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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach debate -
Thursday, 8 Mar 2018

General Scheme of the Insurance (Amendment) Bill 2017: Discussion (Resumed)

No. 9, session one, is pre-legislative scrutiny on the insurance (amendment) Bill 2017 (resumed) with Mr. Kevin Thompson, CEO, and Mr. Declan Jackson, direct of government affairs, Insurance Ireland. I welcome Mr. Thompson and Mr. Jackson to the meeting.

Before we begin, there is a note on privilege which I am obliged to read out. I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I ask Mr. Thompson to make his opening remarks.

Mr. Kevin Thompson

I thank the Chairman and members of the committee for the opportunity to appear before the committee as part of the pre-legislative scrutiny on the draft general scheme of the insurance (amendment) Bill.

On behalf of Insurance Ireland, I welcome the proposed legislation as it brings to an end an anomaly which first came to light with the liquidation of Setanta Insurance by the Maltese authorities. Prior to the Setanta situation, insurance companies that encountered difficulties were placed in administration which allowed for the orderly wind down and transfer of policies. In a liquidation scenario, these tasks became much more complicated.

Insurance Ireland accepts the proposed funding arrangements as contained in the general scheme of the Bill. Prior to the Supreme Court decision in the Setanta case, the industry, through the Motor Insurers Bureau of Ireland, was responsible for meeting not only all the motor third-party liabilities, MTPLs, of Setanta but also for any other company which entered liquidation. Clearly, the circumstances where a prudent company was responsible for the liabilities of a less prudent competitor was a classic example of market failure.

Insurance Ireland has always been of the view that in order to maintain the orderly functioning of the motor insurance market in Ireland it is vital that certainty exists around the annual contribution rate. Such certainty is the key feature of both the UK and French markets. In the UK, there is a monetary limit to the contributions which the sector is required to meet in any given trading year. In France, an ex-ante contribution is collected in advance of any liquidation event. This rate does not change from year to year and therefore it also provides the certainty to which I referred earlier.

The proposed methodology in the general scheme is in line with international norms of consumer protection and as such is to be welcomed. Furthermore, we accept that it is prudent to begin the collections at a level of 2% of motor gross written premium and to taper this back as the fund is built up to an appropriate size. The collection of the fund is also equitable because the entire market would be required to contribute based on the previous years motor gross written premium. Insurance Ireland agrees with the general direction of the general scheme that the best manner to avoid the complications and unnecessary uncertainty which arose as a result of the Setanta liquidation is to collect an ex-ante contribution for all insurers writing motor business in Ireland.

I thank Mr. Thompson.

I thank Mr. Thompson and Mr. Jackson for their attendance and for the opening statement.

Perhaps Mr. Thompson could summarise his understanding of how the reformed system that will be brought about when the general scheme of the Bill is eventually enacted will work in practice in the event of another insurance collapse in Ireland and how will that be different from the saga we have had over the past four years following the Setanta collapse?

Mr. Kevin Thompson

First, I will provide a bit of context in terms of how we got to where we got to with the Setanta situation. If one looks at the current insurance legislation, I suppose the anomaly reaches back to the 1964 Insurance Act which was amended in 2011. Under that Act, if a company - up until Setanta - went into administration, 100% would be paid through the ICF. Unfortunately, with Setanta, when it was put into liquidation by the Maltese regulator, it was the first time a liquidation had occurred within the State and an anomaly had appeared within the 1964 Act where in such cases one had a cap in terms of what could be claimed through the ICF, namely the lesser of 65% or up to €825,000. In short, unfortunately, that meant we had a liability of 35% for the claimants.

The proposed amendments to the Act would bring liquidation in line for compensation in relation to administration. They also propose a pre-funding mechanism to build a fund up to a maximum of €200 million through a 2% collection on gross written premium for market participants in the previous year. In addition, should the fund be called upon before an adequate amount could be built up within that fund, the Insurance Compensation Fund, ICF, would backstop it until the ICF could be paid through the pre-contributions of the industry. There is also provision within the proposed general scheme that an extra 1% could be called upon in extraordinary cases.

The pre-funding mechanism, in terms of getting this lump sum or funding together, will bring stability to the market in that policyholders who are affected by such liquidations in the future would have moneys to call upon. From an industry point of view, it brings certainly in terms of the contribution that will have to be made to the fund, and which is in line with international practice. Under the French model, for example, they collect a 1.1% levy from policyholders and the industry makes a 1% contribution as well until they build the fund up. That is our view of it.

In essence, in the event of a further collapse, instead of this 35% shortfall, the ICF will meet 100% of the cost of outstanding claims-----

Mr. Kevin Thompson

Correct.

-----and that will be funded by the levy. Is the 2% non-life levy that people are currently paying here to stay?

Mr. Kevin Thompson

Correct. That will still go to the ICF.

To what level will the fund have to be built up? There is a very significant shortfall currently projected due to the work-out of the Quinn Insurance deficit. There is probably a decade or more of 2% contributions that will have to be paid in to clear that alone and then one must build up the fund. How does Mr. Thompson see that working its way through?

Mr. Kevin Thompson

With the proposed pre-funding 2%, it will probably collect, on the latest gross written premium, between €34 million and €40 million a year. Currently, the ICF collects approximately €74 million a year. All in all, one will be collecting over €100 million a year.

Deputy Michael McGrath is correct in stating there is approximately another ten years to go in paying down the Quinn piece. Even though we are only contributing the €34 million, in the context of Setanta where there was a €90 million, one is looking at a three-year contribution to cover that liability. Once the fund is established, it will bring a degree of certainty should such other events occur in the future.

I will ask Mr. Thompson about a related issue, the passporting into Ireland of insurance services. Ireland is part of the EU Single Market and it is allowed that firms such as Setanta can have their prudential regulation in another EU member state and be regulated here only for conduct of business purposes.

Does Insurance Ireland have any concerns about the nature of the EU-wide regulation? Has it improved and can we have reassurance that we are not likely to see a Setanta-type collapse over the period ahead?

Mr. Kevin Thompson

In terms of reassurance, the Deputy will probably be aware that, in the last couple of years, we have gone through the implementation of Solvency II. One can argue this is a risk-based prudential model that is more robust in terms of prudential regulation of insurers within the marketplace. As an industry, we are firmly committed in terms of the existing FOS and FOE passporting model because our industry is ultimately heavily reliant on that. If one looks at the Irish international financial sector, particularly in regard to insurance, insurers domiciled here passport into 110 different countries, servicing 25 million policy holders across Europe and beyond. Our industry has been built on this and we firmly believe in the FOS model. We also firmly believe that the establishment of Solvency II, particularly as it becomes more established and refined, will be the ultimate protector for consumers in terms of making sure there is adequate solvency within each entity in Europe.

With regard to the outstanding claims that are caught up in the Setanta collapse, Mr. Thompson knows it has been a real nightmare for many because claimants have been left short and left waiting to get all of their legitimate claims settled. Of course, policyholders have been really left there in the sense that they have been informed that, legally, they could be held personally liable for any shortfall, which could include judgments against them, judgment mortgages and so on. It has been a real nightmare for such people who bought a legitimate insurance policy here.

We now have the Government statement that 100% of the cost of claims will be met, so we have the 65% from the ICF and we will have some amount of money left over from the liquidation process eventually. What role do Insurance Ireland or its member companies have in the work-out of the remainder of these claims? Does Insurance Ireland have any role in ensuring this is dealt with efficiently and closed off quickly, and that all outstanding claims can be settled in full in a short period? Is it involved in any way in this process?

Mr. Kevin Thompson

First, I would concur it has been a difficult time for both policyholders and claimants and we totally sympathise with them in this situation. Our focus is on trying to make sure that legislation is enacted as quickly as possible to allow payments to be received, particularly in regard to the claimants. As an industry body we will engage with the Department of Finance as and when we need to, and as requested by it, to make sure there is refinement of the legislation and that it is passed as quickly as possible. Ultimately, once that legislation is passed, our industry will help in whatever way we can to make sure these claims are processed as quickly as possible. Our focus is on making sure the legislation is enacted as quickly as possible and doing anything we can do to assist that.

The legislation will not be retrospective so the resolution of the outstanding Setanta claims will be dealt with outside of this legislation. Is that not the case?

Mr. Kevin Thompson

Yes.

Dr. Declan Jackson

There is an appointed liquidator and it is an ongoing process. We have no formal role in regard to those cases but the goal has to be that we learn the lessons so people are never in a situation like this again.

I welcome the witnesses. They have said that the case of liquidation is much more difficult than examinership. We have seen in the past when places go into liquidation that the liquidator is always the first person who is going to get paid, and things can be dragged out. In the case of future liquidations, will the ICF, given it is the body which will collect the funding, have any say on who the liquidators are, how quickly a liquidator is appointed and how quickly the situation is dealt with?

Mr. Kevin Thompson

The Senator is right that once the anomalies are evened out, it will be a decision for the Central Bank and the State Claims Agency, which works through the claims, to decide whether the scheme is either put into administration or liquidation. The advantage of administration is that it allows for an orderly run-off over a long period of time, which has less detriment to both the policyholders and to claimants. The Senator is right in respect of the liquidator, who has to be appointed, that there is an order in respect of who gets paid what if a company goes into liquidation. However, that will be down to whoever goes to the High Court to seek that the insurer be put into either administration or liquidation, and that will generally be the Central Bank.

Would the ICF have any say in the appointment of the liquidator and who that would be? Would it give the liquidator a timeframe in which to wind things up?

Mr. Kevin Thompson

Our understanding is that, yes, it would, in conjunction with the Central Bank.

If this comes into place, can policyholders expect that their premia are going to go up by 2%? Will this just be passed on to policyholders?

Mr. Kevin Thompson

As an industry body, we have no insight or any interaction regarding how companies conduct their pricing. It will be for each individual company to decide how it applies this, whether it applies a 2% levy or whether it absorbs the cost itself. It is down to each individual insurer how it participates within the market, particularly in the context of pricing.

There is nothing in the legislation to prevent or discourage insurance companies from simply putting the 2% onto policyholders.

Mr. Kevin Thompson

No, and, equally, there is nothing preventing them from absorbing the cost.

I would say their drive for profit might push them in one direction rather than the other.

I apologise for being late. We were at the Vótáil 100 show with Ryan Tubridy. Happy International Women's Day to all, even though there are not many women on this committee.

I have a couple of points and I apologise if they have been covered before. Now that we have the system in train to deal with future Setanta-type issues, how much do the witnesses expect premiums to fall by? At the end of the day, this was one of the main reasons the industry gave for the huge price increases in recent years. I and many others imagine this will lead to a dramatic drop in insurance prices.

Mr. Kevin Thompson

I refer to my earlier comments. We have no visibility in terms of premiums or the commercial activities and how our members price. What we do know is that, within the market in which they operate, we had a lot of volatility and, of course, we had Setanta. There is the established fact of the claims inflation environment which is out there. We also had a reduction in investment returns and changes within the jurisdiction limits. There were a lot of factors out there which led to the situation we had. On the positive side, what we have seen recently, particularly through the CSO figures, is a reduction in motor insurance premiums to the extent of some 9% or 10%. Our view is that market dynamics will play out and companies will compete against each other, and, when they do, it generally delivers good value for the consumer.

This really concerns me, not least because my own car insurance - which is on the same car and the same everything else, with no claims - has gone up by 20%. I would be surprised if I am the only person in the country this has happened to. The CSO figures giving that information on insurance costs do not reflect the reality on the ground that I am dealing with. The insurance industry has said that because of Setanta and the resulting liabilities, and because that was not sorted out, this caused insurance premiums to be higher than they would normally be. People's expectation now is not words or platitudes but a decrease in their insurance policies, and the witnesses need to give us more assurance that this is going to happen. It has been a major piece of work to bring us to this point and we need to see that reflected. It is absolutely useless, and we have all wasted our time, if it is not going to be reflected in a dramatic drop in insurance costs.

Mr. Kevin Thompson

I can only come back to my earlier comments. We have always said premiums are a function of claims.

That is where the bulk of the costs arise for all types of insurance. I highlighted the numerous factors responsible for claims inflation in the marketplace, the liquidation of Setanta Insurance being one. Previous figures from the Central Statistics Office reflected increases in premiums and Insurance Ireland was challenged in this regard. More recent CSO figures reflect a reduction in premiums, which we view as a positive development.

I return to my earlier comments. The market dynamics will take effect in that companies will compete for customers. We encourage people, in trying to obtain the best premium, to ensure they shop around because there is value to be obtained in the market.

As the organisation representing the insurance industry, can Insurance Ireland take a proactive approach to encouraging consumers by directing insurance companies to reflect in their premiums the fact that the case of Setanta Insurance has been taken out of the equation?

Mr. Kevin Thompson

We cannot do that. We have no involvement whatever in terms of the pricing decisions of members, which are a matter for each individual company operating in the competitive and free market we have.

Mr. Thompson's response is not encouraging for people whose pockets are still being raided by insurance companies. People must have insurance and premiums are not falling, unless I am only meeting people whose premiums are increasing. I tested this personally by asking my insurance company for a reduction in premiums on the basis that there had been no changes in my policy. It refused to do so and informed me my premium would increase by 20% this year for the same car on a policy on which no claims or any other changes had been made. That Mr. Thompson's view is not reflected on the ground is a matter of great concern. My message to the insurance companies is that they must stop ripping off citizens who must have motor insurance because it is not right.

Now that the insurance compensation fund, ICF, will come under the Central Bank of Ireland, will it be subject to scrutiny by the Comptroller and Auditor General?

Mr. Kevin Thompson

We would expect so.

That is significant and I would welcome that if it is the case.

Mr. Kevin Thompson

Yes, that is to be welcomed.

What is the current balance of the ICF?

Mr. Kevin Thompson

It is in deficit at the moment. I understand approximately €800 million remains to be paid out arising from the liquidation of Quinn Insurance. As I noted, the ICF currently collects approximately €74 million per annum. Under the proposed legislation, an additional amount of between €34 million and €40 million will be collected, giving a total annual figure of slightly more than €100 million.

When will it be possible to remove the levy? Has Insurance Ireland made a calculation in years?

Dr. Declan Jackson

No, we have not examined that issue, which is a matter for those who administer the insurance compensation fund.

It is important that this is done and that Insurance Ireland keeps track of this issue. I am sure actuaries in the insurance industry have worked on a calculation and I would expect Insurance Ireland to have a figure. I also expect the Comptroller and Auditor General to play a key role in this matter. Irrespective of what we in this committee may say or what scrutiny takes place, it will not matter if a damn unless insurance premiums are reduced and insurance companies stop insuring people on the basis that they will never make a claim.

Mr. Kevin Thompson

On that point, the insurance industry has actively engaged with the Government as part of the recommendations of the cost of insurance working group. As an industry, we have lobbied and advocated hard for reform of the Personal Injuries Assessment Board to ensure it is given more powers and more claims are processed by the board at a reduced cost. We have also argued that the level of personal injury claim costs, as borne out by independent facts, is out of kilter with costs in other jurisdictions. Hence, we have actively engaged with the Personal Injuries Commission under the chairmanship of Mr. Justice Nicholas Kearns. We submitted data covering Ireland to the commission in order that awards made here could be benchmarked against those made in other jurisdictions. We hope a recommendation will be made providing that awards can be pitched at a level that society can afford. Insurance is very simple. Premiums are a function of claims and only when the cost of claims in this jurisdiction is addressed will we see real reform in respect of premiums.

I will conclude at this point because I am afraid I will become even more irate.

My car is getting older, as am I, and I am doing fewer miles on the road, yet my insurance premium has increased by 17% or 18%. I share the frustration that has been expressed. While I acknowledge that increases in premiums are connected with claims, it is highly frustrating for someone who does not have penalty points and has an ageing car that is losing value to see his or her motor insurance premium increase rather than decline. I expected my premium to decline, especially as my car has lost value and I am getting older.

While Mr. Thompson can argue that premiums are a function of claims, they are also a function of greed, bad business practices, losses in the industry and reckless business decisions. They are the function of many factors, not only claims.

Fraudulent claims are also a factor.

Yes, but they are not the only one and it would be wrong to argue otherwise.

Mr. Kevin Thompson

In my opening remarks, I highlighted the various elements that brought volatility to the marketplace. One was Setanta Insurance and another was the reduction in investment returns. For Insurance Ireland, the predominant element was claims inflation and claims frequency in the marketplace. We have highlighted numerous factors which have contributed to where we are now. We are working through the recommendations of the cost of insurance working group report. Our ambition is that reform will be implemented, particularly within the claims environment, as quickly as possible in order that consumers can benefit from it because we understand the frustrations of consumers.

As each of those elements is removed, we need to see this reflected in the costs.

I remind members that we will meet the Minister again to discuss the implementation of the working group's recommendations.

Dr. Declan Jackson

If I make one point in response to the Senator's original question, we need to be very careful from a competition point of view. We cannot facilitate or engage in any conversations on pricing. However, what we can do is work towards bringing certainty on issues such as claims and Setanta Insurance. If we do that with the various stakeholders, and Insurance Ireland is invested in doing that, we will see positive outcomes for consumers. We are seeing this trend take place, although we accept and share the frustration with the pace of reform. However, we are working night and day to ensure certainty is delivered and consumers benefit as a result. On the Senator's specific request, as a trade association, Insurance Ireland is correctly prohibited from having any such discussions.

While I completely understand Dr. Jackson's point, I was referring to the insurance industry in general rather than individual insurance companies.

How will the 2% levy be imposed on an insurance claim? Will the insurance company collect the 2% levy with the premium? How will the proceeds be handed over to the insurance compensation fund? Will this be done at intervals or at the end of each year? Will the insurance industry hand over the full sum in one amount? Will the 2% be immediately transferred to the ICF once a person pays the premium? How will the levy be administered?

Mr. Kevin Thompson

It is proposed that the levy will be collected via the Motor Insurers Bureau of Ireland, MIBI. The reason is that anyone who wants to act in the marketplace, that is, sell motor insurance, must be a member of the MIBI. This applies both to insurance companies domiciled here and insurers passporting into this country from other jurisdictions. The MIBI will collect the 2% on an annual basis and build up and hold the fund. In the event that an unfortunate event, namely, a liquidation, takes place, the insurance compensation fund will call on the Motor Insurers Bureau of Ireland to make remittance to the ICF.

In very simple terms, that is how the mechanics of it will work. The Motor Insurers Bureau of Ireland, MIBI, will collect and hold, and the insurance compensation fund, ICF, will call against MIBI as and when it needs to do so.

Is it the case that MIBI could hold this fund for years? Will it invest that fund or what is envisaged?

Mr. Kevin Thompson

The mechanics of that need to be worked out but, in short, it will collect and hold the fund up to the ceiling of €200 million, at which point the levy will stop.

Mr. Kevin Thompson

Yes. I assume that any fund of that size would be administered in such a way as to try to get the best investment return that maintains security around the fund, that is, no losses.

Dr. Declan Jackson

There are oversight mechanisms envisaged in the legislation in terms of the governance around the holding of such a considerable amount of money by MIBI but in terms of the actual operation, that is probably an issue for MIBI.

Dr. Declan Jackson

MIBI is the Motor Insurers Bureau of Ireland and its role is to pay claims associated with untraced or uninsured drivers. If one of us was misfortunate enough to be hit by a stolen car or something like that, MIBI would pay that claim. It operates on the basis of a pay-as-you-go model, so each year it will look at its claims. If a driver at fault could not be identified or found, MIBI will step in, in conjunction with the State's responsibilities under the European regulations, and pay that compensation. It funds itself on a pay-as-you-go model, so it levies a cost on the insurance industry. I believe its annual run rate is approximately €60 million.

Who has the oversight on MIBI?

Dr. Declan Jackson

I believe there is an agreement with the Department of Transport, Tourism and Sport, which is the line Department regarding the motor insurance directives. If the Senator has detailed questions on that I would suggest they are probably more appropriate for MIBI. We are happy to give any indicative answers but it is just to ensure accuracy.

We do not know much about MIBI but it will collect and hold the fund.

Dr. Declan Jackson

As it is envisaged, yes.

Mr. Kevin Thompson

That is the proposal.

That is the proposal for this legislation.

Mr. Kevin Thompson

Yes.

One of the biggest costs in insurance arises from bureaucracy and paperwork. We all thought that computers would cut out the need for paperwork but there seems to be more now than ever was the case in the past. Are there any proposals to make the process easier from the point of view of paperwork?

Mr. Kevin Thompson

In general, like any sector, our industry is moving more and more towards online. That is both at the quotation and issue of a policy stage but also at the claim stage. For any type of claim there is a certain level of assessment and statements which have to be made and sometimes that ultimately results in paperwork having to be carried out. However, the majority of simple claims are processed quickly and in an efficient manner, and often electronically. I know from my own experience that I was able to do that. That is a natural course of events. In time, more electronic formats will be part and parcel of the industry.

I thank Mr. Jackson and Mr. Thompson for attending today. I propose we suspend the meeting before proceeding to session B. Is that agreed? Agreed.

Sitting suspended at 10.35 a.m. and resumed at 10.38 a.m.

We are resuming on pre-legislative scrutiny of the Insurance (Amendment) Bill 2017 with Mr. Gerry Cross, director of policy and risk, and Ms Sylvia Cronin, director of insurance supervision at the Central Bank of Ireland. This session is to conclude by 11.20 a.m. Both witnesses are very welcome to the meeting.

Before we begin I will read a note on privilege, which I read out earlier but the witnesses would not have heard. I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I invite Mr. Cross to make his opening remarks.

Mr. Gerry Cross

I thank the Chairman and the members for the invitation to meet them today as part of the pre-legislative scrutiny of the Insurance (Amendment) Bill 2017. I am joined by my colleague, the director of insurance supervision, Ms Sylvia Cronin. In my short opening remarks I will briefly outline the bank's current role regarding the insurance compensation fund, provide a brief overview of the Central Bank's involvement to date regarding the revised framework for insurance compensation in Ireland and outline the new envisaged role for the bank as set out in the Bill and our views on this proposed role.

Overall, the Central Bank supports the proposed amendments set out in the general scheme of the Bill as a welcome development for consumers. The failure of Setanta Insurance and the uncertainty that followed over compensation arrangements had a detrimental impact on Irish policyholders. The bank welcomes the enhanced clarity that this Bill will bring to the insurance compensation framework.

As the committee is aware, the insurance compensation fund, ICF, was established under the Insurance Act 1964. This Act has been amended on several occasions, most recently by the Insurance (Amendment) Act 2011. At that time, the insurance compensation fund levy was reintroduced and a significant policy change was made, as the scheme changed from a home-based to a host-based insurance compensation scheme. Under a home-based scheme, compensation is paid by the insurance compensation scheme of the member state of the regulator of the insolvent insurance company while under a host-based scheme, compensation is paid by the member state in which the risk is located. Ultimately, this means that the scheme is targeted at Irish customers of Irish and EU insurers rather than at the EU and Irish customers of Irish insurers.

The bank's current role in respect of the ICF involves the following functions: carrying out an annual assessment of the financial position of the fund; determining an appropriate contribution to be paid to the fund by non-life insurance companies, not to exceed 2% of gross written premium; liaising with the Department of Finance in relation to interest rates and repayment terms on any loan advanced by the Exchequer to the fund; and publishing a notice on the Central Bank's website and delivering a notice to each non-life insurance company specifying the contribution to be paid to the fund.

In early 2016, the Department of Finance set up a joint working group comprising representatives from the Departments of Finance and Transport, Tourism and Sport to review the current insurance compensation framework in Ireland. The focus of the review was primarily on motor insurance. The Central Bank, drawing on expertise across a number of areas within central banking and financial regulation, provided technical input and policy views to the Department of Finance during the early stages of its proposals. The bank is supportive of the extension of compensation for third party motor claims in the case of insurer insolvency from 65% to 100%. This removes an inconsistency and is positive from a consumer perspective. In regard to the split funding concept for third party motor liability claims, where the insurer is insolvent and in liquidation, whereby the liability for the payment is to be shared 35% and 65% between the Motor Insurers Bureau of Ireland, MIBI, and the fund respectively, the bank has been concerned to ensure that the practical operation of this arrangement not give rise to undue complexity for affected consumers. Our view is that the proposed approach appears to address this concern. There remain some points of complexity in the wider scheme that might be considered as part of this process. In particular, we would like to see some analysis of the current difference of approaches between the situations where a firm is in administration and when it is in liquidation.

Notwithstanding the above points, the main impact on the bank directly is, of course, that the administration of the fund will be transferred from the accountant of the High Court to the bank. In January 2017, the Governor of the Central Bank confirmed to the Minister for Finance that, subject to an appropriate legislative framework and consultation with the European Central Bank, ECB, the Central Bank would be willing to take on this function. It already administers the deposit guarantee scheme, DGS, which protects depositors in the event of a bank, building society or credit union authorised by the bank being unable to repay deposits. In administering the fund, the bank will liaise as necessary with the relevant stakeholders, including the State Claims Agency, relevant liquidators and the Department of Finance, to ensure the proper operation of the fund. In the event of the liquidation of an insurance company resulting in a draw on the fund, the liquidator will make an application to the High Court to approve payments from the fund, on receipt of a verified claim with due diligence completed by the State Claims Agency. On High Court approval, the bank, as administrator of the fund, will pay the specified amount to the liquidator for distribution to claimants. The bank will also provide an annual statement of account for the fund to the Minister for Finance. This will be in an agreed format, similar to that currently provided to the Minister by the accountant of the High Court.

It is important to note that the proposed conferral of new tasks on a national central bank in the European system of Central Banks must be assessed against the prohibition on monetary financing. In the context, therefore, of the proposals to transfer this new function to the bank, an assessment is required as to whether the task proposed to be undertaken by the bank is a central bank task or a government task. Assuming the latter, the bank must be fully compensated for the work that it will carry out in administering the ICF. The bank cannot provide any moneys to the fund from its own resources nor can it have any liability from the fund. This is provided for in head 4 of the Bill. The assessment mentioned is to be carried out by the ECB. We understand that the Department of Finance will request that the ECB assesses this once the legislation is published.

Work is currently under way at a European level on recovery and resolution in the insurance sector. Currently, there is no European harmonised framework of recovery and resolution for the insurance sector. The Central Bank is participating in work being carried out by the European Insurance and Occupational Pensions Authority, EIOPA, to examine what such a framework might look like.

The bank is supportive of the proposed amendments to the Insurance Act and its objectives of addressing the lack of clarity in current compensation arrangements for claimants as highlighted in the Setanta case. In regard to the bank's proposed new function as envisaged under the Act, we will continue to work with the Department of Finance, the accountant of the High Court, the State Claims Agency and other relevant stakeholders to ensure the successful transition of this function to the Central Bank in line with the finalised legislation.

I thank Mr. Cross for his opening statement.

I, too, thank Mr. Cross for his opening statement. In Mr. Cross's opinion, what difference will this legislation make to insurance policyholders?

Mr. Gerry Cross

In general terms, when an insurance firm gets into difficulties and needs to be wound up the situation of policyholders is obviously significant and it is important that we have appropriate compensation arrangements in place and in so far as this addresses the problems that were identified during the Setanta Insurance case, it is welcome from the Central Bank's point of view.

We, too, very much welcome that this will bring an element of certainty to the industry. Has the Central Bank assessed how this might be reflected in terms of a reduction in premiums?

Mr. Gerry Cross

There are a number of choices to be made. As the scheme will now compensate to a higher level, there will be a cost that needs to be borne somewhere and how that cost is to be distributed needs to be examined. One option would have been to have it borne by the current insurance compensation fund but because of the way in which that fund is levied, the result would have been a direct additional levy on policyholders and so this option was not chosen. With this approach, a MIBI fund has been set up for the additional 35%. This fund will be built up to €150 million in the first instance on the basis of a 2% levy to insurance companies. It is a levy to the insurance companies, which will form part of their cost base. How they manage it is a matter for them. It is different to the ICF levy in that it is levied directly on the premium holder. As I said, in this case the levy will form part of the insurance companies cost base.

Is there a possibility that as a result of this insurance costs could actually increase rather than decrease?

Mr. Gerry Cross

The 2% levy represents a modest increase in the cost base of relevant insurance companies and there is clearly a possibility that this cost could be distributed across policyholders generally.

If I understand Mr. Cross correctly, he is saying that there is a real possibility that insurance premiums may increase rather than decrease? We have been told for so long by the insurance industry that the uncertainty in terms of Setanta and so on is one of the substantial drivers of the cost of motor insurance premiums. Is Mr. Cross now telling us that following on from what is provided for in this legislation, that uncertainty has been removed but there is a possibility that people's insurance will increase?

Mr. Gerry Cross

There are two issues, the first of which is motor insurance premium levels, which this committee has discussed at great length. The Central Bank has been very involved in the work of the cost of insurance working group led in the first instance by the then Minister of State, Deputy Eoghan Murphy, and later by the Minister of State, Deputy Michael D'Arcy, in addressing questions around the reason premium levels have increased. We are now seeing a moderation in premium levels. On this side, there is a whole suite of issues to be addressed.

On the straightforward issue of compensation, clearly if there is enhanced compensation to be available to individuals, if and when there is a failure of a firm which needs to be paid, then that cost is distributed across-----

I completely understand that. I cannot understand how there would be a disconnect between the two. To me, they are directly connected. There is the levy put on the insurance companies. However, that big chunk of uncertainty has been taken out, which we were told all along was one of the drivers. There was an expectation that once Setanta was dealt with, it would reduce insurance premiums across the board. Will that happen?

Mr. Gerry Cross

For example, if it was required that compensation was to be paid all in one go by, say, the Motor Insurers Bureau of Ireland, MIBI, that would have a significant potential impact on the contributors to the fund. They would be required to pay a large sum in a relatively short period. This arrangement allows for the money to come from MIBI. If it does not have that money, it can be loaned by the Government and then be paid back over a period at 2%.

I understand the different models.

Mr. Gerry Cross

That leads to a moderated impact.

However, I am concerned that, even with all of this work, there could be even a chance that insurance premiums could go up rather than down. For example, my motor insurance premium went up 20% this year while none of the elements of the coverage changed. Will the delegation give me an assurance that it will not go up another 20% next year?

Ms Sylvia Cronin

Over the previous 12 months, there has been uncertainty over this particular issue. Accordingly, insurance companies have had to put aside reserves for the worst-case scenario. Now, with this certainty, those reserves should be able to be released. In turn, this should result in more money becoming available in the short term.

If more money is available in the insurance industry, then that should automatically lead to a reduction in premiums.

How will the Central Bank ensure we get the result we need?

Ms Sylvia Cronin

Insurance pricing is a commercial decision for all insurers. There are several factors which they need to take into account, the key one being the whole claims environment. We are actively involved in the good work being done by the working group in the initiatives in the claims area. We closely monitor how that is being assessed in the insurance industry.

What form will that monitoring take?

Ms Sylvia Cronin

On the supervision side, we have engagements with the companies. We conduct on-site inspections and thematic reviews. We look across sectors and assess how reserving is effective. The important point for us is to ensure the financial resilience of insurers and that there are enough funds to pay claims.

Does this mean that the insurance compensation fund, ICF, will be brought under the scrutiny of the Comptroller and Auditor General?

Mr. Gerry Cross

That is a good question. I would imagine the administrative functions of the ICF which fall within our remit would be subject to the Comptroller and Auditor General. However, we are not responsible for auditing decisions around the payment of claims, for example. That is for the State Claims Agency.

The work done by the cost of insurance working group, CIWG, has led to the publication of heads of a Bill for the establishment of a claims information database. That will not just allow the overall premium prices to become available but also a large range of data that was missing from the discussion to date.

How much is in the ICF?

Mr. Gerry Cross

After the Quinn administration, there is an outstanding need for €782 million to be paid back to the Minister. There is an additional €110 million in respect of Setanta. There is currently €22 million in the fund, meaning there is an outstanding amount of €870 million. We calculate that on a 2% levy basis, it will take 11 years to clear that.

Insurance Ireland was only €70 million out. What is €70 million to the insurance industry?

Mr. Cross said the Central Bank will have to get resources from the Government to do this work. How much will that cost? Has the Central Bank had discussions with the Government on this? Has it given the Central Bank a commitment in this regard?

Mr. Gerry Cross

We have not got to the costing stage at this point. I would, however, expect it to be a relatively modest amount.

That will be up to the Government.

All of this work will matter nothing if it does not reduce the cost of premiums. My experience is that they are continuing to escalate. I hope involvement from the Central Bank, and the Comptroller and Auditor General indirectly, will lead to reasonable costs for insurance.

Is the ICF in a deficit of €870 million?

Mr. Gerry Cross

Yes.

Over how many years has that deficit been run up? What is the reason for that being so high?

Ms Sylvia Cronin

Basically, it started when PMPA went into administration. We have had PMPA, ICI, Quinn and Setanta.

What is the levy on the insurance companies?

Mr. Gerry Cross

It is a 2% levy. That is the maximum allowed by the legislation.

Has that been in place since the PMPA days?

Mr. Gerry Cross

It came in with PMPA.

Ms Sylvia Cronin

It was a 1% levy for PMPA and then 2% for Quinn.

In essence, there is no fund but a large overdraft.

Mr. Gerry Cross

Yes, it is an ex post system.

Even when it is taken over by the Central Bank, it is not in a position to get returns on funds.

This is purely about pulling back on the deficit that is there.

Mr. Gerry Cross

The ICF - the 65% bit - is always after the event.

If one were to pull that back and clear the €870 million, what would be required for the fund to operate efficiently in terms of being in surplus and of a levy on the insurance industry? What is happening here, in essence, is that a model is being established to clear an overdraft. I am taking it a little further and trying to put it into a space as to when a fund like that becomes self-financing. Has the Central Bank looked at what will be levied on individual insurance companies based on modelling and so forth to establish the rate to levy to make the fund self-financing?

Mr. Gerry Cross

It is 11 years down the road before that is even in prospect. In effect, for the fund to be self-financing, it would almost be a different model. The focus at the moment is very much on getting to the-----

This is individual insurance companies which do not have proper reserves or whatever. It is nothing to do with the actual consumer. We have seen it in more recent times with Quinn and Setanta. The Central Bank is taking this over. If it is levying an extra 2%, is that another 25 on top? Am I correct?

Mr. Gerry Cross

The new MIBI fund for the 35% is a different model. There, the idea is that the fund will be built up to €200 million. That is based on a 2% levy. If it drops below a certain point-----

In essence, it is a 4% levy in total. Am I correct? It is 2% for the insurance company and 2% for - they are both the same.

Mr. Gerry Cross

Yes. When the MIBI fund is built up and reaches €150 million, the levy drops to 1%. When it reaches €200 million, there will be no levy.

Mr. Gerry Cross

When does the Central Bank anticipate that will happen?

Mr. Gerry Cross

It will take four or five years.

If it gets above €200 million in four or five years, there will be no levy.

Mr. Gerry Cross

The original 2% for the ICF is still there.

I want to look at it in the round. There is a deficit of €870 million and 2% per annum indefinitely. The Motor Insurers Bureau of Ireland levy is 2% to deal with the 35% coming out of the Setanta judgment. If a company is licensed in Malta and operating in the Irish market, will it be levied with the 2% as it is and will it be levied with the new 2% from the MIBI?

Mr. Gerry Cross

Yes.

Did the Central Bank ever consider seeking a larger payment from the insurance companies? I understand why it is working with the model it is using, but how can it prevent insurance companies from passing this on to the end consumer? That is the problem.

Mr. Gerry Cross

In my opening statement I alluded to the following. The Central Bank does not have the legislative and policy-----

The €870 million is still underwritten by the State.

Mr. Gerry Cross

Yes, but it is not for the Central Bank to determine what the right system for running this scheme is. If one looks across Europe, one finds all sorts of different schemes. Some countries go to 100% for all non-life or life. Some countries do 90%. Some do home and some do host. There is a real variety and one of the things we are engaged in is work in Europe to get that harmonised a bit. For now, it is not.

As to whether one can stop the levy being passed on, European legislation prevents the Central Bank and the Government from interfering in that commercial decision of an insurance company. That is the difference. The scheme says it forms part of the cost base. I am not clear what more can be done.

Can the Central Bank say that if there are adequate reserves in a particular insurance company, there is no justifiable reason it should pass this 2% on? It is the sense of fairness. Someone looking in from the outside sees €870 million, which is not too far off €1 billion, in debt placed on the shoulders of hard-pressed people who are trying to cover rising insurance costs. According to the latest returns, insurance companies are making serious money. That person will therefore ask why there is a 2% levy - in essence a 4% levy - being placed on those people for companies which are making incredible levels of profit. Everything is about fairness. We need an insurance industry that is solvent and profitable but we also need one which is competitive and does not fleece the market. The ordinary person is looking in and sees that there is nearly €1 billion in debt which he or she is being asked to repay through a 2% levy that is passed on directly. He or she also sees that there is a 2% levy coming on the new MIBI for the next four or five years which will more than likely be passed on as well. That person will ask what can be done where companies are making enormous profits with healthy reserves to prevent them passing on the 2% on the MIBI for the next four or five years.

Mr. Gerry Cross

As a regulator, our objective is to ensure to the extent possible that we have a well-functioning market in insurance products, that companies are well run and financially sound with strong and effective governance and that they operate in the interests of consumers in terms of fairness, suitability of products and clarity of pricing. Acknowledging very much the issue the Senator identifies, the answer goes back to what I said to Senator Conway-Walsh at the beginning. Whenever one wants to provide a compensation scheme and there is money to be paid into it, one has a distribution question. It is hard to avoid that distribution question. My answer to the question Senator O'Donnell puts relates to the work that has been done by this committee and the cost-of-insurance working group under the Minister of State at the Department of Finance. Various pieces, proposals for change and recommendations emerged there and the work is ongoing. It is about bringing forward improvements in transparency and a review of how the costs of claims are divided and arise. All of those things will contribute to there being a more effective motor insurance market. We are seeing a moderation in premium levels.

Everything must be done to ensure the insurance industry does not exploit this particular 2% on the MIBI to increase premiums. Over the last year, I have met people involved in various areas who deal with insurance companies. They all predicted a year ago that profits for the insurance industry this year would be very high. The ball appears to always be in the hands of the insurance companies rather than the consumer. We have to find a way to give the ball back to the consumer.

Everything here appears to add extra cost. Premia should only be decreasing and I ask that insurance companies do not exploit the situation and use it as an excuse to raise premia.

I welcome Ms Cronin and Mr. Cross to the meeting. Did the liquidation of Setanta cost €70 million?

Ms Sylvia Cronin

It cost €90 million.

How much did it cost to do the same for Quinn?

Ms Sylvia Cronin

It cost €900 million.

All of the cost, in terms of AIB, has been eliminated. Is the outstanding sum of €870 million relatively new, between Setanta and Quinn?

Ms Sylvia Cronin

Correct. It would be primarily made up of Quinn.

It would. Was the Quinn proceedings a liquidation or examinership?

Ms Sylvia Cronin

No. It was administration.

Mr. Gerry Cross

It was administration.

Therefore, the administration of Quinn cost the insurance industry €900 million. Will the Central Bank have oversight in the legislation on the Motor Insurers' Bureau of Ireland, MIBI?

Ms Sylvia Cronin

No.

Mr. Gerry Cross

No.

Will MIBI self-regulate?

Mr. Gerry Cross

Yes.

Ms Sylvia Cronin

It is run by itself.

Mr. Gerry Cross

It is run by itself.

Ms Sylvia Cronin

Yes.

Will MIBI not be subject to oversight by the Central Bank?

Mr. Gerry Cross

Yes. The role for the Central Bank is in relation to the insurance compensation fund piece. That is the bit that is under us.

Will MIBI collect the 2% levy?

Mr. Gerry Cross

Yes.

How will the 2% be collected? Will the insurance companies collect the 2% levy? Will they hand it over on a case-by-case basis or at the end of the year, every three months, six months or whatever?

Mr. Gerry Cross

It is an annual 2% levy on insurance companies.

Ms Sylvia Cronin

It is annual.

Will the levy be collected by MIBI?

Mr. Gerry Cross

Yes.

Will that be done without oversight?

Mr. Gerry Cross

With respect, it will be in the same way as it currently operates - whatever the current arrangements are for MIBI.

The 2% levy for the compensation fund may not be collected in the case of a liquidation. Is that correct? Let us say a company went into liquidation or examinership at the end of the year but there is 2% on all the premia. The client will have paid his or her 2% in the full knowledge that the contribution is for the compensation fund. I believe the levy may not be collected and will go into the liquidation.

Mr. Gerry Cross

I do not know and I am not even sure if it is clear from the heads of the Bill at this stage. The current MIBI arrangement is based on the firms that are in business this year and on the claims that were made previously. The Senator has raised a good point and it is something to be considered when drafting the Bill.

In the case of Quinn liquidation, is it fair to say that the levy probably was not collected by MIBI? How would MIBI be treated in such an instance? The compensation fund should be deemed a preferential creditor.

Ms Sylvia Cronin

Yes, the levy would have been outstanding.

In other words, the money would have gone down the swanny in this case if the levy was not paid. The matter should be considered-----

Ms Sylvia Cronin

Yes.

Mr. Gerry Cross

Yes.

-----in either the regulations for oversight or in the legislation.

Do the witnesses envisage the new data protection Bill will affect the way the insurance industry retains insurance records?

Ms Sylvia Cronin

Let us consider the insurance industry itself. In 2016, the introduction of the Solvency II Directive was probably the single biggest regulatory overhaul in a generation. Solvency II came into play for all insurers that operate in all members states across Europe. At that time there was quite a significant focus on data protection because of the cross-border nature of insurance and the tendency to have a parent company located in one state and a number of subsidiaries located in different states. There was a focus on data protection because information was being centralised within the European Insurance and Occupational Pensions Authority in Frankfurt. There was a need to ensure that personal data was protected and what could and could not be transferred between member states. Yes, a lot of work has already been done in the insurance sector but further work will need to be undertaken with the general data protection regulation, GDPR, coming into play.

I thank both Mr. Cross and Ms Cronin for attending here today. I propose that we suspend the meeting until 11.30 a.m. when we will commence the next session. Is that agreed? Agreed.

Sitting suspended at 11.20 a.m. and resumed at 11.35 a.m.
Deputy John McGuinness took the Chair.
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