Cantillon: insurers have boosted profits by releasing reserves

A few nuggets compiled for data miners in a supplementary spreadsheet accompanying German group Allianz’s quarterly results yesterday made for sobering reading.

Allianz’s Irish property and casualty insurance business had been one of the more resilient in recent times against the backdrop of rising claims costs across the industry. However, it fell into a €9 million operating loss in the first quarter of the year from a €44 million profit for the year-earlier period.

The unit’s combined operating ratio – a keenly followed industry gauge – rose to 112.2 per cent in the first quarter from 94.9 per cent for 2015 as a whole. A ratio above 100 per cent indicates an insurer is paying out more in claims and expenses than it is raising from premiums.

Insurance firms have hiked motor coverage rates by 32 per cent in the year to March, while home insurance costs have been raised by 9.5 per cent over the same period, according to the Central Statistics Office. FBD, the country’s only publicly-quoted insurer, warned last month that further increases are needed to return the beleaguered industry to profit.

Industry players blame a spike over the past few years in court awards for injury claims. The average award for whiplash in Ireland is €15,000, three times the rate in the UK, industry representative group Insurance Ireland said last year.

But, in truth, the sector’s real problem – an inability to price risk properly – has been brewing for years.

Four years ago, the Central Bank highlighted in one of its first Macro-Financial Review reports of risks in the financial system, that insurers had been boosting profits by releasing reserves built up in prior years for expected claims. There’s nothing necessarily wrong with that. But this game has a limited lifespan and can have a nasty sting. (Regulators have been putting pressure on insurers over the past year or so to increase reserves again).

More recently, the Central Bank warned in 2014 that insurers were becoming increasingly reliant on investment income to shore up profits – “a significant risk to the industry in the low interest rate environment.”

With euro zone bond yields hovering around record lows, the cushion of investment income has all but disappeared – leaving insurers even more exposed.