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, I intend to concentrate on both the general background and the specific circumstances which gave rise to the 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 financial 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 case the supervisory process applied involves particularly close monitoring of operations over the formative years of the enterprise concerned. Furthermore, 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 share-holding 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 at this stage, firstly, the responsibility and competence of insurance supervisory authorities under EC law and, secondly, the system of supervision applied by my Department.
On the first point, the position is that all insurers operating in the EC are subject to specific financial and other requirements laid down by EC directives which harmonise basic insurance supervision throughout all member states. The relevant directive deals with the situation where a company headquartered in one member state may, in accordance with the freedom of establishment under the Treaty, extend by way of simple branch operation into another member state. That directive makes the supervision of the branch activities the responsibility of the supervisory authority of the member state in which the branch is located, while the supervisory authority of the head office must oversee the solvency of the global activities of the company. In order to perform the latter function, however, the head office supervisor is dependent on the branch supervisor to vet and examine the accounts of the branch which feed into the head office accounts. That is the system laid down by the EC and, while there is provision for co-operation between member states, the formal Protocol of Collaboration clearly recognises the division of competences between supervisory authorities as provided for by the directive. In the case of the London branch of ICI, the appropriate supervisory authority was the Department of Trade and Industry in the UK.
As regards the system of supervision employed in Ireland, my 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 their 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 assurance 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 were requested to provide further detailed information on the outstanding claims provisions struck for Irish business. My 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 tok place in 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 1984 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 its free reserves. The specific question of the London branch business of ICI was raised at the meeting also, and the Department was 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 of 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 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 former London branch business of ICI in particular, about which the former owners were, seemingly, 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 data base 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 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 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. On a petition from me under the Insurance (No. 2) Act, 1983, 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 25 March. The purpose of the takeover and administration of ICI was to ensure the continuation of the insurance business and the protection of all policy holders.
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 additional 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, of 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 the 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 audited 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 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 available to it in-house 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 should like to make it clear that one should be extremely wary of various amounts which have been bandied about. 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. That 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, the Government had to act on the basis of the best information available from those who examined the company's affairs from within. This information indicates that the losses incurred in London fall within the range of £50 million to £120 million. I have to stress that I mention £120 million as an upper limit of losses and not in any circumstances as the most likely figure. These figures are, of course, based on reinsurance contracts being sustained as it must be assumed they will be.
Any financial assistance required by the administrator of ICI will be channelled through the insurance compensation fund. Until such time as the exact financial position of the company is clarified, it is pointless to speak other than in general terms about the likely funding requirements. However, for the purposes of the administration of ICI, the compensation fund will be financed by funds provided by the Central Bank in conjunction with the banking system generally. The Central Bank have indicated their willingness to provide this funding within the dimensions of the problem which I have indicated and subject to reassessment by the Government of the position at the end of 1985. Sufficient funding will be provided to deal with the problem as it arises so as to obviate the need for recourse to the Exchequer. As the Minister for Finance made clear during the Dáil debate last week, the Central Bank will be discussing with Allied Irish Banks and the other licensed banks the appropriate form and apportionment of this funding.
As a result of the helpful decision of the Central Bank last week to involve themselves in the funding arrangements, the prospect of direct Exchequer funding is, to all intents and purposes, removed. This welcome development is entirely in line with the Government's objective to ensure that, if at all possible, the ordinary taxpayer would not have to pay towards the rescue of ICI.
An important focus on this whole debate is the extent of 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, AIB will make a loan of £50 million, for a period of three years at a rate four percentage points below the three-year gilt rate, to the Central Bank. This is equivalent to an interest subsidy of £2 million per year. AIB have further agreed that, should the emerging position and the reassessment at the end of this year warrant it, they are prepared to extend the term of this loan facility for a further period not exceeding two years.
Second, AIB have agreed to place a non-interest bearing deposit of £20 million with the Central Bank to cover the contingent liability being assumed by the State in respect of the AIB's guarantee to the Institute of London Underwriters. This is worth £3 million a year at current interest rates.
Third, AIB have agreed to share with the Government, in proportions to be determined when the ultimate losses are known, the proceeds of the bank's action against the former auditors of ICI.
Fourth, AIB have paid a purchase price of £2½ million for Credit Finance Bank, which they had "sold" to the Government with ICI for £5.
Fifth, AIB sold their 20 per cent share-holding in the Insurance Corporation of Ireland Life, a healthy and profitable company, for £5 also.
Finally, AIB will be required to contribute in proportion to the additional funding package to be co-ordinated under the auspices of the Central Bank.
The total of £70 million provided by AIB to the Central Bank will be passed on to the insurance compensation fund to finance the operations of the administrator of ICI. These funds will, of course, be entirely separate from the moneys already in the fund and the continuing 2 per cent contributions which are helping to finance the administration of the PMPA.
With regard to the arrangements which I have outlined for financing the administration of ICI, there are a number of general points 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. The losses will not all have to be made good in any one year in that finance will be required according as claims fall due to be paid over a period. The administrator will use his commercial judgment as to how to obtain the best return for the company from the assets available to him. There has, of course, been debate as to the amount which should be paid by AIB.
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 which has been charged by both Houses of the Oireachtas with the responsibility of ensuring the soundness of the banking system.
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. In such circumstances, the terms on which the bank itself could then borrow money would immediately be affected. If this happened all of those who borrowed from the bank would also suffer. We have rescued not the shareholders of the AIB, but its customers, the public at large and the policyholders of the ICI.
If ICI had been left in AIB's ownership, 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.
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 somewhat 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.
I believe that I need refer only briefly at this stage to the provisions in the Bill. Sections 2 to 13 are standard provisions in relation to State companies. In this case, Sealúchais Árachais Teoranta is merely a holding company which will hold the shares in ICI on behalf of the Minister. The directors of the company are two officials of my Department and the company will have no employees. Neither will it have effective authority over ICI, which will remain fully under the control of the administrator, who is answerable to the court.
Section 14 of the Bill empowers the Minister, with the consent of the Minister for Finance, to guarantee up to a limit of £20 million ICI's liabilities in respect of marine business underwritten on or before 15 March 1985 by virtue of the insurance company's membership of the Institute of London Underwriters. The marine business involved is sound and of good quality. The State has undertaken a contingent liability in respect of a guarantee covering the institute business written by ICI up to the date of sale of the insurance company by AIB, at which time their membership of the institute terminated automatically on change of ownership. It is extremely unlikely that the guarantee will be called upon. The additional exposure arising in respect of the marine business involved is put at an extreme of £20 million. AIB have already deposited £20 million interest free with the Central Bank to cover the State's exposure in respect of the guarantee. 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.
Section 15 is consequent on section 14, and provides that any advances under the latter section shall be from the Central Fund.
Section 16 of the Bill contains minor amendments to the Insurance Act, 1964 so as to allow for the creation of priorities on the insurance compensation fund; and also to permit the High Court, before approving payments out of the fund, to have regard to the state of solvency of the fund. These amendments are of a technical nature only. The remaining sections of the Bill are standard ones.
The steps which have been taken by the Government to deal with the ICI problem will permit the recovery of Allied Irish Banks from the setback which it has suffered. This is essential for the wellbeing of the economy as a whole. It is important to bear in mind that financial institutions depend on trust and can operate properly and effectively only in an atmosphere of confidence and calm. Those who indulge in uninformed speculation about the affairs of financial institutions, wherever they do so, should be acutely conscious of the possible damage that they may cause by their very indulgence in this speculation. This applies to the banking and insurance industries alike, and I am sure that in debating this Bill today all Members of this House will maintain a responsible attitude in the national interest. I recommend the Bill to the House.
