I move:
That Seanad Éireann takes note of Report No. 24 of the Joint Committee on the Secondary Legislation of the European Communities — The Impact of Certain EC Legislation on the Irish Insurance Industry.
I would like to comment on this very interesting and worthwhile report which examines the position in Ireland in a comprehensive way. When I get around to dealing with the recommendations I will find myself in general agreement with them.
As the House is aware, freedom of establishment for insurance companies within the EC has been with us for some considerable time. There are many foreign companies operating in Ireland. Of the 35 companies operating here, 29 or 30 of them are foreign companies. Many of these are huge companies with very big resources with far more resources than the Irish companies. For that reason they are able to compete in the sense of being able to stand minor and major shocks and are able to cope with years where the claims experiences are very adverse. They can take these things in their stride in a way which is much harder for relatively small Irish companies to do. Approximately 50 per cent of non-life premiums at present are going to foreign companies. What we must be concerned about is that with the new directive which allows companies to operate here without being actually established here there is a serious danger that the 50 per cent going to non-Irish companies will increase further.
Not only have foreign companies an advantage in competing fairly but there is also the danger — I am not saying they necessarily do it or do it very often — that they can do what is the equivalent of dumping. They can give very competitive rates. This is particularly possible and useful so far as insurance companies are concerned because they normally have a kind of portfolio of policy and claim experiences. If it so happens that they find their experiences in other countries in fire, public liability or whatever insurance is very good at a particular period, then they are able to offer very low premiums in other countries. In that kind of situation a company doing business in many countries throughout the world would be able to offer extremely low premiums and rates in Ireland in certain sectors. This, of course, would have a very serious effect on the Irish companies. Without them doing anything wrong they would be able to offer rates in particular areas at particular times which would have a very serious effect on Irish companies which are operating in Ireland only.
One of the problems Irish companies have in facing up to the prospect of the new directive is the fact that they have gone through very difficult times in the past few years. This was caused among other things as a result of what happened with the PMPA and the ICI. What happened was that these companies for a few years before they went out of business were offering rates which were totally unrealistic and it was because they were offering rates that were totally unrealistic that they eventually went out of business. It also had the effect that other companies had to try to compete with them. Their rates went down, not as far as the PMPA or ICI, but down to such an extent that they lost business and found themselves making no profit for many years. The second effect of that situation was that a levy was applied which again undermined their finances.
The Irish insurance industry is facing up to the prospect of the new directive in what can only be described as a weakened condition. This makes it very difficult for them to face up to this potentially dangerous situation. If the foreign companies decided, deliberately or otherwise, to under cut their rates, they would certainly completely destabilise the insurance industry. This ultimately, of course would have a very serious effect.
One of the dangers is that new firms coming in here would start, without examining the situation, by charging premiums or rates which would be comparable with what they were charging in their own country, not realising that claims are very much higher in Ireland than they are in other countries. By doing this, of course, they would again destabilise the market. Subsequently when they realise their rates were too low they would naturally bring them up to a realistic rate. By that time they might have had a very serious effect on the native companies and put some of them out of business. These stronger companies would put up their rates and would get the very much larger slice of the business.
I want to emphasise again something which seems to be overlooked by many people when discussing insurance — the imperative connection between claims and premiums. For more than a year or two, premiums cannot be kept down if claims are not kept down. To look at it another way, if claims go up and are higher in Ireland than they are in other countries premiums will have to go up also. That is one of the things that has to be continually borne in mind when talking about the necessity of bringing down the cost of insurance or bringing down premiums. It can only be done if claims go down and claims are very much higher in Ireland than in most other countries. It was because of trying to ignore this fact that we had the position of the two companies who went out of business. We have to bear in mind the possible effects of the introduction of new foreign companies who will not initially, at any rate, be aware of the fact that claims in this country are very much higher than in most other countries.
Having said that it is not merely a question of the insurance companies — some people would not lie awake at night worrying about whether they stayed in business or went out of business but these companies play a big part in the financial and economic life of the country. When any of them go out of business there is a very serious effect on employment. At present, there are something like 5,000 people employed in insurance in Ireland. If the new directive is availed of where people can do business in insurance without having offices here it would be a situation where very few people would be employed to do that business as compared with the number who are employed at present.
That change would also have an effect on the funds available for investment in the national economy. At present these are very strictly controlled. Ninety per cent of the funds have to be invested in Ireland. It would be impossible to control the funds of companies operating from abroad. In very rough figures something like 1,000 million funds are generated by insurance of which 90 per cent is invested in Ireland. That could be changed very much in the future.
Of course, there are all kinds of other relatively minor spin-off benefits to the country for example, benefits to areas where local offices operate. Apart from employment the amount of money spent by these offices in rates, power, upkeep and so on, is of important benefit to the economy.
Looking at the impact the directive will have, there is little doubt but that Irish insurance companies and, consequently, the economy, will be adversely affected. What we have to look at is the question of how far they will be affected and what can be done to limit the effect. It would be unrealistic to expect that it will have no effect whatsoever.
The form of the directive is very important. It is very important to make sure that the graft is done in such a way so as to avoid as far as possible, adverse effects on the industry. It will be very important to have a derogation to allow the industry to recover from the effects I mentioned earlier to recover from the number of years where companies have been forced to operate at uneconomic rates because of the unrealistic rates quoted by the companies who went out of business and also because of the fact of having to pay levies to pay for the collapse of these companies.
There are a number of other matters the Government should bear in mind in approaching this problem. I would like to quote from the report made by the Irish Insurance Association in relation to this directive.
At page 20, they state:
(i) A substantial derogation must be negotiated for the Irish market.
(ii) Both established and non-established insurers must compete on equal terms. This would mean that both should be subjected to the same general rules and laws and in particular laws or rules regulating investments abroad (e.g. Exchange Control) contributions towards guarantee funds, government levies, etc.
(iii) Rules in the Directive and-or our own legislation implementing it must restrict the ability of services insurers to use persons established in Ireland to carry out certain duties on their behalf. In particular, we feel that a services insurer should not be able to delegate to such persons power to settle claims on its behalf.
(iv) Provisions must be incorporated in the Directive to deal with cases of dumping or unfair competition. The Directive, we would suggest, should define what constitutes dumping — unfair competition in the insurance sector.
These are all matters which the Government should bear in mind and every effort should be made to ensure that they are observed. If that is done, some of the more serious effects of the directive on services could, if not entirely avoided, at least be minimised.
One of the problems is that insurance companies coming in here from abroad may not realise at first the high level of claims. This is something which is of course a fact of life — and it certainly has been a fact of life. The Government could play some part in trying to deal with this problem. There are a number of reasons why claims are high. It is something that has gradually grown up and norms have been established which are difficult to interfere with at present. These norms are, unfortunately from the point of view of people who pay premiums, approximately twice as high as in the UK. The awards of damages are, by and large, something of the order of twice what they are in the UK even though they have varied over the years. The damages usually have a bearing on the costs and consequently, both the damages and costs are very much higher than in other countries.
There is also another reason why insurance is so high, and that is because of uninsured drivers. This has been estimated as being something of the order of 20 per cent. In other words, 20 per cent of the premium paid by the motorist who does pay insurance represents the subsidy he has to pay to make allowances for the number of people who do not insure their cars.
The Government have introduced a Bill which will probably have some effect on the high awards of damages and costs. It has taken some steps in relation to uninsured drivers and as far as they go they will be very helpful. It is essential that the powers taken by the Government should be pursued vigorously by the Garda to ensure that everybody on the road at present is insured. With the necessity of having a tax disc it should be reasonably simple to ensure that anyone who is not insured should not be able to continue to drive. This is a very serious matter and something which I am hopeful will be improved dramatically in the next year or two. Something like 20 per cent of people in Ireland are uninsured compared with something like 3 per cent in other European countries. That is one area in which we can look forward to a very considerable improvement.
In general, the recommendations made by the Joint Committee are very good and helpful and I am in general agreement with them. The Government can do something very positive in relation to recommendations Nos. 5 and 6. Recommendation No. 5 states that:
Consideration should be given to the provision of tax relief on the annual increase in the minimum statutory insolvency margin.
This is a technical matter but it is very important to insurance companies that when they have to put by funds in reserve to deal with the solvency margin they should not be taxed on that. It is not something that will go towards paying out anything to shareholders or anything like that; it is a technical necessity. It would be very helpful if the Government could look at that recommendation.
Recommendation No. 6 states:
The extension to the non-life insurance industry of the 10 per cent corporation tax should be considered.
There seems to be no reason why the same relief should not be shown to insurance companies as being shown at present to industrial manufacturing concerns. This is particularly so if the insurance industry is to be given every opportunity and encouragement to extend its activities to other countries, in which case it would be the same as exporting goods. In these circumstances, they should have the same treatment as manufacturing firms.
The recommendations of the joint committee are extremely useful, with which in general I agree fully. I hope the Minister will give them very close attention and implement as many of them as possible.