Comment: The latest earnings figures from the insurers Allianz and Aviva suggest that "value for money" for Irish consumers of non-life insurance products (motor, home, business insurance, etc) continues to remain elusive, writes Harry O'Rahilly.

Despite recent reductions in premiums, preliminary data suggest the profit margins in Ireland have widened over the past three years to outstrip those in Europe.

Announcing earlier this month its earnings for the second quarter, Allianz, the global insurance giant, cited operating profits of €68 million in its Irish business that almost equalled the €71 million recorded by it in Britain.

This comparison is particularly striking considering that in terms of net premiums earned, the British business is more than treble the size of the Irish operations.

On a group-wide basis, Allianz achieved a combined ratio (a key industry metric of claims and costs as a proportion of premiums) of 93.3 per cent for the first half of 2006. The company stated that its overall underwriting performance had remained strong for the period.

However, the strength of its group operations fell short of the Irish business, which recorded a combined ratio of 78.8 per cent, some 14 percentage points better than the group figure. As a result, Ireland is close to the second-highest combined ratio in the Allianz group.

The earnings picture is not unique to Allianz. For the first half of 2006, the general insurance business of Aviva in Ireland (branded as Hibernian) achieved an underwriting profit of £63 million (€93 million) and a combined ratio of 74 per cent. This represents an 18 percentage point margin over the worldwide general insurance combined ratio of 92 per cent, which in itself was, by Aviva's own admission, excellent, and has placed it in the first rank of its businesses worldwide by profit margin.

For the past three to four years, the Government has been addressing reform in the insurance market. During this time we have seen the creation of the Personal Injuries Assessment Board, the introduction of the Garda Traffic Corps, the passing of the Civil Liability and Courts Act and random breath testing.

The aim of these measures has been to create an environment that results in lower claims size and frequency and, therefore, one that should lead to more attractive pricing for consumers.

The measures taken to date to reduce the cost of insurance have had some effect, with the Irish Insurance Federation reporting that premiums across all classes had fallen in 2005.

In spite of these measures, given the evidence of the widening margins thanks to lower claims expenses, the insurers have retained most of the reductions in costs created by an environment with lower risk.

Critical to the margin retention enjoyed by these insurers has been the lack of new market entrants competing for Irish business.

There are several possible reasons for the delay in the arrival of new competitors. Primarily, while Ireland has an attractive underwriting environment, the size of the market may have dissuaded potential entrants from committing capital to establish insurance operations that normally require large scale to achieve the necessary efficiency and long-term profitability. In addition, the nature of the presentation of insurance company earnings makes credible profitability analysis difficult.

This feature has no doubt contributed to a lack of understanding of how comfortable the market in Ireland has become and why there has been no widespread demand to see more insurers arrive to compete for business.

Because the Irish market is now one of the most lucrative, thanks to the reductions in claims, it may eventually attract new entrants searching for above-average returns. However, until such a time, it is difficult to foresee a change in pricing policies so that much of the value generated by the improved claims experience makes its way to the consumer by way of lower premium levels.

The timing of such an entrance is a matter of conjecture, but in the interim the consumer will likely continue to suffer the world-beating returns generated in a benign pricing environment.

Given this, it is time the policymakers focused their attention on attracting more competition into the market. The demand side benefits from reduced costs and claims must be actively matched by increased supply of insurance underwriting capacity, otherwise households and businesses will continue to shoulder the burden of a sellers' market.

Harry O'Rahilly is principal of policy consultants Elea Group and a former UK equity analyst covering the insurance sector for Deutsche Bank