I move:
That Seanad Éireann takes note of the Fifth Report of the Joint Committee on Small Businesses — The Insurance Problems of Small Businesses.
Fifth Report of Joint Committee on Small Businesses:— The Insurance Problems of Small Businesses: Motion.
I should like to welcome the Minister of State, Deputy Richard Bruton on the occasion of his first visit to this House and wish him well in his office. We were colleagues on Meath County Council some years ago and we had a very happy relationship.
This House has already debated the first four reports of the Joint Committee on Small Businesses. These reports covered the main sectors of small businesses and were published in the following sequence, (i) manufacturing industry; (ii) retail and distribution; (iii) tourism, catering and leisure; and (iv) construction. The publication of those sectoral reports represented the completion of the first phase of the committee's work. For our second phase, we decided to look at a number of topical issues related to small firm development. The issues we chose were:
(i) The insurance problems of small businesses, our report on which was published last March and is the subject of this debate;
(ii) The development and management of small businesses co-operatives, which was published in July; and
(iii) New technology and the small business, on which the committee are working at present.
We selected insurance as the first topic for this phase of our work because committee members had been receiving a growing volume of complaints from individual firms regarding the cost and availability of insurance. We decided that the report would deal with, employers liability, public liability, professional indemnity, product liability and property insurance.
I am vice-Chairman of that committee and, like other members, I had been receiving my share of complaints about insurance for small firms. However, I can honestly say that we were taken unawares by the extent of the problems that we uncovered during our investigation. In fact, it is fair to say that we touched on one of the rawest nerves of Irish business today.
As the committee's interest in the insurance difficulties of small firms became more widely known, we received a barrage of complaints from individual small firms and trade associations. These complaints reflected a mood of anger, bitterness and incomprehension as to why a basic business service such as insurance should, over a short space of time, have become so costly and, sometimes, so difficult to obtain.
A small but representative selection of these complaints is provided in the report and I should like to quote from the submission by the Federated Union of Employers:
From 1982 to 1984 the increase in employers' liability premiums was on average 280 per cent, inflation over the same period rose 23.9 per cent. Some individual employers experienced increases of between 300-400 per cent (from a survey of FUE members).
In their submission the Irish Caravan Council Ltd. stated:
The feedback we have received from a representative selection of our members would indicate that the cost of public liability insurance has increased by as much as 400 per cent in the past two or three years.
The Royal Institute of Architects of Ireland stated:
This year, for instance will see an increase of at least 50 per cent (for Professional Indemnity Insurance) and many firms will have experienced an increase of 100 per cent over a two year period. There is every likelihood that there will be similar increases in future years.
RGDATA (Retail Grocery, Dairy and Allied Trades Association) in their submission stated:
Current premium increases from 200 per cent to 1,000 per cent (for property insurance) are being experienced by many retailers.
In recent years we have seen the effects of prolonged recession on small firms right across the business spectrum. We have seen the closures and the job losses. We have seen, and still see, small firms fighting for survival in the face of weak markets, intense competition, onerous levels of taxation and the highest interest rates in Europe. These firms now have to cope with massive increases in insurance premiums as well. The situation is now so bad that many firms can no longer afford adequate cover. This is a very serious matter.
There are also implications for the competitiveness of our manufacturing industry. In a submission to the committee the Small Firms Association, which is connected with the Confederation of Irish Industry, claimed that premium rates for employers liability were five and a half times higher here than in Britain. This claim has not been refuted either by the Department of Industry and Commerce or by the insurance companies.
In a submission to the committee, the Industrial Development Authority stated that: "inability to obtain insurance at reasonable rates increases the risks inherent in start-ups and in the case of employers liability can prove to be a disincentive to expansion of employment". We all realise the urgency of the jobs situation, particularly for our young people. We now have 232,000 people on the live register as unemployed, of whom 75,000 or one-third, are under 25 years of age. Yet, we now have a situation where difficulties in obtaining employers liability cover at affordable premium rates are a real disincentive to new employment.
However, side by side with this unacceptable situation, there is the irony that employers liability insurance is not compulsory in this country. Naturally, an employer who does not have this cover could lose his entire business in the event of legal action for personal injuries by an employee. Moreover, an employee working in an uninsured or under-insured firm is in an extremely vulnerable position. In the event of a serious accident he runs the risk of long term incapacity with the prospect of little or no compensation. Is this a situation that we can continue to regard as tolerable?
Employers liability is one form of liability cover. Many small firms in catering and retail have to cope with the growing problem of claims from customers for damages under public liability, even in the case of the most trivial of accidents. Professional people have to come to terms with the growing costs of professional indemnity cover. Our manufacturers will have to adapt to the provisions of the EC Product Liability Directive, which could mean considerably increased costs for this form of cover.
I believe that we have a crisis in business insurance. It is not something that developed overnight and will not be solved immediately, but I believe we have set out the solutions in our reports. However, before dealing with the solutions I propose to explain the reasons why business insurance costs have increased in the way they have.
In the report we set out what we regard as the four main factors behind the massive increases in insurance rates. They are: (i) the volume of claims and the level of compensation; (ii) the legal system; (iii) risk management; and (iv) crime and vandalism. Let us look at these causes one by one. With regard to the volume of claims and level of compensation as a committee we were very surprised to learn from the Department of Industry and Commerce that there were 22,000 claims under employers liability in 1983. We were even more surprised to learn that this represented an increase of 35 per cent in the number of claims since 1979. The average cost per claim in 1983 was £1,925 which represented an increase over 1979, equal to 1.8 times the rate of inflation. However, there was virtually no change in the total numbers employed during those years. That is an interesting comparison. In other words, 35 per cent more claims originated in 1983 than in 1979 from a workforce the size of which remained static.
We encountered widespread criticism of the legal system which is regarded as slow, inefficient, expensive and as a lottery. Legal costs account for 15 per cent to 20 per cent of the total amounts paid out by the insurance companies in meeting claims. With regard to the poor level of risk management the general perception, particularly among the insurance companies, is that the management of safety in Irish workplaces is not what it should be and is certainly below European norms.
The growth in levels of crime and vandalism has particularly affected the cost of property insurance. While crime and vandalism are mainly urban problems, I have to say that we also have our share in our villages and towns.
There is a further factor which has affected the insurance issue and that is the way in which the insurance industry in Ireland has developed. The insurance industry comprises the insurance companies and the brokers. Our main concern was with the insurance companies. It is the companies who accept or decline business, who set the premium rates and impose security and other conditions. The brokers are essentially insurance advisers and the principal channel for placing insurance business. We received submissions from the insurance representative bodies and took evidence from them. You might ask how the committee viewed the insruance companies. We had hard things to say about them.
Until the mid-seventies the insurance industry enjoyed a protected home market. The industry comprised Irish-owned companies who had no interest in spreading their wings in overseas markets and subsidiaries of British companies who had operated here prior to 1936. Crime levels were low and fairly static and so were inflation levels. The Insurance Act, 1936, had more or less frozen the number of companies operating in a protected home market. The commercial environment for insurance companies here was very cosy indeed. This very stable way of life was rudely shattered by the passing into Irish law in 1976 of the EC Non-Life Establishment Directive. From that point on, foreign companies already established in other EC countries were allowed to set up subsidiaries in Ireland and since 1976 18 additional foreign companies set up office here.
So, then we had several years of cut-throat competition for insurance business between insurance companies that were apparently oblivious of the other changes taking place in the environment for insurance — growing levels of crime and vandalism, increasing litigation consciousness, and historically high levels of inflation. The attitude was one of "get insurance business at all costs and forget about economic premiums". This situation came to an end within the last couple of years as insurance companies have been forced to take corrective action in the face of mounting losses.
In a defensive response to criticism of recent massive premium increases the insurance companies lashed out at everybody else as being responsible for a situation largely of their own making. They have blamed the legal system and Irish firms generally for poor levels of risk management and, it has to be said, with some justification. However, they seem to have absolved themselves from major responsibility.
The committee were harshly critical of the attitude and response of the insurance companies. In our report we said:
The panic reaction of the insurers to difficulties, largely of their own making, shows absolutely no regard for the many problems of small firms in a time of recession, little sensitivity for customer relations, and a blinkered view of their own role in the economy. The measures now being taken by the insurance companies, and the manner in which they are being taken, reflect an overwhelming concern for their own wellbeing, without any accompanying overview of the effects of their actions on their customers, on the economy generally, and on employment in small firms as a whole.
In fairness to the insurance companies, they have recently taken some steps. When we were preparing our report there were two representative bodies for insurance companies. On the very day that we published our report these two bodies merged to become the Irish Insurance Federation.
The new federation have given a detailed response to our report, which is something that I appreciate. It is clear that they have given our report some very thorough consideration and agree with much of the thrust of the report. However, I am a little disappointed that they tended to support committee criticism of the legal system and the lack of good risk management, while at the same time they were very negative regarding criticism of the insurance companies themselves. That is a great pity. There are a number of interest groups involved with insurance and they all have to change the way they do things.
The greatest contribution the Irish Insurance Federation could make would be to give a lead in putting the house of the insurance industry itself in order. However, I was glad to see that the federation recognise that the insurance companies in general have a poor overall image and that measures are being introduced to improve this situation. I hope that in time public representatives will have to listen to fewer complaints from members of the public regarding the behaviour of the insurance companies.
Who can solve these problems? Who has a role in finding a solution? The insurance companies have an obvious responsibility, so also have Government Departments, the legal profession, business itself and the trade unions.
Quite a number of Government Departments have a role in issues affecting insurance. The Department of Industry and Commerce have direct responsibility in regulating the insurance industry. The Department of Labour are responsible for legislation, regulation and inspection in respect of safety at the workplace. The Department of Justice have the ultimate responsibility for the operation of the courts.
As a committee, we found a lack of coordination between the various Departments on insurance related issues. This may have been acceptable when insurance cover was obtainable in the ordinary course of events at low premium rates. However, something more is now called for in order to get premium rates down to what we would describe as acceptable levels.
The courts are the channel through which many claims are settled. I am not going to indulge in bashing the legal profession — it might be a very dangerous thing to do. However, it has to be said that there is widespread dissatisfaction with the courts. There is a growing public perception that the courts are there mainly to serve the interests of the legal profession rather than those of either plaintiff or defendent. The courts system as it stands at present is slow, cumbersome and costly. However, it has to be said with regret, that there has been no adequate response from the legal profession in meeting public concerns. There seems to be no appreciation on the part of many legal people that the present costly system for determining settlements and awarding damages is part of the cost burden on Irish businesses and that there will have to be changes in that area.
Although the committee found shortcomings in the approach of Governmental Departments, the insurance companies and the legal profession, it also has to be said that there is need for a much more safety conscious approach by the managements of small firms. More and more businesses must be brought to appreciate the simple fact that a reduction in the level of accidents in the workplace is the most effective way of controlling insurance costs. Trade unions need to get a similar message across to their members. If we are to get our business insurance costs down to the levels of other countries, we must get our standards of managing safety at work up to their levels.
The main objective must be to get our business insurance costs into line with those of Britain and other European countries and to ensure that adequate cover is readily available. The committee felt that the realisation of this main objective depended on achieving four sub-objectives:—
(i) a reduction in the volume and levels of claims
(ii) the establishment of an efficient, expeditious and inexpensive compensation system
(iii) a safer workplace environment
(iv) a reduction in exposure to crime and vandalism.
With regard to the volume and level of claims the report says:
The increase of 35 per cent in the number of Employers Liability claims between 1979 and 1983 bears no relationship to changes in the numbers at work during those years. In fact total employment in 1983 was 1,125,000 or 20,000 fewer than in 1979.
While it is generally accepted that the public at large has become much more claims conscious, it is reasonable to ask to what extent this development has been encouraged by a notion that insurance companies will pay out without too much resistance and by a growing perception of the existing legal system as a lottery.
There is a belief in many small firms that insurance companies have not opposed the more frivolous or speculative claims with sufficient vigour.
While we have a figure for the increase in claims in employers liability, I feel that most small firms would feel that there has been similar growth in claims under public liability.
We were quite clear in our view that speculative claims should be resisted. We said, and I quote from our report:
We feel that there is a lack of balance in the growing number of Liability claims. While accepting that levels of risk management are grossly inadequate in this country we do not believe that workplaces were 35 per cent more unsafe in 1983 than they were in 1979, nor do we believe that risks to the public safety generally are that much greater.
We believe that businesses generally and the insurance companies in particular have a greater role to play in resisting speculative claims.
Liability insurance should be about adequate cover for compensation in respect of genuine injuries and incapacity. Some sections of the public need to be re-educated to this fact.
We have to accept the fact that a large section of the business community has lost faith in a courts system that is more attached to its own archaic ways than to the notion of giving value for money to the taxpayer.
The judgments of the courts must always be independent of outside pressures. That independence is one of the cornerstones of any democracy.
However, notions of independence and good efficient administration are not incompatible. They are complementary.
This realisation and the reforms necessary will not come from the Courts themselves. The Department of Justice, who have the ultimate responsibility for courts administration, must intervene to ensure that changes are brought about including the abolition of the three counsel rule and settlements on the steps.
There is another significant reform which would make a considerable difference. The committee, having examined the position in a number of countries with regard to compensation for accidents at work, came to the conclusion that we should have a system of compulsory occupational insurance with levels of compensation decided by independent tribunals rather than the courts. We would see the right of an employee to sue for negligence being exchanged for the guarantee of adequate cover and compensation on a no-faults basis.
The introduction of such a reform would have positive social benefits in that all workers would be insured against work injuries with an efficient means of determining compensation. The right to sue under public, professional and product liability would remain.
In the report we said:
We believe that risk management in Ireland is in need of urgent, rapid and substantial improvement.
However, all of the legislation, all of the regulations, all of the inspection, will be of limited use only unless firms themselves develop a genuine understanding as to why a safe workplace is important. There is a major task here for Government, the insurance companies and for trade associations.
We are told that there is a reduction of 10 per cent in the level of recorded crime. If that is the case, it is good news. However, we have daily reminders in our newspapers as to the prevailing high levels of crime and vandalism. In this context the committee questioned the Government decision, since enacted, to repeal the malicious damages legislation. It was a bad move for urban development.
Only last week we had the President of the Insurance Institute quoted in The Irish Times of 7 October as saying that some risks have become uninsurable at any price following the repeal of this legislation. I have to say that I think the changes in this legislation were a retrograde step in the present climate. There was a need for change having regard to the amount of vandalism.
There is a new type of vandalism in rural Ireland where at certain times of the year, usually at Christmas time, people who have their premises well stocked — the evenings are short and the nights are long — have suffered sporadic raids from the cities, notably Dublin. The raid is carried out at 2 o'clock or 3 o'clock in the morning. The raiders throw a stone through a shop window and clean out the place. I know of one man who bought a premises, refurbished it, decorated it, spent a lot of money on it and stocked it. The week before Christmas the premises was robbed. I was actually a witness to this robbery and we could do nothing about it as we were told our heads would be blown off. Unfortunately there was no garda on duty the same night. The car used in the robbery crashed through three barriers on its way to Dublin. I am glad to say the raiders were apprehended and I must compliment the Garda. That type of robbery, vandalism and thuggery is becoming more common in rural areas. Vandalism in rural Ireland is not so prevalent but when they come down from the cities for these sporadic raids, there must be some people willing to receive these stolen goods and resell them.
In the report we touched on motor insurance which is an issue public representatives encounter every day. There are also business aspects to motor insurance. We have seen in recent weeks the level of upset increases in motor insurance are causing taxi drivers.
In the report we refer to:
Instances of young people who have been unable to hold or accept jobs due to difficulties in obtaining motor insurance cover.
The Department of Industry and Commerce need to re-examine the declined cases agreement to ensure that the system operates more effectively than at present. I am sure Senator Daly who is in the motor business will have a few words to say about motor insurance.
It was not, in a sense, our brief to deal with motor insurance but people have many strong feelings on motor insurance. We have complaints on a regular basis. For instance, some unfortunate motorist caught with an excess level of alcohol, brought to the court, disqualified for six months or 12 months, paid his or her fine and had to try and get work for that period either having a car or paying his or her way will find when reapplying for insurance that it is impossible to get cover. I know instances where that has happened. That is total discrimination because if people have paid their debt to the State, they have paid it and should not be discriminated against by insurance companies or anybody else for that matter.
I know of a man who comes home every four or five years to this country, a man with a foreign name, married to an Irish girl. He had lived here about four years previously. He called to see me in the summertime. I will quote what he said to me: "What the hell has happened to this country in the last four years?" My answer to him was: "We have another Coalition Government; that is what happened in the last four years". He was referring to his request for insurance cover. This man looked for insurance and he could not get it. I asked him to get a letter. I have the letter here and I will quote:
We regret we were unable to obtain motor insurance for you as you are not resident in this country.
It is a poor way to further the cause for increased tourism in this country if we have that type of attitude by insurance companies. The insurance companies should be asked why there is extra loading on persons under 28 years of age? In the company with which I insure my car, there is an extra loading on anybody under 28 years of age. There is a lot of concern among the general public with regard to motor insurance.
In conclusion I want to say that we looked at the insurance problems of our small firms in a comprehensive way. We have demonstrated beyond reasonable doubt that we are dealing with a very serious situation and we have set out in a very comprehensive but straightforward way what needs to be done. There is no recommendation that is not capable of being implemented and by implementing the report we would achieve a sane insurance environment for small firms at no additional cost to the taxpayer.
I look forward to a positive and meaningful response from all interests involved here to bring about the changes recommended in our report.
I am pleased to be a member of the Joint Oireachtas Committee on Small Businesses which produced reports for the manufacturing industry, the retail distribution industry, two of them catering for leisure, and the construction industry. One point I will make forcibly is that in each of these reports we came across the problem of insurance. The problems ranged from the astronomical cost of insurance to the difficulty, in other sections, in trying to get cover. In the preparation of their report the committee took evidence and received submissions from a wide section of small businesses which would include the construction and allied trades, tourism and manufacturing. They also took evidence from the Law Society and from chartered surveyors. One could give a continuous list and, in each case, the message was the same. Between the years 1982 and 1984 that insurance had risen by an average of 280 per cent. Inflation in the same period rose by 24 per cent. Some employers experienced an increase of between 300 and 400 per cent. This type of rise is detrimental to small businesses. It cannot be carried in today's competitive world. If one wants to be successful one must be cost efficient and be in a position to compete at home and abroad.
As of now the cost of insurance in this country is five and a half times higher than the cost in the UK. This ludicrous situation should be tackled immediately by the relevant Department. To outline the enormity of the problem I will quote four extracts from the submissions received. Perhaps the Minister would take account of the fact that people cannot become competitive and give gainful employment while these costs increase at their present rate. The first submission is contained in a letter from a roofing contracting business which states:
In 1984 our Employees Liability Policy for the roofing contracting company cost us £5,800. In 1985 the same policy cost us £18,000. There was no increase in the number of employees in the two years. We have also had no claims against our Employees Liability Policy in the last five years. ... We have had no quotes so far this year for our Employees Liability Policy ... but indications to us are that it will be in the region of £25,000. We are fast reaching the point in this particular industry that unless premiums are more reasonable we will have no choice but to shut down the company and as a consequence put 12 people out of work.
That is a very sad letter and spells out clearly the difficulties being faced by small businesses. Another letter from a well drilling company states:
We wish to inform your committee that our employers' liability insurance for this year will be increased from £606 to £4,000 and public liability from £1,000 to £2,200. Considering the fact that we have never had a claim in more than 20 years in operation with these figures in view, we cannot continue in business and will have to cease operations.
The next letter is from a small family-run building business which states:
Our business is a family business consisting of three brothers and one unskilled labourer. Premiums quoted are in excess of £3,000 for new house-building only. Premiums for reconstruction work have been quoted in excess of £5,000. Our business consists of 50 per cent new house building and 50 per cent reconstruction work. The amount of work we do does not allow us to pay the above quoted unrealistic premiums.... As a result we are being forced, due to an injury risk factor, to lay off our labour, close down our business and draw unemployment benefit.
Another submission was from a small building company with two employees and sub-contractors where the company's broker can only get one company to quote. The cost was £4,800 and it was the biggest single overhead in that company.
It is obvious from those few submissions that insurance is a major problem in all types and sizes of business today. As a result it militates against the possibility of taking on people and giving much needed employment. We have now reached a stage at which the cost and availability of something as basic as insurance is an obstacle to employment creation. The committee have received indications that people starting their own businesses, particularly in the under 25 age group, cannot get insurance at any price or that, when they can obtain cover, it is, in a word, prohibitive.
There is a lot of work being held up at present because small businesses and contractors cannot get cover and, when they can, cannot afford to pay for it. For example to undertake to build an £80,000 local authority housing contract one would need public liability and employers' liability insurance which would cost somewhere between £3,500 and £4,000. In most cases these premiums are payable in advance. Before moving onto the site one must show one's policy to the local authority to demonstrate that one has cover. But in order to do so one must have paid for it. Therefore before one ever moves onto any site and incurs any outlay on raw material one must have one's insurance in order at a cost of approximately £4,000. That is much too severe, particularly for the smaller building contractors, leaving them now unable to quote for local authority housing.
For public works contracts local authorities insist on a high level of cover which is extremely difficult to obtain in the case of small contractors resulting in some being forced out of that type of business. Local authorities recently increased their all risks clause in public contracts from £500,000 to £1 million indemnity resulting in an increased premium of £450 to £500.
To outline further the difficulties being experienced by small contractors I might quote from a submission on the subject from The Society of Chartered Surveyors who state:
The extraordinary increase in the cost of providing Employers' Public Liability insurance over the past few years has caused major problems for building firms. Some contractors have experienced an increase in premiums of over 100 per cent. In many cases, on private contracts, the contractor has difficulty in recovering the increased costs due to (a) inability to establish from the insurance industry what the market increase in insurance costs have been and (b) following on that inability to document the increases, there is a reluctance on the part of the consultant to recommend and certify payment. On Government contracts the position is exacerbated by the general belief that the GDLA conditions of contract do not allow recovery of same.
In addition to the increase in basic rates many insurers have changed their methods of collection. Previously, a contractor's premium was calculated at a set percentage on a provisional amount of wages expected to be paid by the contractor during the insurance year. A premium was paid on this provisional basis and at the end of the year an adjustment was made resulting in extra being paid or a refund being made. The position is now changed in so far as a lump sum payment is demanded and extra is charged if estimated wages are exceeded but no refund is made if there is a shortfall. This change means that if a contractor's workload is running below that advised to insurers, perhaps he will have a further incentive to tender for work at a low overall margin with the intention of using up insurances which are wage-related and for which he is going to pay anyhow. These factors contribute to the growing occurrence of unrealistic tenders being submitted for building work.
Some insurance companies have a minimum premium for employers liability cover, in some cases as much as £5,000. This is well beyond the scope of small business people. It is something of which I will again ask the Minister to take specific notice in order to ascertain if he can have this practice rectified. Employers and public liability insurance are two costs that are growing relatively fast in Ireland. To protect our competitive position and enhance employment we must contain all industrial costs within reasonable bounds maintaining them compatable with those applicable elsewhere in Europe.
It should be remembered that, in many cases, the working capital involved in insurance premiums has to be borrowed. Because of the differential interest rates between the Republic and many of our international creditors, the small firm sector incurs additional penalties. One aspect of liability insurance concerning all sectors of the business community, large and small, is the fact that some insurance companies refuse to quote for liability insurance despite possessing a licence to participate in the market.
In the submissions received by the committee a number of people raised the point that they could not get cover for their types of business. I will now quote one or two of these submissions to illustrate again the difficulties experienced by small businesses. The first one states:
We are a small roofing contractor operating from Dublin City Centre. Up to September 1985, we had five men employed with us. Unfortunately, our insurance company informed us at that time that they would not be renewing our insurance. We contacted several other insurance companies, but to no avail. We wrote to the Minister for Trade and Industry about our difficulties in obtaining insurance cover, but all that we received back from him was a list of various insurance companies we might try. Having contacted these, we are still without insurance cover. We feel most distressed at this situation as we would have employment for six men if we could obtain insurance at a reasonable cost.
This is a sad letter. The second case concerns a small woodwork business. It reads:
We have a proprietor and one employee. No insurance company will quote at any price. The one employee I am paying is not covered for accidents. As a matter of interest, this business has received grant aid and a Manpower subsidy. No insurance certainly means no further employees.
Again, it can be clearly seen that the problem of insurance is one of the biggest problem facing small businesses and other industry today. It can be seen that companies have an aversion to hiring people. Work is being pushed down the line to sub-contractors operating the black economy. People in small businesses are setting up shell companies in which to hire labour because they cannot get and cannot afford employer liability insurance.
Small firms in some cases, and long standing customers have received notices of massive increases in premiums without any warning, some refusals to renew insurances and sudden demands for very expensive security measures, often in cases where there had been no claim over a number of years. The panic reaction of the insurers and the difficulties — in my opinion largely of their own making — show absolutely no regard for the many problems of small firms in a time of recession, little sensitivity for customer relations and a blinkered view of their own role in the economy.
The measures now being taken by the insurance companies and the manner in which they are taken reflect an overwhelming concern for their own well being, without any accompanying overview of the effects of their reactions on their customers, on the economy generally and on employment in small firms as a whole. Insurance companies concede that there are areas where insurance is not available due to the high levels of crime and vandalism, but they maintain that the number of businesses affected is small. They concede, however, that there may be a growing number of under-insured companies due to their rapid increases in premium rates.
There is a growing reluctance on the part of insurance companies to provide cover for property in certain urban areas due to the high levels of crime and vandalism. The type of businesses affected include public houses, retail outlets, factories and warehouses. Representatives of the insurance industry, in evidence to the committee, conceded that there were certain high risk cases in urban areas for which insurance is not available. However, most trade associations are adamant that there is now a widespread problem with regard to property insurance in urban areas.
The National Federation of Retail Newsagents in their submission stated:
There are many areas in Dublin which are designated by insurance companies as "high risk" areas. It is impossible for our members to obtain any property cover in these areas.
I believe the insurance companies themselves are responsible for a lot of the problems that exist in the insurance industry today. I accept that the insurance industry has gone through a traumatic time during the past ten years. After 40 years of stability in a home market, the number of insurance companies operating here increased following the enactment of the EC Non-Life Establishment Directive into Irish law in 1976. The insurance companies operating here prior to 1976 were totally unprepared for competition from the outside and, to an extent, the present problems are the consequence of that lack of preparedness. The cut-throat competition which ensued for new business and for the retention of existing business has resulted in uneconomic premiums and a lack of sufficient emphasis on sound risk management. Insurance companies were more interested in getting business rather than taking an interest in safety standards for their clients. During this period the safety standards of small businesses deteriorated and this was happening against a background of high inflation and high crime.
It was in the early eighties that the symptoms came to light and it was then that the insurance companies decided they would change their system. First, their premiums rose and, secondly, they began to be very selective in relation to choosing their clients. It was in the 1984-85 period that we had massive increases in premiums. We had new security measures imposed in order to obtain a premium and as I already mentioned, there were many refusals which have already been outlined in this report. Incidentally, this report was drafted principally because of the vast number of complaints from people in constituences who have been lobbying their TDs and Senators and who are totally frustrated by the lack of response to and interest shown in them by the insurance companies.
I believe that the crisis in the insurance industry, and related difficulties, caught both Government Departments and businesses unawares. The State response to the crisis has been inadequate and disappointing. The State plays a major role in resolving many of the current problems and issues relating to the high cost of insurance at present. The relevant Government Departments with responsibility for insurance issues are the Department of Industry and Commerce — whose responsibility is the regulation of the insurance industry generally — the Department of Finance, who deal with taxation, the Department of Labour, who deal with safety standards and practices, the Department of the Environment, who deal with fire safety, and the Department of Justice, who deal with the courts and the Garda.
The insurance companies accept that, due to the escalation of premium rates, there is a customer relation problem in certain instances. My own opinion at the moment is that insurance companies have a very poor consumer image, principally due to the high cost of these premiums. The CII claimed last month that the employers' liability increased, over the last 12 months to between £60 million and £80 million, which is an increase of one-third during a period when we have had 4 per cent inflation.
Insurance companies must get their costs down and they must apply new technology, promote better safety records and reduce their management and administration costs which appear to be very high at present. The insurance companies will need to take a good look at themselves and stop blaming Government Departments, the legal system and the jury system. In order to bring premium costs down in line with other EC countries, the insurance companies will have to carry out a detailed examination of their own performance. I understand that wages costs here are much higher than in the United Kingdom, a factor the insurance companies allowed to develop here.
The courts and the legal system are also parties to the injustices. The existence of an insurance contract should not be used to justify extravagant awards. The courts, via the jury system, appear to have adopted a theory of entitlement that has led to rampant judicial inflation. The level of awards and the cost of defending even minor claims are also instrumental in creating excessively high premiums.
While the Department of Justice have overall responsibility for the administration of courts, substantial aspects of courts administration lie within the statutory competence of the courts and of the judges themselves. In the District Courts and Circuit Courts either solicitors or barristers may appear on behalf of their respective clients in cases decided by the sitting judge. However, in High Court actions the system is different. These actions are decided by a jury. Although a solicitor may appear before a jury, the universal practice is that a solicitor will instruct the counsel, that is a barrister, to pursue the case in court. However, the barristers operate a three counsel system, which requires that each side in a court action be represented by two senior counsel and one junior counsel. The effect of the three counsel system is that each side in a court action be represented by two senior counsel and one junior counsel. The effect of the three counsel system is that in a High Court action the plaintiff and defendant are each represented by two senior counsel, one junior counsel and one solicitor. Therefore, usually eight lawyers participate in each action.
It has been estimated that legal costs in Ireland represent between 15 per cent and 20 per cent of claims paid, or roughly twice the British level. The report states that the disparity between British and Irish costs must contribute to the high level of legal representation in cases in Ireland. It is my view that the court system as it stands today is archaic, inefficient and expensive and it should be changed. It should not be left to the legal people themselves to reform the courts. I believe the Department of Justice must be given the clout to do the job and it is up to the Government to provide it.
The jury system and the massive awards given by them have been blamed on many occasions by the insurance companies as one of the main reasons for the increase in costs of premiums. The Government are aware of the enormity of this problem and at the moment they have a Bill before the Dáil to abolish the jury system for personal injury claims. Ireland is the only country where personal injury compensation is decided by a jury. Most European countries have systems involving judges and assessors. In the UK a judge decides liability and the value of the settlement. He has access to a standard reference which is updated regularly and is widely accepted. However, the essential benefit of the UK system is that there is a recognised set of precedents for most types of injury and, therefore, more and less expensive out-of-court settlements. Jury cases take longer than cases decided by a judge sitting alone, probably one-third longer, due to more speeches, examination of witnesses, summary and so on. There is the perception that juries tend to favour the plaintiff and that sympathy for the plaintiff rather than the law will be the deciding factor in many cases. There has been a major increase in the number of High Court jury actions disposed of in recent years. In 1978 the number of jury actions disposed of was 1,555. This rose to 5,725 in 1984. The jury system has been regarded as too erratic, that 12 lay people are incapable of providing a consistent pattern of awards. There is a widespread belief that juries have been too generous and as over 90 per cent of settlements and awards are paid by insurance companies these settlements are reflected in the high cost of insurance premiums.
There are also factors which could contribute to a reduction of insurance premiums. The Department of Labour have a big part to play by ensuring that the factory Acts are strenuously implemented in the workplace. At the moment the standard of safety in the workplace is extremely low and does not compare favourably with any of our European counterparts. I see the major problem here as an educational one. There is a difficulty in getting the message across to businesses that increasing and improving safety at work with consequent fewer claims will mean a reduction in premiums and, therefore, lower costs. There is a message here for the FUE and for the trade associations to get people educated in relation to safety at work. The insurance companies also should have seen to it that these Acts were implemented but they were too busy looking for new business in a very competitive world.
The general attitude in relation to safety must also change and improve from the firms' point of view. It is important to get people to recognise the relationship between safety standards and the cost of insurance premiums. The working environment should be designed in such a way as to prevent as far as possible the occurrence of accidents. In 1980 the Government appointed a commission of inquiry on safety, health and welfare work under the chairmanship of Mr. Justice Barrington. The commission reported in 1983 and made a number of recommendations, two of which are as follows: the establishment of a single national authority with clear identifiable and undisputed responsibility for occupational safety and health issues; and a massive and sustained exercise of training, educational and information at every level. The Department of Labour are at present preparing legislation which will be closely following on the recommendations of the Barrington report.
The committee examined the insurance situation in a number of other countries to ascertain possible alternative models that this country could adopt in resolving the current difficulties in relation to insurance. The most striking developments were under the general heading of employers' liability in so far as most countries now operate the no-fault occupational injuries schemes. These schemes provide compensation in respect of injuries sustained at work but in most instances the right to sue for negligence no longer exists. These schemes are funded by employers and administered by statutory boards which assess and pay damages, although some schemes are administered through private insurance companies. The no-fault system appears to have worked very successfully in Canada, the United States, France, and in West Germany and New Zealand where it is compulsory. I recommend that the Department make a more in-depth study of the insurance industry in these countries.
Finally, the report has made recommendations for the improvement of the insurance industry and has divided these recommendations into three categories: first, the insurance industry itself; second, the State; and third, the insured business sector. With proper understanding and co-ordination put into these three units I am satisfied we can have a better and more competitive insurance industry as a whole. In theory, insurance is a solution wherein the losses of a few are shared by many and, consequently, the cost is minimised but in fact as opposed to theory because of changing circumstances the solution has become a problem.
I should like to say a few words on this report but perhaps before I do so I should declare an interest being a director of an insurance company. Everybody connected with insurance would have some interest in that sense and if you did not have an interest in that sense you would be unlikely to know a great deal about the subject.
First, I would like to acknowledge that the cost of insurance is a serious matter for small business and it is difficult to solve that problem. Let me say that insurance is a business based on claims experience, that is to say, the premiums are based on the experience in the previous year. The insurance company takes in premiums, pays out claims and hopes at the end of the year to have enough left over to pay administrative expenses and perhaps to have some profit. Insurance companies have no control over most of the factors that affect the premiums. They have no control over the number of accidents that take place; they have no control over the number of claims that are made and they have no control over the amounts of these claims. These are the things in particular that put up insurance premiums and these are things over which the insurance companies have no control whatsoever.
If rates go up in a particular sector it is because there have been high claims in that sector in the previous year. These rates are monitored by the Department of Industry and Commerce who have acknowledged in the report that insurance companies have lost money in most recent years. No insurance company would impose rates which were unreasonably high. They could not do so because competition is too severe. The last speaker was inclined to harp on the fact that Irish insurance companies have led a secluded life, that they were not quite aware of what was going on and that they were not taking steps they should take. It should be realised that it is not only Irish insurance companies that operate in this country.
There are 39 companies operating here, and only six of them are Irish controlled. There are insurance companies here from most of the big countries in the world. They are all in here and they are all highly competitive. They are all looking for business and nobody can say from that point of view that the insurance companies are anything less than competitive in the rates which they charge. Any company which tried to have high rates would quite simply not get any business. These international companies charge higher rates in this country than they charge in their own and other countries for one reason only, that claims and awards are higher here. On the other hand there have been insurance companies here which have quoted too little. They bowed to the pressure and criticisms that they were charging too much and they attempted to lower their rates in order to get more business. The inevitable result was that they went out of business. We should be very conscious of the fact that two of the biggest insurance companies in this country quite simply went out of business because they attempted to charge rates that were not viable and inevitably lost so much money that they collapsed. There is no use trying to force insurance companies to charge lower rates if that means that they go out of business.
The major types of business mentioned in the report are employers liability, public liability, property and indemnity. As far as indemnity is concerned, the rates are going up here but they are still nothing like the rates for indemnifying professional people in other countries. A few years ago in the United States top surgeons had to pay premiums of $250,000 a year because of the high claims taken against them. In the UK this type of experience is beginning to show as well. Our indemnification rates are still very much lower than any of these other countries. However, as far as property in the inner city is concerned premises are becoming uninsurable. This is not because of anything that the insurance companies are doing but because the incidence of crime, burglary and vandalism is so high that it is impossible to quote an acceptable figure for insurance.
Debate adjourned.