INSURERS may be setting premiums too high for motor and liability business because they are not taking investment income into account when judging the profitability of this business, the consultants found.
Motor and liability business was profitable when investment income was included, they said. Explaining their findings, they said that the insurers' income was made up of earned premium and investment income. To judge profitability, both incomes must be taken into account and not just premium income.
Using premium income alone, the companies would show losses because underwriting break-even is seldom if ever achieved". Apportioning investment income to motor and liability business on the basis of claims reserves in each class and adding this income to premium income, the consultants found that these classes of business were profitable.
"The achievement of underwriting break-even is dictated by understandable prudence in the wake of the past failures of the original PMPA and the ICI, but it does contribute to the setting of premium levels without regard to the overall profitability of motor and liability insurance when investment income is taken into account," the consultants said.
"It may well provide the insurers with a motivation to set premiums at higher levels than is necessary in terms of adequate profitability, expenses and provisions for claims."
Irish insurers put a higher proportion of motor and liability premium income into claims reserves and pay out a lower proportion of premium income in claims each year than British insurers, according to the report. They found that the Irish level of reserving was three to six times the British level as a proportion of premiums for liability insurance. For motor insurance, the level of reserving was three to five times the British level.
On the payment of claims, the consultants found that 56 per cent of Irish liability premium income went to pay claims in 1994 compared with 83 per cent in Britain, while 70 per cent of motor premium income went to pay claims in Ireland compared with 73 per cent in Britain.
The higher level of reserving was attributed to inflation in personal injury awards well ahead of the rise in the Consumer Price Index, longer settlement periods, the higher rate and cost of liability claims here and the higher personal injury content in motor claims. There was no evidence that reserving levels were too high in Ireland, the consultants said.
