This is the first time the chairman of the authority has appeared before this committee. One of the things I sought in the Competition Act 2002 was the ability to meet this committee and discuss the work of the authority. I look forward to many other such opportunities.
The briefing note I have given Members has three themes. The first sets out the role and function of the authority. Drawing on the documentation that has been published on insurance and my background as an economist, I thought it was useful to put the competition issues in a broader perspective. This forms the second theme as I know of the committee's interest in the many aspects of insurance reform. The final theme will outline the authority's section 30 study on the insurance sector.
The authority has three roles: enforcement of competition law, advocacy of competition and merger reviews. Our role regarding enforcement is the enforcing of sections 4 and 5 of the Competition Act, namely, the agreements between undertakings and abuses of a dominant position. We must be conservative in what we say about investigations as breaches of the Act are criminal offences and we do not wish to prejudice any actions we might take.
In 2002, the single largest category of complaints from business and consumers related to insurance. The complaints relate to lack of choice, absolute levels of premia, increases in premia, the methods employed by insurance companies in assessing risks and allegations of discounts offered in exchange for purchasing a range of insurance products, which we term "tied selling". When we investigated these complaints many of them did not reveal a breach of the Act. However, they pointed to a general malaise in the market - the market is not working well for buyers.
We have had many complaints about refuse collection. It is clear this is another market that is not working well for consumers. Insurance last year was the number one issue and refuse was the number two issue. Whether members come from rural or urban constituencies, they will know that refuse charges have increased a lot. It is not surprising that we receive complaints when prices increase.
As is often the case, making a link between the specific issues raised by those individuals and a breach of section 4 or 5 of the Act is not necessarily an automatic link. One case is under investigation in the insurance sector where we have concerns that the Act was breached. In the normal course of events, we would bring proceedings if we did not succeed in getting changes to industry practices to address that. That investigation, which is a substantial matter, is still ongoing.
In regard to other complaints, our preferred approach in dealing with them is to undertake a section 30 study, to which I will refer in a moment. That enables us to get a deeper understanding of what is going on in the market so it is better to address these complaints to understand the context in which they occurred. Very often our experience is that what is driving consumer and business dissatisfaction with the performance of a market may have more to do with regulatory practice, the structure of the market and so on than with actual competitive behaviour by undertakings. All these can be factors.
Our second role is the advocacy one. We use the term "advocacy" to mean championing of competition, such as what I am doing here today, what we do in the newspapers and what we do in review groups in putting forward proposals to Ministers and so on regarding new legislation. We try to ensure that regulations and legislation do not impact negatively on competition unless they must. Too often in the past, restrictions on competition were used, not so much to achieve public policy objectives, but to protect incumbents in markets from competition. The taxi example is always the topical one - it never seems to go away. We have done work on pharmacies, liquor licensing, electricity, telecommunications and a whole range of other areas.
We do these studies for a number of reasons. I will refer to criteria later. If we think there is a complex issue around regulation in the market, perhaps high levels of concentration, and if it is an important market in terms of contribution to the economy, we will do a study. The study which is ongoing and relevant to insurance, other than the insurance study itself, is the study of the professions. In that context we are looking at both legal professions, barristers and solicitors. We expect late next week to publish an interim phase of the study, which is a very large report by Indecon Economic Consultants on competition in eight professions. It will include two substantial chapters on the legal profession, and the study will continue. I expect to receive questions on the professions study so I will then come back to it.
The third area of our responsibility is merger policy, for which we have just assumed responsibility. Up to January we did not have responsibility for domestic mergers. Until two years ago we had no involvement in European merger policy. It is a new function we have taken on and from now on we will be very vigilant as to mergers in this and all sectors. The process has been much more open and transparent since 1 January.
On competition issues and insurance, the sectors we are talking about, particularly motor insurance, employers' liability and public liability, including the whole area of non-life insurance, are very important. They amount to 7% of GDP. Problems in the market, particularly competition problems, can affect consumers directly. They can also affect them indirectly because they purchase goods whose prices have increased because the producers of the goods must pay higher prices for insurance. They also harm industry in terms of inward investment and the ability to price competitively, employ more people, innovate and so on. These costs are distributed widely across the economy. One of the reasons we are interested in this area is the magnitude of the problem, not just the complexity of the issues.
Having said that, our focus is primarily on addressing longer-term structural issues in the market and, not usually and not in this case, short-term issues. I want to distinguish between issues that affect long-term premia for insurance and those issues that have to do with the recent price tags, and deal with both of these separately. What we can act on in Ireland, both from a competition and non-competition perspective, are the long-term structural issues. I have identified a number of these issues in my submission, including litigation costs, fraudulent and exaggerated claims, inefficient pricing of risks, levels of compensation and variability in levels of compensation. If there is a lot of uncertainty around competition - it will be more expensive to resolve disputes. There are also issues of weak competition and accident frequency. On litigation costs, the Personal Injuries Assessment Board's work on the professions could address litigation cost issues. The current advertising campaign on fraudulent insurance claims and punishment for fraudulent claims are important measures in that area. The availability of data to insurance companies in terms of efficient pricing of risk and levels of compensation and the idea of a book of quantum are important factors is resolving the risk. Health and safety compliance in terms of accident frequency, including the penalty points system in motoring, is important.
There are many different policies, and competition policy fits in as one of the important policies. Much can be done in Ireland about all these policies. We are very supportive of the policies that are outside our remit and we are very keen in terms of competition policy, which is relevant as one of these factors, and in terms of all the other factors, because it has an important role to play as part of that process. That is why our study is timed to coincide with these other reforms.
Let me turn to the change in insurance premia. The changes in the past 18 months appear to have been driven primarily by international factors outside our control. They have helped in drawing attention to the already high level of premia in the Irish market. Our evidence is based on the fact that several other competition authorities in Europe are now looking at insurance because premia has increased. The OFT indicates that increases of up to 50% have occurred in the liability market in the UK so we are not alone in what has happened in liability insurance. There are two factors, one of which appears to be once-off events such as 11 September and climate change. The other is the decline in equity markets where insurance companies have increased their prices to shore up cash reserves to meet claims rather than sell equities, although I expect they have done both. The first of these probably affects the liability market more than the motor market. The liquidity problem probably affects both, but it may affect liquidity more. This is one of the things we will be trying to find out in the study.
There are many predictions that international rates will fall. Our primary concern is that the benefits arising from a combination of structural reform in the Irish market and a fall in international rates are passed on. There is very little point in undertaking major structural reform in the insurance market if there is not effective competition to ensure the changes are fully delivered to consumers and business buyers. We want to focus attention on the need to have vigorous competition in the market. It is probably not as important paradoxically when prices are rising internationally because that is when the domestic sector has the least opportunity to put up premia. It is when prices are falling internationally or when there is structural reform in the domestic market that we must be most vigilant about ensuring competition. That concludes my general remarks on where we see competition policy fitting in. I reiterate that we consider it important in itself, but it is also important in delivering the benefits of the reforms in other areas.
Let me now turn to the study itself. The authority is constantly asked to study various sectors of the economy. One of the difficulties is knowing where we should put our resources. Last year there were a number of requests and we drew up a set of criteria which would help us in deciding what areas we would study - I have listed them on page seven of the submission. The economic importance of the sector is one such area. I have referred to the 3% contribution of the non-life insurance sector to GDP. This is a fairly substantial sector. The second are indicators of possible competition problems. There we had the findings of the Motor Insurance Advisory Board, evidence of the price rises in the sector and the large number of complaints we got. That was a significant factor in looking at this study. The third is the existence of public or private barriers to entry - questions are also raised about barriers to entry in the Motor Insurance Advisory Board report. The fourth is the degree of public interest - no one would deny that this is a huge matter of public interest.
The insurance study came in on top regarding all these criteria. We also undertook to do a study on banking, which people can see also meets all the criteria. We did not have the money or personnel to do a study on refuse collection this year. Food distribution was also on our candidate list last year. There were other areas further down the list but those are the two we have earmarked, unless some other candidate overtakes them, for future years. Banking and insurance were the two we felt we could take on this year.
Having decided to do the study, we published, last September or October, the draft terms of reference. We see this as important when we are doing these studies. These section 30 studies are reasonably big machines once one cranks up the apparatus. We undertake a lot of public consultation and we will do a lot of data collection and so on. This is not unlike the exercise undertaken by Ms Dorothea Dowling's committee in terms of being rigorous. We like to consult on the terms of reference so we published draft terms of reference and we sought feedback on those. We suggested that the draft terms of reference for the study, which is carried out jointly with the Department of Enterprise, Trade and Employment, include motor insurance, employers' liability and public liability. There was a question about professional indemnity insurance being the other single major category in the non-life market where there was concern. We raised that as a possible question in the consultation process but the response was not overwhelming and we felt, on balance, that it was better to keep our focus narrow in the other three areas. We can return to that issue later. Much of what we discover in this study may be relevant to it.
The outcomes of the study could include advice to the Government or to specific Ministers on regulatory reform; recommendations for change by industry itself - depending on what we identify as the problems, this could refer to the insurance or brokering industries or, perhaps, the legal profession; advice to consumers on how they can drive competition; and if we come to the conclusion that competition is healthy in the industry, it is possible that we give a clean bill of health.
Having set the study out in those terms, we are planning the final document to consist of four parts. The first part will comprise an introduction and overview. This will look at the regulatory systems in place in the insurance industry. We will try to get a sense of what is happening internationally and to relate that to what is happening here so that we are able to get a good sense of whether increases in Ireland are consistent with those that are happening in other countries and, if not, the reason for that. For each of the three sectors - motor, employers' liability and public liability - we propose to do a competitive effects analysis. That involves defining the relevant markets, of which there could be many. A difficult issue will be to decide whether, for example, motorcycle insurance is a relevant product market of its own or part of the wider insurance market. That will require a good deal of consultation with purchasers and suppliers and the use of data.
Having identified the markets - let us say motorcycle insurance, for example, is a market - we must then find out who are the suppliers in that market, what are their market shares, what is their interaction with brokers and so on. We will then look at barriers to entry. We will see if people can easily enter the market and whether there has been entry. We will look at rivalry and the extent to which consumers can switch. If there is only one supplier and the relevant market is narrow is there a position of dominance? If there is a suggestion of dominance we will ask if there is a possibility of abuse of dominance. The purpose of that is to narrow down where, if at all, there are competition problems in the sector.
One of the questions the MIAB raised, which we are keen to answer, is why there has not been entry into the market. This is one of the conundrums of the industry. For example, in motor insurance there are five major underwriters and conflicting claims about profitability. If it is the case that profitability in the Irish market is relatively high why is there not greater entry? EU regulation does not prevent it. The various directives tend to facilitate entry. Is the market here so different from that in Europe? There is an argument that the way liability insurance is run in continental European countries is so vastly different from the way it is run here that companies from continental Europe might not wish to enter. However, that would still leave the question of why companies do not enter from the UK, where the system is very similar.
We are hoping to analyse questions like that and illuminate the question of how much rivalry there is in the market, what the possibilities are for entry and whether industry practices are efficient. Another EU regulation allows information sharing by insurance companies and one of the questions we will be interested in looking at is the extent to which that is fully used, the extent to which the benefits envisaged by it are passed on to consumers and whether that information is fully available to entrants so that they can price their risk efficiently. We will be examining all those various issues.
I can understand that there is a good deal of frustration abroad, and probably in this room, at how long it takes to do a study of this kind. We would love to be able to have a rigorous, considered and well argued set of findings for the committee today but those requirements are not internally consistent. It is easy to get a consultancy firm, in eight weeks, to give a reasonably superficial account of an industry but our preferred approach is to get our hands dirty in looking at the details of how this industry works. We have just put three consultancy contracts out to tender. One is for someone who is an expert in international insurance issues, one is for someone who is an expert in competitive effects analysis, which will supplement our skills in that area, and a third is for someone who has statistical or econometric skills to analyse data. Our intention is to incorporate those individuals, or whoever we select, into our team so that we will have five or six people working on this for the remainder of this year. We will not have a final report by the end of this year. I am hopeful of delivering one early in 2004. The timing will depend on how much further we feel we need to go. There is always the possibility of our publishing part of the study first if we think that would be useful.
We will be approaching, not just the insurance industry but also other industry groupings to assist us with our data collection. Our experience in the past has been very positive in getting assistance from industry. We do not have a preconceived agenda. We have a sense, with these studies, of trying to inform ourselves and the general public of what the issues are. Some of that may be good for particular segments of industry and some may be bad. It is difficult to predict which way it will be.
Ensuring that competition is working is important in delivering the overall package. The timing of the conclusion of the study will be important in coinciding with the first delivery of the structural reforms in the sector. In that sense, the timing works well. Having gone on longer than the committee may have wanted, I will pause for questions.
