On the map

Ireland is no longer the poor cousin in the insurance and reinsurance sectors. Liam Flynn reports on the past year's performance

The Irish insurance and reinsurance industries have developed dramatically in recent years. The domestic insurance sector has seen increased revenues, while the emergence of an international insurance and reinsurance sector, based in Dublin's International Financial Services Centre (IFSC), has put Ireland on the world map.
On a market overview, figures for the 2000 year of account published by the Department of Enterprise Trade and Employment (DETE), which regulates the industry in Ireland, show 180 insurance undertakings with Irish establishments, 50 being overseas insurers' branch offices. According to DETE figures, total premium income for both Irish and foreign risks underwritten by these insurers in 2000 was e17.7bn (£11.27bn). The Irish Insurance Federation (IIF) gives total premium income for Irish risks, and thus the value of the domestic sector, as e10.3bn (£6.56bn). This leaves total premium income for foreign risks, and thus the value of the international sector, as e7.4bn (£4.71bn).
The statistics show a remarkable rate of growth in all areas. In 1995, Irish insurance undertakings' total life premium income was e2.48bn (£1.58bn); by the end of 2000 it was more than five times that. In 1995, Irish insurance undertakings' total non-life premium income was e1.7bn (£1.08bn); and by the end of 2000 it was 2.6 times that.
Dublin's IFSC includes many of the world's largest and most prestigious reinsurers, including Axa Colonia, Bavarian Re, Cologne Re, Hannover Re, QBE, Swiss Re and XL Capital. Insurers and reinsurers operating within the IFSC had premium income of e6.4bn (£4.08bn) in 1999, so undoubtedly reinsurance premium levels are growing.
Global themes are evident in Ireland, with consolidation and rises in claims costs and expenses evident in the domestic sector. The international sector is keeping a close eye on tax and regulatory developments. Meanwhile, the importance of the industry in modern Ireland means that it has a high political profile.
In the international sector, Ireland's tax and regulatory system is a major attraction for overseas financial services companies. Ireland is sometimes mistakenly viewed as a tax haven. In fact, it has a complex and developed tax system, which in many respects mirrors that of the UK, but in one area – that of trading profits – applies a rate that by international standards is low. A 10 per cent rate was formerly applied to all profits derived from activities in the IFSC, but this rate will expire for IFSC companies at various times between 2002 and 2005. The Irish government, therefore, secured the EU's agreement to a reduction of the general rate of corporation tax applicable to trading profits to 12.5 per cent with effect from 1 January 2003, so that there will be minimal disruption to existing IFSC operations. The government has committed itself to maintaining this rate into the distant future.
There are other tax advantages to doing business in Ireland – in particular, life policyholder funds are not subject to Irish tax in the hands of the company and can be rolled up gross. Many overseas life companies have found Ireland an attractive base for pan-European operations in recent years, for this and other reasons.
Regulatory capital levels for insurance businesses in Ireland are determined under rules imposed pursuant to the EU insurance framework directives. In practice, the DETE insists that an insurer should maintain at least twice the minimum margin of solvency required by the directives, and many will maintain higher multiples. The EU adopted two new directives in March 2002 requiring undertakings to maintain increased minimum margins of solvency. These must be implemented in Ireland by 20 March 2003 to apply to the 2004 year of account, although a five-year transitional period can be permitted. Despite recent dramatic equity market falls worldwide, and press speculation that FTSE index figures remaining below 4,200 for any appreciable length of time will result in widespread selling of equities by insurers, there has been no public indication from the DETE that any Irish-regulated insurers are at risk of breaching solvency margin rules.
The reinsurance industry is also attracting attention in Brussels. In January 2002, the EU launched a study of the industry, to establish whether a framework directive, similar to those adopted for life and non-life insurers, should be introduced. A voluminous report, prepared by KPMG for the European Commission (EC), was published in March 2002, and is under consideration in Brussels.
At present, Irish reinsurers are not required to maintain solvency margins by statute and are not directly regulated by the DETE, although new powers introduced in the Insurance Act 2000 require them to give notice of their intention to commence business in Ireland and permit the DETE to order them to cease trading on a number of grounds. A framework directive modelled on those introduced for life and non-life insurance would be likely to require reinsurers to maintain solvency margins, and to cover technical provisions with approved assets. One possible advantage of such a directive for the Irish industry would be that reinsurers could, like direct insurers, use Ireland as a base from which to establish branches throughout the EU using a single 'passport'.
In the domestic sector, Ireland has been no exception to the worldwide trend towards consolidation of the financial services industry through M&A activity. For historical and geographical reasons, UK insurers were represented heavily in the Irish marketplace, and the spate of large-scale insurance mergers in the UK had obvious implications in Ireland. Some M&A activity has been home market-driven, as overseas insurers, responding to the remarkable levels of growth in the Irish economy, have identified the country for investment and expansion. Many of the leading general insurers in Ireland are now subsidiaries of international groups – Allianz, Axa, CGNU, Royal & SunAlliance and Zurich are all represented among them.
Consolidation on this scale has resulted in public and political concern that the choice available to the Irish consumer is restricted. Significantly, the EC, when reviewing the CGU-Hibernian merger in January 2000, did not regard the merger as creating or strengthening a dominant position, and pointed to the existence in the Irish market of other major European insurers and strong brokers and distribution channels.
Particular concern has been expressed in Ireland regarding the availability and cost of motor insurance. DETE figures show 27 motor insurers, both Irish and overseas, nominally active in the domestic market in 2000. Total motor premium income in 2000 was e1.207bn (£768.9m), of which e933m (£594.3m) – 77 per cent of the total – was underwritten by just five companies.
This level of concentration does not, of course, translate automatically into increased profits for those insurers that remain in the market. DETE figures show an overall loss on motor insurers' technical account in 2000. The public, though, sees matters differently, and in October 1998 the government established the Motor Insurance Advisory Board (MIAB). It was set up to inquire into the reasons behind the high cost of motor insurance in Ireland and to make recommendations to reduce those costs.
The MIAB published its report in April 2002, which is likely to lead in due course to significant changes to Irish insurance law. One change has already been announced: regulations were made under the Insurance Act 2000 in July 2002 requiring insurers to provide motorists with a minimum of 15 days written notification of renewal terms and to provide a no-claims bonus certificate automatically, all to enable motorists to shop around more effectively for competitive quotes.
A major driver of the cost of motor insurance is, of course, the level of personal injury (PI) awards and the cost of claims. In this area, Ireland suffers from the lack of a scale for PI awards, as exists in the UK, and awards are often significantly higher. The MIAB report established that claims costs, comprising principally legal and expert witness fees, added 40 per cent to every PI award. It endorsed the conclusion of an earlier working party – the Special Working Group on Personal Injury Compensation – that the Personal Injuries Assessment Board (PIAB) should be established to assess levels of compensation to be awarded to accident victims.
The working group stopped short, however, of recommending outright abolition of the fault-based system of compensation in tort, and its replacement with a no-fault system, such as exists in Quebec and New Zealand. The government is committed to implementing both the MIAB report and the PIAB recommendations, and an interdepartmental group is currently working on an implementation strategy.
These interesting initiatives may, in time, benefit consumers through lower premiums. They may also benefit insurers themselves, permitting them to focus more of their time and resources on developing their existing customer base and generating new business.
Liam Flynn is an associate in Matheson Ormsby Prentice's banking and financial services department, specialising in corporate, commercial and regulatory insurance and reinsurance