I move: "That the Bill be now read a Second Time".
The purpose of this Bill is, on the face of it, the relatively simple and straightforward one of statutorily underpinning a holding company formed on behalf of the Minister for Industry, Trade, Commerce and Tourism. However, the Bill also forms part of the basis for the action taken by the Government in the past fortnight to avoid the collapse of a large insurance company. In my contribution to this stage of the Bill, I intend to concentrate on both the general background and the specific circumstances which gave rise to the draft legislation now before the House. I will be commenting on the serious problems of the Insurance Corporation of Ireland which have come to light in recent weeks together with the attendant implications for the Allied Irish Banks Group; the choices open to the Government and the corrective action taken to deal with these particular difficulties; and the arrangements likely to be made to enable the insurance company to be restored to a sound commercial footing.
I propose to start by referring to the position of the Insurance Corporation of Ireland. We are dealing with an established company of almost 50 years standing trading in a market in which they had long experience. In these respects they differed from a newly authorised undertaking or a relatively recent entrant to the non-life insurance market, in which cases the supervisory process applied involves particularly close monitoring of operations over the formative years of the enterprises concerned. By contrast, ICI were a company whose state was satisfactory over a long period of years. The company were trading normally, had a consistent track record of steady profitability and were disclosing a very comfortable surplus of assets over the required solvency margin. Prior to 1984 they had a broadly based board of directors representative of their various shareholding interests; these included American and Dutch insurance interests and other institutional investors, including Allied Irish Banks. Since September 1983 ICI were under the full control and ownership of AIB.
I should explain briefly here the manner in which my Department supervise insurance companies. The Department receive the accounts of insurers annually and undertake detailed analysis of the information supplied in relation to the different classes of insurers' business. The examination undertaken by my Department does not and cannot substitute for the role of statutory auditors. It would be unreasonable to expect that the State should provide resources to double-check on the work done by auditors. My Department's work is, rather, an independent outside test on the information supplied. This is in line with the supervisory practice for insurance internationally.
Arising from the tests applied to ICI my Department began to be concerned about the adequacy of the technical claims reserves set up by the company in relation to its Irish business. During 1983 the Department communicated formally to ICI their concern at this particular aspect of the company's operations. The company indicated in reply that they had learned that they had not made adequate allowance for the development of some very large cases which worsened unexpectedly; they had strengthened reserves to make additional allowance for this type of potential development and they hoped that the provisions would prove adequate.
Notwithstanding the assurances of the company, the Department decided to examine the 1983 accounts of ICI on a priority basis when received. These accounts were duly submitted on 26 June 1984. Based on the 1983 accounts as submitted, ICI held free assets of £56 million, equivalent to a surplus of 124 per cent over and above the statutory solvency margin required.
Following their analysis of these accounts in July 1984, the Department were not satisfied that adequate provision was made in the company's 1983 accounts for outstanding claims on their Irish business. This aspect of the accounting returns was gone into in considerable detail at a meeting between the Department and company representatives on 17 August 1984.
The responses of the ICI representatives at that meeting were considered inadequate by the Department, and the company was requested to provide further detailed information on the outstanding claims provisions struck for Irish business. The Department had already decided to engage a firm of consulting actuaries to undertake an examination of the Irish technical claims reserves of ICI. Discussions between the Department and the firm in question took place during September 1984. The study commenced in early October, and representatives of AIB and ICI were formally advised of this at a meeting with my Department on 14 November 1984.
The purpose of the meeting in November was to discuss the insurance company's results contained in the interim report of the Allied Irish Banks Group for the half year ended 30 September 1984, which were being released at that time. At the meeting in question, it was indicated to my Department that AIB had decided to strengthen the outstanding claims provisions of ICI by £23 million as at 30 June 1984 and that the bank would be taking immediate action to strengthen the capital base of the insurance company arising from this depletion of their free reserves. The specific question of the London branch business of ICI was raised at that meeting also, and the Department were assured that while there were problems with the London branch, corrective measures were being taken to rectify matters; furthermore, there was no under-reserving apparent in the London claims reserves.
In December 1984 the issued share capital of ICI was increased by £40 million, of which £30 million was fully paid up by AIB. Subsequently, in a report dated January 1985 the actuarial firm engaged by my Department confirmed that the reserves of ICI in relation to their Irish business, as strengthened, were adequate.
To a large extent, the above facts speak for themselves. In relation to their supervisory functions, my Department acted quickly and with diligence in recognising the claims reserving problems facing ICI on their Irish business, following which corrective action by way of identifying the shortfall and a substantial injection of fresh capital took place in December 1984. Although not directly within their area of supervisory competence, my Department also raised questions with AIB and ICI representatives in relation to the London branch operations of the insurance company, and received assurances that there was no under-reserving on London business, and, furthermore, that corrective measures to improve the current trading experience of the London branch were being implemented. The Department of Trade and Industry in the United Kingdom had not communicated any concerns to my Department in relation to the UK branch business of ICI. Given this fact and in the light of the reassurances received from AIB and ICI at the meeting in November 1984, my Department had no reason to question matters further at that stage.
I would like to make it clear that I am not imputing any dereliction of supervisory functions on the part of the United Kingdom supervisory authority. Indeed, I understand that the UK branch accounts of ICI for 1983 disclosed a surplus of some £19 million sterling in admissible assets over branch liabilities. Furthermore, the UK branch accounts were not qualified in any respect by the statutory auditors.
It is clear in the relatively short space of time that has elapsed since November 1984, that there were serious problems with the London branch business of ICI in particular, about which the former owners were unaware and which had not come to light at that stage.
New auditors were appointed to ICI in mid-December 1984. Detailed audit work got under way in January 1985 and by early February the auditors realised that there were serious deficiencies in the information systems and database covering the London branch operations of ICI. Once AIB were advised of this, they immediately ordered an accelerated programme by a special investigating team to establish, as far as possible, the true financial position of ICI's London branch.
By the first week of March 1985, the results of this investigation had led AIB to conclude that ICI had very serious problems with their London branch operation. AIB notified both the Central Bank and my Department of the position at separate meetings on Friday, 8 March. By letter dated 15 March 1985 the board of ICI notified me that they had concluded that as at 31 December 1984 the company did not comply with the requirements of the European Communities (Non-Life Insurance) Regulations in a material respect, and that this position still obtained.
Before turning to the ultimate decision reached by the Government in relation to the problems of ICI, I would like to state that I consider that the management of AIB acted promptly and responsibly in bringing the matter to the attention of my Department. I have to say more than this, however. It is almost incomprehensible and more than a little disquieting that it apparently took so long for senior management in both ICI and AIB to begin to realise that there might be fundamental problems with the London branch operations of the insurance company, which after all accounted for about 70 per cent of total business in gross terms. This is even more difficult to understand when one considers that problems had arisen within the head office operations of ICI in Ireland, and corrective measures were taken during 1984. The facts are far from clear even at this stage, and it is difficult to say how much of the London branch's problems arose while AIB were a minority shareholder and how much actually arose during 1984, at which stage ICI were under the full control and ownership of AIB. It is obvious that a serious lack of management control, particularly in relation to the flow of information between London and Dublin, contributed in no small measure to the present problem. If the problem had been spotted and the position established at an earlier date, then the magnitude of the present difficulties would not be as great. The belated realisation that there were problems in London is, therefore, all the more disappointing.
The problem which came to light in ICI was one which called for urgent, firm and decisive action. The Government decided on 15 March 1985 to acquire ICI from the Allied Irish Banks Group for a nominal sum by a company controlled by the Minister for Industry, Trade, Commerce and Tourism. The provisions applying to this holding company, Sealúchais Árachais Teoranta, form the greater part of the Bill now before this House. An administrator was appointed provisionally by the High Court to take over the business of ICI on the evening of 15 March and the High Court confirmed the order for administration at a sitting on Monday last, 25 March. The purpose of the take-over and administration of ICI was to ensure the continuation of the insurance business and the protection of all policyholders.
The Government decision offered the best solution to the problems which arose within ICI and which could have had serious implications for the insurance market generally. Other companies in the market could not readily have absorbed the market share held by ICI, particularly in the critically important employer and public liability classes. Furthermore, it was the view of the Government that it would not be feasible for the parent company, Allied Irish Banks, to undertake the addition financial commitment and other reorganisation measures required to restore ICI to an even keel; the bank could not prudently persist in the attempt to resolve the problems of ICI without the risk of adverse effects on their banking operations.
The placing of the Insurance Corporation of Ireland under administration, and the funding of that operation, are covered by existing legislation, that is the Insurance Act, 1964, and the Insurance (No. 2) Act, 1983. These Acts provide the statutory powers for the appointment of the administrator by the High Court on the petition of the Minister for Industry, Trade, Commerce and Tourism and for the provision of moneys from the insurance compensation fund to enable the administrator to carry on the business of the company as a going concern. I would remind the House that the administrator is appointed by, and carries out his duties under the supervision of the High Court. The insurance compensation fund is administered by the accountant of the High Court under that court's jurisdiction. The entire process of administration, therefore, is under the control of the court.
Pending the completion of the full investigation of the company now being undertaken under the direction of the administrator, it is difficult to say with certainty where the blame lies for the problems facing the company. However, I have already referred to the lack of adequate information systems and of management control, particularly in relation to the London branch of the company. It appears that the information supplied by the London branch to their supervisory authority and to their head office in Dublin did not reflect the true position of the business being transacted in the branch. The investigation now in progress is intended to establish how far the true position differs from the reported position.
The problems which have come to light in this case clearly raise the most serious questions about the role of management, directors, shareholders and of auditors of companies. The chain of responsibility is clear. The primary responsibility for ensuring the satisfactory conduct of company affairs lies with the shareholders and is exercised through the directors and management of the company. The secondary responsibility for the correct presentation of the financial activities and standing of any company rests on the auditors. In the case of the more important financial institutions, such as insurance and banking, the State has a tertiary responsibility. The tertiary responsibility must obviously involve the State, through its various agencies, in laying down certain minimum standards and in assessing the adequacy of the systems and the competence of persons involved in the first and second stages of responsibility. The State's role also involves, in the case of insurance, examination of the information supplied by insurers and auditors as required by statute.
The failings which have been disclosed in the present case confirm the need to proceed quickly with a redefinition of the statutory responsibilities of directors and of auditors. The Government have already approved the provisions to be included in a major reform of companies legislation and drafting has been proceeding apace. I have now directed that those aspects of the full Bill which are of special relevance to the points which I have been making should now be finalised as a matter of urgency.
In addition to the changes in the area of company responsibility, I will also be giving special attention to an assessment of the supervisory role of my own Department. This will involve a full review of the frequency and quality of the information required from insurers, and of the technical capacity of my Department to assess such information. I am particularly concerned that my Department should have access to statistical and actuarial expertise in the examination of accounts and other information supplied by insurers. I might add that the non-life insurance industry in general could also benefit from much greater use of expertise of this type which has tended to date to be concentrated in life assurance companies.
It is not possible at this stage to speak in definitive terms about the precise financial position of ICI. The company audit is in progress and the administrator estimates that it will take at least six weeks to clarify matters. Based on the company's own draft unaudited accounts, it appears that losses in 1984 will amount to at least £65 million, resulting in a minimum deficit of £25 million in the shareholders' funds in the company balance sheet.
At this point, I would like to make it clear that one should be extremely wary of various amounts being bandied about in recent days. Such figures are speculative and some of the orders of magnitude are so astronomical as to be totally unrealistic. Such speculation as there has been about possible losses in the company has not been based on the information derived by those who have examined the company's affairs. This information, from those who have been in the company, is the only sound basis on which any decisions can be made.
While I have stressed that the information available is not definitive, I must say that on the basis of all the facts known at present there are no grounds for believing that the losses incurred fall outside the range of £50 million to £120 million. I have to stress that I mention £120 million as the known upper limit of losses and not in any circumstances as the most likely figure. There is no information known to the Government which would place the losses outside these parameters and all of the Government's actions are based on these figures which I have stressed are the only reliable information available.
As has already been made clear, any financial assistance required by the administrator will be provided by means of the insurance compensation fund. Until such time as the exact financial position of ICI is verified, it is pointless to speak other than in general terms about the likely funding requirements. For the purposes of the administration of ICI, the compensation fund will be financed on a broad basis by a number of special arrangements involving Allied Irish Banks, the banking and insurance sectors generally, and if necessary, and only as a last resort, the Exchequer.
I do not think that it would be productive to enter into speculation now as to the exact distribution of the burden between the different sources of financing until the precise extent of the burden is known. Any measures to be introduced, involving levies on the banking and insurance sectors, will of course have to be debated and approved in this House.
An important focus in this debate will be on the contribution by Allied Irish Banks to the rescue of ICI. As the owner of ICI they should, in the normal course, meet the entire cost. In fact they are contributing as follows. First, writing off their total acquisition cost of ICI, resulting in a loss of £86 million. Second, a major share of any damages arising out of legal proceedings against the former auditors of ICI to go to the State. Third, interest subsidies of £6 million on a £50 million loan over three years. Fourth, an additional interest free loan of £20 million, worth almost £3 million per year at current interest rates. Fifth, the purchase price of £2½ million paid for Credit Finance Bank which they had "sold" with ICI for £5. Sixth, the sale of a 20 per cent shareholding in the profitable and healthy Insurance Corporation Life, also for £5. Seventh, the biggest share in any bank levy that may be imposed.
I would explain that the interest free loan of £20 million which AIB have placed with the Central Bank as stakeholder is in respect of the contingent liability undertaken by the State in respect of a guarantee to the Institute of London Underwriters. This is provided for in section 14 of the Bill. In the event of any liability arising in excess of designated reserves, the amount involved will be deducted from the £20 million before the balance is repaid to AIB. This is the additional contribution by the bank to which reference was made over the past weekend; it is worth, as I have said, £3 million per year at current interest rates.
The amount which should be paid by AIB is, of course, open to debate. The Central Bank, whose job it is to assure the soundness of our banking system, were involved in the discussions leading to the decision to rescue ICI. Their strong view, as a regulator of the banking industry, was that the contribution by the bank that I have already outlined was the limit of what AIB could prudently be expected to make at this time. The Central Bank were also most anxious that there should be certainty about AIB's liabilities, as uncertainty would be damaging to the bank and to the financial system generally. The Government and this House must give due weight to the advice of the Central Bank who have been charged by both Houses of the Oireachtas with the responsibility of ensuring the soundness of the banking system.
Let me remind the House that if AIB had never bought ICI, the problems we now face would still be there. All of ICI's losses would ultimately have to be met from the Irish headquarters of ICI. This would inevitably have led to the crash of the company. But, in those circumstances, there would have been no recourse to any bank for help. No preferential loans and no bank levies would then have been available. Instead, we would have been faced with the even more stark choice of either the collapse of an insurance company covering up to a quarter of the workers in the country for employers liability or the insurance sector and the Government, alone and without any help from the banking sector, having to resolve the entire problem. This did not happen, and it is at this stage only a hypothetical situation. But it is a very enlightening hypothesis.
Let me return now to the actual circumstances of the present case, and the choice faced by the Government two weeks ago. If the Insurance Corporation of Ireland, a wholly owned subsidiary of Allied Irish Banks, had gone into liquidation this would have had consequences for the bank itself as well. A bank itself is borrowing money all the time. The terms on which banks can borrow depend critically on their standing as a bank who will, in all cases, be able to repay these loans. They get much better terms than ordinary companies because they have this standing. If a wholly owned subsidiary of the bank collapsed, the terms on which the bank could then borrow would immediately be affected. If this happened all of those who borrowed from the bank would also suffer. I believe that we have rescued not the shareholders of the AIB, but their customers, the public at large, and the policyholders of the ICI.
AIB remain a strong financial institution, despite the heavy losses which they incurred on the ICI fiasco. The AIB board have announced that they will maintain their dividend despite the losses. While I personally regard this as a somewhat insensitive announcement, highlighting the bank's much greater concern for shareholders than for the policyholders with the ICI, or for the general public, I am advised that a cut in dividend would be taken in the stock markets here and abroad as a signal — in this case false — that the underlying strength of the AIB was somehow damaged.
Confidence of this kind is very important in international financial circles. As a country which borrows substantially abroad, it is vital that our financial institutions be seen to be strong. The continuing uncertainty as to the bank's potential liabilities and the resultant speculation would have held many dangers for the bank. Other proposed solutions involving meetings of financial institutions generally or an extraordinary general meeting of the bank would have lacked the confidentiality and the speed necessary for an effective rescue. This ruled out some other solutions to the problem which might otherwise have been attractive.
Turning to the arrangements for financing the rescue of ICI, there are a number of general points which have to be made. I understand that the company have good liquidity at present and that the need for a substantial cash injection is not foreseen in the immediate future. It should be made clear that the losses will not all have to be made good in any one year. Finance will be required according as claims fall due to be paid over a period. The administrator will use his commerical judgment as to how to obtain the best return for the company from the assets available to him.
The commitments of contributions from Allied Irish Banks which have already been received will go a considerable distance towards financing the rescue. It is the intention that the insurance and banking sectors should make a substantial contribution to the cost of the rescue also. The precise form and extent of this contribution will be settled when a firmer indication of the size and incidence of the losses have been established.
The idea that companies in sectors such as banking and insurance should contribute to saving the deposits and policies of failed companies is not a novel one. It is normal in the case of rescues of financial institutions elsewhere that other companies in the same sector contribute to keeping particular businesses going where their failure would cause dramatic damage in the particular financial market generally.
The insurance sector as it stands faces substantial underwriting losses in a number of classes, not least the employers and public liability classes in which ICI have a 25 per cent market share. The cost of insurance cover and the problem of availability of cover at an economic price in some cases have been matters of serious concern to me for some time past. This is obviously an aspect which has to be considered in the context of a possible further levy on insurance. The higher the cost the greater is the prospect of people taking the risk of doing without insurance cover. The Government have been conscious of this danger in planning their response to the crisis in ICI. In order to deal with the cost of insurance premia, the Government have decided to modify the right of access to decisions by jury on the extent of damages for personal injuries. The Minister of Justice will be bringing detailed proposals before the Government on the matter.
While dealing with this matter I should also refer to some reckless statements which have been made in the past fortnight to the effect that ICI was not the only insurer which is in trouble at present. I have to say quite categorically that statements of this type should not be made unless there is very sound evidence for them and, so far as I am aware, there is no such evidence. I trust that in debating this matter Deputies will take a responsible attitude and will not cause any doubts to be raised which might further damage confidence in this important sector of the economy.
I know that others in the banking sector and in the insurance sector feel that it is unfair that they should have to pay the penalty for failures by other members of the same sector. They will claim that this is almost a reward for imprudence. While I can understand this sense of grievance, I would say to the financial institutions in question that they must understand that the taxpayer who is not even in the same sector would have an even greater sense of grievance at having to pay the cost. The sector as a whole must benefit from the existence of some form of mutual assistance, hence in this case of necessity it is right to turn to the banking and insurance sectors for a contribution. Although it is too early yet to give any guarantee on this point——