With regard to insurance supervision in particular, our strategic plan points out that we have started to carry out best practice reviews. We will allocate additional resources to the supervision of insurance companies so that more regular and comprehensive reporting by these companies can be introduced and the frequency of on-site inspections can be increased. We are also engaged in preparations for expected enhancements to the regulatory system with the implementation of the EU solvency II directive. I will now to go into more specific detail on the area of solvency.
The purpose of prudential supervision or supervision in terms of safety and soundness of institutions is to ensure that risks, including the incidence and value of claims, are adequately assessed and that there are sufficient assets to meet all liabilities to policyholders and claimants. The EU rules require insurance companies to establish an adequate solvency margin. The solvency margin is the extra funds cushion that member states' regulators require an insurance company to hold to meet unexpected liabilities.
As the committee is aware, the single market means that insurance companies authorised in any member state are entitled to provide services throughout the EU without any price control or prior notification of terms and conditions. Under this "single passport" system, insurance companies authorised by the relevant authorities in one member state can carry out business in another member state either directly or by establishing a branch. This system relies on the regulator in the state where the company is based setting out appropriate solvency requirements under agreed rules known as the EU solvency rules.
A question has been raised as to whether our solvency requirements are a barrier to competition or to entry to the market and whether lower solvency requirements would directly result in lower premia. The committee will be aware of what the Competition Authority said on the subject of the additional requirement for new entrants in its interim report. It states "While we have received some indications that this could be a hindrance, to some extent, to entrants, we have not received evidence that it is, in fact, a significant barrier to entry. It has been argued that it would not pose serious problems for viable entrants." Most companies maintain solvency levels well in excess of our requirements and we are not the only member state to require companies to maintain solvency levels in excess of the required minimum.
We can find no relationship between prices charged to consumers and the solvency position of individual companies. We observe that companies with high solvency margins may charge low prices and companies with lower solvency margins may charge higher prices. We have no evidence that companies have been dissuaded from pursuing an application for an Irish licence because of these solvency requirements. There is no sign that our solvency requirements are a deterrent to entry to the market here.
It is important to note that 400 companies are entitled to sell business into Ireland under EU rules. These are not subject to our solvency requirements but to the requirements of their own member state. However, only a handful are actually undertaking business here, which suggests that it is not the issue of solvency requirements that is shaping their decision.
We do not want solvency rules to be used as an arbitrary method to restrict entry. We want solvency rules to protect consumers from the disastrous consequences that would arise from the failure of an insurance company.
I wish to address the specific recommendations that relate to the Irish Financial Services Regulatory Authority in the interim report. Recommendation 5 states that we should facilitate placing of motor insurance business outside the jurisdiction by amending regulations. We are not aware of any regulations prohibiting the placement of Irish motor insurance business outside the jurisdiction. However, if any does come to our notice or if the committee can bring such facts to our notice, we would be happy to pursue them.
Recommendation 19 states that we review the Irish solvency regulations to ensure that they are in the best interests of policyholders, existing insurance companies operating in Ireland and potential entrants. We are currently engaged in a best practice review comparing our supervisory standards and practice against those of a number of other countries, including a number within the EU. In considering changes to our regime in light of this exercise, we will be mindful of consumer concerns, the recommendations of this committee, the MIAB and the work of the Competition Authority. A more thorough review of the EU regulatory standards is now under way. This is known as solvency II and will focus on capital requirements, supervisory practices and transparency through improved reporting by companies. This will introduce a more risk based approach to capital requirements. In other words, companies that can demonstrate that they are managing and providing for risks in a prudent manner will benefit from lesser capital requirements.
Recommendation 20 states that the Government permits insurance companies, as part of their solvency requirements, to invest in public-private partnerships. Under the third non-life EU insurance directive, public-private partnership investments cannot be included as part of the technical reserves of an insurance company. The concern is that the assets could be tied up for a long period of time and could not be quickly liquidated if required. However, assets held against the solvency margin could include a public-private partnership investment where the asset in question was readily realisable in order to meet capital requirements.
Recommendation 22 provides that the Irish Financial Services Regulatory Authority, in the interests of transparency, should publish the justifications given by insurance companies for changes in their premia. We are of the view that transparency is best served through our independent cost surveys which clearly show the prices of typical products. To date we have published surveys on motor insurance and personal current account charges, which have been highly effective in encouraging consumers to shop around. We will shortly extend the cost surveys to include other products such as credit cards and will include home insurance later this year.
Recommendation 23 relates to us and recommends giving effect to the IBEC/IIF communications guidelines by statutory order, so that the guidelines have the power of law. We are currently undertaking a full review of the codes of conduct applying across the financial services industry during 2004. This involves a comprehensive consultation process during which input will be requested from all interested parties. Following that consultation process, we will examine how to incorporate appropriate aspects of these guidelines into the revised codes.
Recommendation 28 states that we should remove all regulatory barriers or regulatory impositions that make entry to the Irish market more difficult than to any other EU country. I have already addressed part of this issue during my earlier references to solvency. However, there has been some comment, including by the Competition Authority, that there may be information gaps in the market and that this may be a barrier to entry. We are already working to improve the information and data available on insurance. This work addresses recommendations of the MIAB and, following a request from the Tánaiste, we are examining how data and information issues in the employer liability and public liability markets can be addressed.
Recommendation 33 refers to the fact that a scheme for brokers should be established that would permit any broker to deal, on behalf of clients, with any insurance company. The structure of regulation operated by us for brokers comprises two principal categories - multi-agency intermediaries, which includes tied agents, and authorised advisers. Brokers can decide which category to opt for. Multi-agency intermediaries may only deal with those insurance companies from whom they hold a letter of appointment and they must tell consumers the names of the insurance companies with which they deal. Authorised advisers can deal with any insurance company in the marketplace. Our rules, therefore, allow brokers to deal with any insurance company, subject only to their demonstrating the necessary level of competency by electing to be regulated as an authorised adviser. Approximately one quarter of brokers are authorised advisers, while the remainder are multi-agency intermediaries. The categorisation of insurance intermediaries has been raised in our consultation on codes of conduct.
Recommendation 35 refers to the fact that we should give consideration to the issue of whether brokers should operate only on a fee basis. We are anxious to increase the level of transparency relating to costs for consumers and what they must pay in terms of fees or commission. We are undertaking a study on this matter and we intend to issue a consultation paper in this regard this year. We will seek consumer views. We have already publicly stated that some types of commission, such as volume over-rides, do not appear to act as an incentive to sell the best product to the consumer. The important point is that consumers should know how much they are paying and for what they are paying.
Recommendation 40 refers to the fact that organisations meeting certain financial criteria should be able to self-insure for all motor risks. It is my understanding that the obligation to hold motor insurance and the possibility of derogations from that obligation is a matter of policy for the Department of Transport. From a consumer protection point of view, the important issue is that those involved in an accident should be able to claim against an entity with sufficient funds. That entity must have the relevant expertise to measure and manage risk.
I thank you, Chairman, and the committee for inviting me to attend this morning. I am happy to take any questions members may wish to ask.
