STORY OF THE WEEK: High compensation levels and claims have been blamed for the high  premiums paid by the Irish motorist. But what about the €436 million profits made by insurance firms? asks John McManusExtensive litigation means that Irish insurance companies get to earn investment incomefrom premiums for longer than in other markets

The first paragraph of the section of the Motor Insurance Advisory Board (MIAB) report dealing with the insurance market contains the following quote which is attributed to an 1825 Select Committee of the British House of Commons: "Whenever there is a contingency, the cheapest way of providing against it is by uniting with others, so that each man may subject himself to a small deprivation in order that no man may be subjected to a great loss."

The quotation does not sound like the ethos underlying the Irish motor insurance market of 177 years later as subsequently described in the report.

Just in case you missed it, one of the more interesting facts highlighted in the MIAB report was that after-tax profits in the Irish market over the past 17 years were more than 10 times greater than the UK market. The Irish insurers made some €436 million in profits over the period while their UK counterparts made under €50 million.

The explanation put forward by the MIAB is a simple one, although it is contested by the Irish Insurance Federation (IIF) which is a member of the board. The hypothesis is as follows: Irish and UK motor insurers operate on much the same margin but because claims and premiums in Ireland are so much higher, the margin translates into much greater profits. Data published in the MIAB report would appear to support this theory.

The MIAB looked at claims per vehicle insured and also premiums per vehicle insured, comparing them across Europe. Claims varied from around 73 per cent of premiums in Portugal to 105 per cent of premiums in Sweden. In Ireland, they were in the middle at around 89 per cent compared with 98 per cent in the UK. This would appear to support the contention that Irish insurance companies operate on similar margins to their European peers.

Irish claims per vehicle and also premiums per vehicle, however, were the highest in Europe at €664.4 and €745.24. In the UK, claims were €421.31 and premiums €431.49.

The MIAB also examined the operating expenses of Irish insurers - on a per vehicle basis - which were €103.26 per vehicle insured, making them among the highest in nominal terms but the lowest as a percentage of premiums.

If you accept the MIAB argument, then you have the basis of an allegation that the insurance industry has been a willing participant in the relentless rise in the insurance costs in Ireland. This is because high premiums are of course only possible if you have high claims costs.

The theory is appealing, not only because bashing insurance companies is the flavour of the week. It also explains a number of other questions that arise out of the MIAB report. The report has identified legal costs as one of the main drivers of high claims costs and the most significant aspect of this is the extensive use of counsel.

The report contrasts the Irish situation - where counsel are routinely used in even the smallest of cases - with the UK situation where they are hardly ever involved. In Britain, most claims are settled directly between solicitors and insurance companies.

This begs the question as to why insurance companies have not adopted a similar approach in Ireland where it could have dramatically reduced claims costs.

The insurers can argue of course that they are just participants in the legal process and if somebody suing them employs a barrister, they would be foolish not to do likewise.

This is absolutely true, but it is curious that the industry has not lobbied on the issue with the sort of enthusiasm they have shown for improved road safety.

The compulsory nature of motor insurance in Ireland removes another incentive for insurance companies to be concerned about claims costs. Normal market forces do not apply and a reduction in premiums is unlikely to produce a substantial increase in the number of customers for the insurance companies. Similarly, price hikes also have only a small impact on demand.

The number of people who are currently priced out of the market is very small and it is unlikely that reducing premiums to get them into the market would produce any overall gain for insurers.

Another reason that has been advanced for why the current situation suits insurance companies is that extensive litigation inevitably delays payments.

This means that Irish insurance companies get to earn investment income from premiums for longer than in other markets. Settlements in the Republic take up to four times longer than in the UK.

Finally, there is also a philosophical - if that is the word - aspect to the issue that goes back to the quote at the top of the story. The insurance industry can argue that its role is to pay out the sort of compensation that society believes is appropriate. Compensation levels are set elsewhere, normally the courts. The business of insurance companies is to offer a service by which people can protect themselves from the risk of having to pay out compensation. As private businesses, they have to do so in a fashion that provides a return for the individuals who provide the necessary risk capital.

The point made by the IIF in the MIAB report is that higher claims mean that the turnover of the business is bigger and the amount of capital that has to be put up by the owners of insurance companies to underpin the business is larger.

"Given our belief that the reported profits do not adequately compensate shareholders for the risks assumed, a reduction in those risks with appropriate adjustment in pricing might well benefit insurers," according to comment from the IIF included in the report. The argument would appear to be that if they needed less capital, they would not have to pay so much for it.

At his press conference after the publication of the MIAB report, Mr Michael Kemp, chief executive of the IIF, reiterated the federation's interest in seeing costs come down. He will have a job getting motorists to take him seriously until he addresses the issue raised by the MIAB.