Before the break we were making our attitude clear to this legislation dealing with the ICI business. We said that this legislative process now being recommended by the Government is unnecessary on one front if the liability as indicated by the Minister was to be taken at face value, that if the liability is of that level an internal arrangement could have saved the day rather than inflicting the trauma and difficulty that the country, the banking institutions and national credibility has had to suffer since that time. If that is not the case and if the liabilities are as they are intimated to us from sources both at home and abroad, the existing legislation is tantamount to providing the Government with an open cheque to deal with the matter. It will mean that the State will take over by and large the funding of the compensation fund set up under the 1964 Act, which now has very wide limits. The limits laid down at that time were removed by the 1983 emergency legislation. Consequently, we are satisfied that the Government intend using this legislative vehicle to saddle the taxpayers with contributing the funding necessary to pay the liabilities as they fall due.
On both counts we have to oppose the legislation. We offered alternatives that might have been considered had the Government not acted so hastily in dealing with the matter on 15 March. The leader of my party gave the instance of the commercial bank in Canada, where interested parties both in government and banking circles are being brought together to provide the rescue package, as an example of what might well be contemplated under the aegis of the Central Bank Act. We were dismissive of the Minister's attempt to rule out the Central Bank involvement in this matter because some of us believe sincerely that the Central Bank had a crucial part to play both in allowing AIB to take on this non-banking activity and in subsequently forcing their hand to get out and to bring the matter into Leinster House.
I talked about the necessity that arises under the supervisory authority's responsibilities in dealing with the supervision of insurance in general. It is obvious to everyone now that we have a very serious criticism of the supervisory authority in the way that it dealt with insurance over a period. We are critical of the Minister of State, Deputy Collins, in the way he has responded to repeated calls to deal with these matters. The Minister of State has disregarded all the pleas and we see now the consequences. We are being forced into dealing with a crisis that could have been foreseen and promptly dealt with to avoid this serious crisis.
I dealt with the question of the necessary technical reserves to deal with liability cover and the question of solvency requirements which must dictate the minimum level of capital and retained reserves. The EC solvency margin stands at about 17 per cent of annual premium income. This solvency margin is a prudent regulation had the Minister seen fit to apply it and seen to it that the margin was being maintained by ICI and others acting in this business. It is necessary because the insurance company accepts unlimited risk and also the liability for claims are usually conservatively provided. The assets may realise less than their face valuation and there are often exceptional claims to be paid.
In Irish insurance circumstances a underwriting break-even is the minimum target, but unfortunately in practice underwriting always results in utilising investment income. The more acceptable norm should be 5 per cent underwriting profit. Normally, insurers lay off portion of the risk with others by way of re-insurance paying a premium for the protection. This protection is necessary against the danger of exceptionally large claims and it is arranged by laying of the risk in tranches. The net premium returns to the Department, included in the blue book figures consist of the gross premiums less the amounts laid off by re-insurance. The solvency of a direct insurer depends on the effectiveness of the transfer of some of the liability of the undertaking to re-insurers and maintaining adequate assets to meet the liability which has been retained. These necessary safeguards and regulations were not complied with in the instance of ICI and there is considerable anxiety being expressed that these regulations are not complied with by a number of other insurers also.
From the blue book, which was provided last evening, I am in a position to prove to the Minister that these solvency margins and the technical reserves are not being maintained by other insurers. While we do not want to make statements which would put a run on anything, we are bringing it to the Minister's notice that he as the supervisory authority has not acted prudently in dealing with the technical reserves and solvency measures necessary to maintain the cover needed to cover the liabilities. This should have been painfully obvious to the Minister after the PMPA business of 1983.
The total cost of claims is the product of the number of claims and the size of the claims. The greatest complaint adding to the cost of the claims and resulting in higher premiums for everyone is that the High Court damages as assessed by juries is completely out of line with the estimate of damages in other countries. There is an inconsistency of awards and a lack of predictability in these awards. There is no doubt but that claimants will fight right up to the High Court in the expectation of getting a more substantial award than if they made an earlier settlement. The level of jury awards that have been granted in this country has actively discouraged attempts at out of court settlements. Our awards system is in advance of awards in the United Kingdom and many of the jury awards have been halved on appeal to the Supreme Court. It would appear that many juries regard insurance companies as impersonal bodies capable of withstanding any claim. We are now virtually on our own in so far as the settlement of awards by juries are concerned and, in fact, the United Kingdom abandoned the system of juries in these type of cases almost 51 years ago. However, it must be stated that the jury system has always been seen as a basic feature of the independent administration of justice and should not be challenged in relation to the determination of guilt. The aim should be to secure a level of award which is fair and just, taking the comparability of cases into account.
A greater degree of consistency is necessary in awards. There is no particular difficulty in assessing special damages, such as medical and hospital fees and loss of earnings as these are matters of proof and mathematics. However, in the area of general damages the least that should be entertained in advance of a Government White Paper on the whole question of the appropriateness of the jury system in damages claims is the authority to the judge to inform the jury of the going rate of general damages for particular types of claims. The Government review, with a specified time scale to report, should also consider the whole area of pre-trial procedures, legal fees, system delays, the level of legal representation needed and jurisdiction of various courts in considering cases.
If curbing the claims side is to be an integral part of official strategy in maintaining solvency of insurers and controlling premium costs and generally easing the burden on policy holders, then swift Government action is needed whether entrenched vested interests are dented or not.
In the ICI case while the Government may not have a clue as to the eventual liability it will have to meet, some interesting facts regarding the London office of ICI operation give us some indication as to why AIB cut its losses and ran for Government cover. The underwriting policy of trading in the non-marine market dealing with general insurance seems to have been the undoing of ICI. It was regarded as one of the softest markets in London, certainly it was not selective in the kind of business it took on board and was loosely referred to as the "rubbish bin" of the insurance world.
It is generally accepted that prior to AIB taking over ICI completely the London market would not accept policy documents until they were guaranteed by AIB. When one considers the type of high risk ventures ICI was insuring is it any wonder they were figured as a ‘soft touch'? They were, in fact, thrown out of the Fire Officers Committee because they did not accept basic rates.
Take the example of the suicidal rate quoted by ICI for the Association of British Travel Agents account. A scheme had been handled by Accident and General Insurance Brokers, using Norwich Union for years, but was switched dramatically to ICI when the latter undercut the premium of £12 million reducing it to £7 million. An unsolicited approach by another broker had offered to arrange the cover with ICI, a subsidiary of AIB. That was the selling point in getting the premium accepted. The whole industry regarded the deal as unrealistic. It is understood that losses were being experienced from the first week from taking on the account. ICI was also involved in huge claims following the Australian bush fires in 1983, the malfunction of satellites and the collapse of Air Florida. It is understood that the London office had a very aggressive role in the re-insurance markets, with particular reference to bloodstock business, which represented 25 per cent of its general accident portfolio. As a reinsurer they were accepting business that others would not keep on their own accounts. Trying to generate huge volumes of business at low cost in high risk areas proved disastrous for them. The word is—and this can be verified — that ICI were doing a lot of their own re-insurance through their own office in Guernsey. It is said that was being done through their re-insurance operation there known as Re-insurance Corporation of Guernsey. They were also re-insuring in South America and South American re-insurance is described by Lloyds as the bucket operation of re-insurance, the last resort of any re-insurer.
To get the volumes they had to utilise binding authority mechanisms and delegated underwriting devices which committed ICI to accept risk over which they had no control. The holders of these binding authorities get paid by commission, but they are not the risk carriers. When claims arose the insurer had to make the pay out. ICI had a large number of binding authorities. It is to be hoped that even at this late stage the holders of these binding authorities have been terminated.
A fundamental question that must be asked is who authorised this kind of risk taking and surely nobody can suggest that it was going on without the knowledge and support of its base organisation.
The activity of ICI did not comply with the scheme of operations dimension by which each licensed holder granted a licence by the Minister must satisfy the supervisory authority. It seems nobody applied the rules to ICI, on the public liability and employers liability side. ICI, had underestimated their claims liability by a huge 55.2 per cent in the period 1978 to 1982. As AIB were both shareholders and on the board of ICI, this information of under provision must have been known to them. The only question that has to be asked here is why AIB at the date of take-over did not make their offer for ICI shares conditional on an independent assessment of the ICI provisions to cover their liabilities. The figures were never challenged by the bank or the supervisory authority and so in the apportionment of blame for the crisis ICI must have the biggest burden of responsibility followed by the supervisory authority and the bank itself.
With the emergence of the figures it must have been obvious to the bank that the bank itself was looking into a bottomless pit which, if the worst came to the worst, would condemn our major banking institution to an untenable position which would not just spell disaster for its own continuation in business, but could result in a serious aggravation of our banking solvency with all the attendant national and international dangers which that implies.
The delay since 15 March in producing the legislation before us, which is necessary to deal with the matter, has had a debilitating effect on both the financial market and on Government credibility. Government inaction today has exacerbated an already uncertain situation. If it was decided that legislation was necessary and if, as we are told, that negotiations were taking place for weeks before the announcement, then arrangements should have been concluded and announcements made only when the legislative process was clear and prepared. What we got eventually is what looks like an innocuous piece of legislation but it could be an albatross around the neck of the country for years.
The Government's timing of their own response leaves something to be desired and shows a further example of mismanagement of the country's affairs. Another example of the Department's inefficiency is its tardiness in the publication of the blue book for 1983, which deals with the summary of the statements of insurance business. It is just another indicator of the inefficiency at Government level in dealing with the insurance industry. Making an excuse for the delay in publication as the non-availability of the PMPA figures until December 1984 is unacceptable. This was known to the Minister of State at the Department, Deputy Collins, on 30 January 1985, when he indicated that the blue book would be published in February of this year at the latest. An inquiry made to the Department on 18 March resulted in information that the matter was before the Government and publication could be expected in the immediate future. On Thursday, 21 March the Taoiseach seemed totally unaware of what the position was but promised to let me have the information on that day.
The following morning, Friday 22 March the Department informed me that matters regarding the publication of the blue book were not yet at an advance stage and that publication must be further delayed. The details dealing with profit and loss account for non-life insurance business, balance sheets for non-life insurance business, together with particulars of non-life insurance written outside Ireland during the year 1983 would be of considerable help in determining the true picture of the insurance debacle we are now discussing.
One has to be just a little suspicious of the Government motive in not meeting their blue book publication deadline. The blue book has now been published and shows a continuing crisis in general insurance. While I have not had much time to consider the implications in the blue book, to prove the point which the leader of Fianna Fáil made this morning and which I now confirm, there is a continuing crisis in non-life insurance here, and the Minister, even at this late stage, is not prepared to do anything about it. The 1983 blue book shows very clearly the problems facing the general insurance industry with underwriting losses of almost £99 million in the areas of motor liability and fire insurance. By far the greatest loss area is motor vehicle insurance with 24 of the 25 companies reporting underwriting losses amounting to £52.495 million and also showing provisions for outstanding claims of £465.405 million, of which provision for the PMPA is £215.938 million and for the ICI £13.954 million.
The other heavy loss area was liability insurance with underwriting losses totalling almost £36 million. In this area, 26 of the 28 companies underwriting this business made heavy losses and the two exceptions only underwrote a total of £19,000 in liability premiums. The ICI suffered the largest losses here, with an underwriting loss of over £7 million, over £3 million higher than the next loss maker. One must remember the report printed in a Sunday newspaper recently which suggested that the outstanding claim estimates in the ICI were reduced by 42.5 per cent which would imply that the liability losses of the ICI were far greater than the figures stated. The total premium income for business written in Ireland amounted to £419,932,000, of which £243 million was written by Irish controlled companies and which accumulated underwriting losses of £58 million, which shows that seven of the 30 companies underwriting in the Republic of Ireland accumulated over 58 per cent of the losses which must give cause for concern, especially since two of these companies are in the hands of administrators. The unsatisfactory situation which has arisen must cause the Minister concern as he is responsible for the overseeing of the industry. It is interesting to note that the ratio between claims paid and those outstanding for motor insurance for ICI is 1.45 to one where the normal satisfactory ratio is 2.4 to one which suggests that the company were not satisfactorily estimating their motor liabilities. This should have been enough to warn the Minister and the supervisory authority that appropriate action should have been taken.
It was also suggested today that there was one motor insurer that did not lose money but the Hibernian Insurance Company — the company referred to — are under-reserving their motor insurance account and the ratio of claims outstanding in relation to claims paid is 1.76 to one. The Minister knows that prudent underwriters would be talking about a ratio of up to 3.7 to one. This is a clear indication that there are insurance companies who give cause for concern in so far as their technical reserves and solvency margins are concerned.
At last the need for new legislation to amend the Insurance Acts 1909 to 1982 with a view to facilitating a more effective control of insurance companies must now be self-evident even to a reluctant Minister and supervisory authority. New arrangements are necessary to deal with the revocation of authorisations in cases of doubtful solvency, minimum share capital requirements, including reserving and solvency requirements to cater for the modern circumstances dealing with reinsurance and matters related to EC Directives, including the qualifications for directors and managers of insurance companies. There must be new regulations concerning the issue of solvency certificates, laying out the precise terms of procedures and conditions under which these certificates can be granted.
There is also need for review of the calculation of technical reserves and the valuation of assets with particular reference to the underwriting of liabilities. The parameters necessary as regards information on the reinsurance arrangements should be unambiguosly stated in any new legislation. The Minister must also have absolute general power to require information in any circumstances concerning the insurance business. There must be new and adequate safeguards which will allow the Minister to satisfy himself that the obligations under the Acts are being satisfied completely.
New procedures must also be provided for the submission of returns and accounts to the supervisory authority. These accounts and returns should and must be certified by an auditor or an actuary nominated by the Minister and operating independently of the accountants attached to the insurer.
All these new measurers must apply to the insurance company and include companies connected or dependent on the major insurance company. Once and for all the penalty for non-compliance with the regulations should be that if the requisitions are not met then there should be immediate suspension of the authorisation to write insurance until such time as the supervisory authority is satisfied.
When the Minister has reason to believe that there is doubtful solvency in the operation of any insurer or has not made adequate arrangements for re-insurance then the Minister must be able to authorise that the offending company refrain from taking new business of a specified type of classes; refrain from making certain investments and realise certain investments to bring back their margins of solvency. It should be an underlying requirement that all insurers granted licences must maintain assets in the State to deal with all total domestic liabilities.
In any new arrangements concerning the control of insurance business, from the experience gleaned during this unfortunate situation, it is paramount that the Minister will have some control over the Directors of insurance companies. The Minister should have full information regarding the qualification and experience of those seeking authorisations, be they directors and managers and if he is not satisfied the Minister should be empowered to curtail or cancel any authorisation granted by his supervisory authority. All changes in directors and chief executive officers should be notified to the Minister and he should retain the right to veto any appointment. Actuarial experience is vital to insurance undertaking and the Minister should lay down certain minimum requirements of persons who may be appointed as actuaries.
Because of the inherent dangers in the reinsurance business it is essential that in the future no reinsurance assurance business be allowed unless specifically authorised in the licence to operate. The accounts of any such reinsurance should be submitted to the Registrar of Companies under the Companies Act, 1963.
There is also need to increase the paid-up share capital of undertakings seeking authorisation to write insurance business. So far as any new procedures are concerned, the Minister should be entitled to attach any conditions he thinks fit to an authorisation to carry on an undertaking with power to revoke these authorisations if conditions are not fully complied with.
Had these or a similar type of regulations been in operation for the past number of years then there is no doubt that the present crisis could have been averted and the AIB instead of buying into what they confidentially expected was a prosperous and solvent insurance company, would have been spared a major embarrassment and a major upset of their growth pattern.
The British Board of Trade, its supervision and monitoring régime, are also suspect and cannot escape the charge of negligence so far as ICI are concerned. Could it be that their concern for the solvency of a company with an Irish banking guarantee was less than that which applied to other insurers under their supervision? The lines of co-operation between London and Dublin departments of supervision need some attention and perhaps a new bilateral arrangement is overdue. As both supervisory authorities operate under EC directives and regulations, the British supervisory authority should be asked to give a full and clear account of their position in this crisis and what steps they had undertaken to see that ICI was monitored properly in their London office.
There is a difference of opinion as to the responsibility of the British Board of Trade in this collapse. The Department of Industry, Trade, Commerce and Tourism would hold that the British authorities are responsible for the activities of the ICI branch located in London and that the Dublin office are responsible for the overall solvency of the company. There are those who hold the alternative view and claim that the British Board of Trade have no responsibility in effect for the ICI branch office in London. The matter needs to be clarified at this time as conflicting evidence is being put forward by pseudo-experts on all sides. The Minister should clear up this matter once and for all.
There is widespread comment that the bank have got off lightly in this matter, but it has to be admitted that the cost has been high to the bank also. There is no doubt that this has been an unhappy episode for AIB and that it has been a major embarrassment for them, both on the domestic front and in their continuing relationships with international bankers. In a business where confidence and competence is the hallmark of success, then this collapse has been a major loss for the bank. The £86 million write-off together with the £6 million that the £50 million soft loan will cost over a three-year period are substantial sums and will result in very restricted profit and dividend growth for a number of years.
The stock market has responded very unfavourably in so far as the price of the bank's shares is concerned and it has to be understood that the capital base of the bank has been severely weakened and it cannot withstand further weakening without rendering it very vulnerable to pressures which would undermine its solvency. There is talk of extra contributions which the bank have considered making available other than the £50 million cheap interest loan which has already been allowed. This kind of rescue by instalment is not the best way to restore public confidence in financial institutions and it would be well for the Minister to outline in the clearest and most unambiguous terms precisely what has been agreed with the bank and when and how much will be paid to relieve the State's burden in this situation.
We are led to believe that further arrangements were negotiated even in the very recent past with the bank as an institution. The least this House can expect when considering the position is to know the full details of the contracts, deals, arrangements and so on. Great efforts have been made by Government spokesmen to indicate that the full liabilities are not yet known and will not be available for some time, but it has to be stated straight up that if the system operated properly, if the proper checks and balances existed at banking and supervisory authority levels, then an absolute estimate of all liabilities should have been possible within two or three days.
The most advanced accounting and computerisation systems in the world are installed in these major institutions and surely it is not too much to expect that read-outs could be made available quicker than the estimated time of two months. This whole uncertainty places Deputies at a very severe disadvantage. While some might suggest that AIB bought a pig in a poke originally, they always had the major trump card of disengagement at any time by liquidation, which was available to them, or the preferred option now utilised of using the Government as a safety net.
But now the Government are in the same position. They are rescuing the pig in the poke and are completely blindfolded as to the cost. It is unsatisfactory for the State to take on unlimited liability in an area of high risk on a perpetual basis. Nationalising a major percentage of the insurance business of the country has many inherent dangers for the State, and it would be undesirable if the State has to carry all the high risks, the bad risks and be the last insurer in the decline cases area.
Somebody should have explained the reasoning behind the dividend pay out by the bank. There was justified anger amongst the public that the bank were looking after their own, while they were being asked to carry the can. Shareholders accepted the risk when the new business was taken on. They should be expected to carry some of the liability of the loss. Somebody should also have come clean on what the national problems would have been had the AIB ended up in serious difficulty. Stock market confidence in the shares of AIB was, and still is, an absolute essential. Institutional funds, and in particular pension funds, had to be guaranteed investment income to meet the commitment which would affect thousands of ordinary people. To weaken the capital base further than that which already has taken place, would be to render the bank vulnerable. The consequences of such a situation can only be speculated on and the wave of resentment against the bank in guaranteeing the dividend was more acute than any other single thing that happened subsequently. If paying the dividend was necessary to maintain the bank, clear reasons as to why it was necessary should have been given.
It must be remembered, in fairness to the bank, that the bank did not create the problem in ICI — that problem was there before AIB came along — but if a proper public relations exercise had been undertaken by somebody to indicate to the general public the reason why the dividend had to be paid and the consequences of not paying it, the people might have adopted a more balanced attitude. It has been stated that the paying of the dividend was necessary to maintain confidence of national and international depositors and that it was taken to maintain the bank's need to continue to attract fresh capital on the international market for use in the development of the bank's business both at home and abroad.
It must be remembered that in excess of 60 per cent of the shareholding in AIB is held by institutional investors and most of it by pension funds of Irish workers, and there is nobody in this House prepared to say that they would like to see done down to the rights or incomes of the thousands of pensioners who are dependent on the investment income which accrues from investment made by institutions catering for their funds. The remainder is held by 27,000 individual shareholders and 88 per cent of them live in Ireland. The individual shareholding on average is about 2,000 shares. The dividend it will attract, even on last year's good figures, will be no more than £200 less tax in the current year. Those 2,000 shares held by the vast majority are only capitalised at about £2,500. If it was so important to pay out the dividend somebody should have told the public the reason why.
There is speculation that the claims provision on the employers liability and public liability account for 1983 was deliberately cut by 42.5 per cent on the orders of management. This is a crucial point and must be answered if the charge of culpable negligence is to be avoided by management of ICI.
The competence of decision makers in the highest echelons of commercial life should be capable of being taken for granted. Banking and related business is built on trust and confidence and this has been severely dented. Whatever rescue package has to be devised it should be just and fair, bearing in mind the circumstances of the case, and it should be undertaken with as much speed as prudent so that we can return to normal business relationships with the minimum of disruption. This legislation does not do that — it creates continuing uncertainty as to the extent of taxpayers' liability and makes budgetary adjustments inevitable for many years to come.
Central Bank control over diversifications in the financial services sector will have to be much more rigid and unless financial institutions can prove a competence and expertise in dealing with non-related areas to their own types of business, then no licence should be granted for ventures into new types of business.
There is a crisis in the general insurance industry. The blue book statistics on the revenue accounts for 1982 and 1983 reveal that the majority of companies recorded losses. Many of them are substantial and some are in excess of £2 million each. The interim company results for 1983 indicate even worse results for that year and nobody disclaims the view that the position has worsened since that time. Some companies have attempted to weather the storm with redundancies, cutbacks, permanent or temporary close of new business in the loss making classes and increased premiums with additional cover restrictions. The latest premium increases announced at an average of 40 per cent or more means simply that fewer people will be able to provide themselves with cover, there will be more unemployment created in industries unable to pay premiums and more companies and individuals will be risking it without any general cover whatsoever. A further increase in the number of uninsured motorists is inevitable.
The big five loss makers in insurance are public liability, employees liability, motor insurance, household and fire damage. It is generally accepted now by all the insurers that the main causes for the losses in these areas are the size of claims, the damage awards granted at High Court level, a slow legislative procedure, the rise in the crime rate, the rising number of uninsured motorists, poor safety precautions in industry and the excessive competition in the market place. All of these areas are directly responsible to the Government but little action has taken place and what has happened so far has been ineffective. There is, in effect, no price control mechanism operating in general insurance. Insurance costs are out of control and, as well as putting insurance companies at risk, they are creating unbelievable burdens for industry and consumers generally.
The compensation fund and the Motor Insurance Bureau demands, in addition to the increased premium being charged, are crippling the consumer and any further penalising of the consumer will leave general insurance outside the reach of the majority of the community. Costs is an area where the Minister has a direct input. He is responsible for the operation of the Prices Acts including insurance charges. Keeping solvency maintenance in mind, he has to keep prices at a competitive rate. The premiums being asked by some companies, when available at all, can increase by up to 100 per cent every premium renewal day. On the other hand, the State company already operating is offering discounted rates in an insurance class where every insurer is losing money and this company, the PMPA, has no worth while investment income to support its liability claims. Its figures in the ‘blue book' make interesting reading, even for 1983. If any worthwhile impact is to be made on the price and cost of insurance the Government will have to give first priority to the elimination of the causes I outlined. This is the only effective way that the consumer can be given a fair chance of getting insurance at a reasonable price.
The Opposition will not do down the bank because to do so would be to commit economic hara-kiri. What we want to do is to strengthen our financial institutions and protect our national integrity. This party do not seek political advantage at the State's expense. There has been an irresponsible outburst of craw-thumping and Government hand-wringing in the past few days, with selected inspired leaks to the media which have added further trauma to the State's dilemma. In a crisis of this dimension it is shameful for the Government, the backbenchers in particular, to seek cheap political advantage from a mess partially created by their own incompetence and ineptitude.
Labour and Fine Gael backbenchers trying to ingratiate themselves with the taxpayer and play the double game by making demands which this legislation does not purport to satisfy is shoddy and irresponsible. They should take a lead from the responsible position taken up by Fianna Fáil which will not only safeguard the bank and the financial institutions, but also protect the taxpayer from an intolerable burden.
There may be many who wish to cry over spilt milk, but they are wasted tears. What has to be done is to restore confidence, provide a rescue package that is fair and just and take whatever measures are necessary to guarantee that we will never again have to use the October 1983 emergency legislation. We cannot accept that this legislation deals properly with the situation. Consequently we oppose the legislation.
