Allianz Ireland welcomes the opportunity to make this presentation to the joint committee. Allianz Ireland supports the work of the committee in which regard I refer members to our letter of written submission of 21 March 2003. I take this opportunity to apologise for not being able to attend the committee's sessions during the summer. This was due to other commitments which could not be changed.
Allianz Ireland does not favour the current status quo for a number of reasons. The one closest to our heart is poor financial returns over the medium term. I will deal with this issue in detail later. We face severely pressured policyholders, short-term behaviour among some opportunist insurers - a matter I will also deal with later - and the increased adoption of self-insurance approaches by what we consider to be unsuitable companies. The purchase of commercial insurance is a financial decision. A decision to forgo the purchase in whole or in part may have serious financial consequences for a company as claims come through. This causes Allianz some concern. We have deeply concerned legislators which is why committee members are here to deal with these issues. We have an endemic compensation culture while the cost of claims in terms of delivery and compensation levels must be addressed.
All of these factors are a recipe for instability at best and, at worst, returns on capital employed are too low. Allianz Ireland believes deep-rooted reform is needed and commends the joint committee in respect of most of the recommendations in its first report. I do not intend to go through the report at this time as the committee has identified most of the issues which need to be addressed. The solutions have been identified and it is now a question of seeing them through.
Recent media reports on the future of the PIAB and the Civil Liability (Courts) Bill were a cause of concern. I read this morning that the PIAB was approved by the Cabinet yesterday and we look forward to the time legislators have an opportunity to pass the legislation in the Houses of the Oireachtas. Allianz Ireland is committed to playing its part in forging a better marketplace for everybody.
Allianz Ireland is a general insurer serving the commercial lines and personal markets. Our focus is on big ticket commercial insurance. We are an all-Ireland insurer and derive about 20% of our gross written premium from Northern Ireland. The company is owned by Allianz and Irish Life Holdings. Allianz Irish Life Holdings plc is the holding company in which Irish Life has a one third shareholding. We have over 900 employees at eight locations in Dublin, Belfast, Cork, Dundalk, Galway, Kilkenny, Limerick and Sligo.
Insurance is a people business and I cannot refer to Allianz without referring to our staff. Among our more than 900 employees, the average age is 36 years, the average length of service is nine years and the qualification profile is that 48% of staff have third level or equivalent education qualifications. We believe in training. In 2002 we spent 2,000 days on insurance training and commit to one week of training per employee per year.
Allianz Ireland's role is to provide solutions to protect policyholders from the adverse effects of accidents and losses. We achieve this through risk control and risk reduction advice to complement insurance. Insurance promises to pay for losses which may arise in the future at an unknown cost. This means we have contractual obligations to our clients to pay now and in the future in respect of the many variables over which insurers have no control. We have served this marketplace for over 100 years and look forward to doing so for the next 100 years and longer.
On page 7 of the document circulated to members we have outlined a profile of Allianz Ireland's business and compared it to the market profile and provided figures in respect of each. We have 11% of what is termed "other business" compared to the market level of 8%. "Other business" in this context refers to marine, aviation, credit and guarantee business. In liability insurance we are higher than the market profile at 21% versus 18%. In property insurance we have 29% versus the market profile of 24%. In motor insurance the market profile is 50% and we come in at 39%. Within that 39%, a large proportion of our motor business is commercial. These figures illustrate that our focus is largely on big ticket commercial insurance.
On page 8 is outlined the financial performance in the Republic of Ireland of Allianz Ireland over the last five years. I have set out for each year the underwriting result and the result after taxation. Losses are included in brackets. Unfortunately, there are too many bracketed figures. Our five year average return on capital to 2002 was 0.5%. Our ten year return on capital to December 2002 was 5.7%. These returns are inadequate in terms of the cost of capital and the risks associated with general insurance business given that we estimate the cost of capital for a general insurance company to be between 8% and 9%. For comparative purposes we have taken the four Irish published banks and looked at their returns for the five year period to December 2002. On that basis we see that their returns were 20.8%.
As I stated, our focus is commercial. Allianz offers assistance and other solutions as an integral part of its commercial insurance business. Risk control and reduction advice are key to the way we do business. We employ 17 risk surveyors who work closely with our insured parties to manage claims. Our claims relationship management and effective management claims practices have been an effort on our behalf over the years to work in close partnership with our insured parties to control claims. One of the problems we face is that some of the factors which have the greatest effect on claims are societal issues. We are heartened and delighted that the committee is addressing these problems. We use occupational and rehabilitation services aimed at helping insured parties recover and return to work more quickly, by which we mean that if somebody has a back injury, for example, he or she may not be able to do any lifting work but could be reassigned to do other work. Unfortunately, we are finding it difficult to get this approach accepted in the workplace.
Having addressed our approach to the business, I will turn to another crucially important issue, namely, the question of transient capital capacity. I welcome the opportunity to raise the matter with the joint committee. Page 7 of my presentation sets out what is, in our view, the insurance market as reported in the blue book in one of the appendices. However, the market is much wider than this here because other companies are operating in it. Capital moves easily in an open, free market with competitors entering and leaving it at will taking business on a selective basis. If one examines the blue book for 2001, one will see that there are 420 non-resident companies authorised to transact business here. While information is not available on the scale of their activities, we believe up to 40% of the commercial property and 20% of the liability business is transacted through them. In addition, offshore captive companies and collective captive operations operated through the brokers and large inward investment companies do not place their insurance business in the local market but tend to place it through global programmes. This has an impact on what is already a relatively small commercial market in that it becomes much smaller. In addition, diversity of risk is not possible in many instances.
The short-term movement of capacity capital in and out of this relatively small commercial market has a destabilising effect. Predatory pricing is applied to target risks and this transient capacity is not offered on a wide scale but is available only to selected risks. The Independent Insurance Company is a good example of this approach. The company undercut resident markets, underpriced risk, created unrealistic expectations and, finally, left many policyholders with unpaid claims which still affect balance sheets today.
There are two good examples of the problem left behind by Independent Insurance, namely, Diamond Engineering in Kilmallock, County Limerick, which was left with in excess of €1.1 million in unpaid claims by Independent Insurance resulting in the company going out of business with the loss of more than 90 jobs, and a well known retailer on Grafton Street which is carrying a provision in its balance sheet in excess of €500,000 to cover unpaid claims from the company. The key point is that one needs capital which covers the market as a whole and is not transient but available for the long-term.
What do we mean when we state transient capital causes instability? We mean prices fall to uneconomic levels before reverting to their previous higher levels. Experience has shown that prices which fall quickly inevitably shoot back up. This type of price instability makes it virtually impossible for businesses to price their products and services. What appears, therefore, to be a short-term gain usually turns out to cause long-term damage. It would be helpful to the commercial insurance market, therefore, if the joint committee investigated ways to oblige transient capital to commit to a minimum period and volume to ensure such companies do not cherry-pick individual risks before they would be allowed to transact business in this marketplace.
I now turn to the request we received - I understand it came from the Chairman - with regard to the movement in rates between October 2002 and October 2003. To summarise, we do our renewals on a monthly as opposed to a weekly basis. The figures I have supplied show that personal motor insurance premiums has reduced by 8% during the period in question, from an average of €905 to €833. In the same period, 17,027 policyholders in October 2002 and 14,648 renewed in October 2003. This means 14% of policyholders did not renew. The reduction in premiums for the period from April is 7.9%.
Overall, we are happy with these figures because they reflect the actual position. We reduced our rates by 5.5% on 1 June and 5% on 1 October. We would have increased our rates between the end of October and early January 2003 by about 2.5% but the figure of 8% in overall terms looks correct and we are happy with it in the sense that the volume of policies is such that the average premium appears to be correct.
Unlike commercial business, there is a homogeneous risk type in the motor insurance business which we compare. When one considers the figures, for instance, in the area of employer's liability, we have 200 policies, the average cost of which was €25,655. I have referred to the fact that we are geared towards larger commercial risks. Within the group of companies for which the average premium is €25,000 or thereabouts, we could have policies of €2,000, €200,000 or €2 million. Averages, therefore, do not indicate the true position.
Also in the area of employer's liability, the position in April 2003 was that we had 145 policies with an average premium of €17,000. Again, as the impact of individual large policies distorts the average premium, it is not possible to examine this sector of the business from the perspective of average premiums. Most of our larger risks are merit rated, which means they are rated based on the actual claims experience of the insured. As members will see, the overall trend is downwards but, again, we believe this to be only broadly indicative and we would not attach too much credence to it.
In summary, commercial business is merit rated; there are significant variations between policy premiums; unlike personal motor insurance no uniform pattern of business presents each month; different terms, conditions, offers and variations of premium levels apply, not all of which are written on a ground-up basis - there may be deductibles; and average premiums at policy level are affected by wage inflation on employers liability, the number of employees and declaration of premiums. Overall, the average reduction in the cost of the policies we renewed in October 2003 in comparison with the same policies in October 2002 was 8%. Due to the nature of commercial business, however, it is not possible to obtain an average which we could stand over.
Allianz Ireland fully supports and is anxious to see the implementation of the PIAB and the enactment of the civil liability and courts Bill to which we wish God speed through the Houses. Allianz Ireland recommends that the joint committee take into consideration the impact of transient capital on the overall stability of the commercial insurance market.
