committee went into private session at 3.55 p.m. and adjourned at 4.05 p.m. until 11 a.m. on Thursday, 4 March 2010.