By exposing a previously unimaginable risk potential, the events of September 11th have changed forever the business of general insurance, according to industry players. But change was already well under way in the Irish market, evidenced by double-digit increases in premium rates in 2001, higher excess on policies and restrictions on the cover offered.

Since September 11th, most reinsurers - insurers to insurance companies, with which the companies offset a portion of the risks they underwrite - have refused to cover terrorism risks and become more selective about other risks they will accept. As a result, the availability of reinsurance for many risks has contracted and the cost of what is available has risen dramatically.

The events of September 11th have resulted in a marked change in the risk environment, with numerous lines of business now exposed to catastrophic risks once mainly confined to natural occurrences, according to insurers.

In the Irish market, insurers have been increasing prices and becoming more selective in the risks they accept since late 1999, after a soft market through the mid- to late-1990s. At the same time, customers' options have contracted because of mergers and takeovers and the demise of Independent Insurance.

There are now five main companies competing, compared with 12 five years ago. These five - Hibernian, Allianz, Royal Sun Alliance, AXA and Eagle Star - have about 80 per cent of the market.

Insurers say they need to improve and stabilise underwriting performance, to provide adequate returns for shareholders and to bring new capital into the market. The income of general insurance companies is derived from the premiums charged and from returns earned on invested reserves.

Because it takes time to establish the cost of any claim, insurers set aside reserves, which are invested, to meet future costs. Outgoings or costs consist of claims paid, commissions paid to brokers, contributions to reserves and operating costs.

Insurers complain their income/ costs equation has deteriorated sharply in recent years, mainly because of huge inflation in costs of claims.

Factors driving claims inflation are increases in legal and medical costs and high wages, which drive up the cost of settling future loss-of-earnings claims.

Insurers say they also need to increase reserves because recent court decisions are expected to push up the costs of settling personal injury claims. In McEneaney v Monaghan County Council, the discount rate applied in personal injury cases was cut. Used by actuaries to calculate the present cost of future wage loss and medical care, a lower rate will lead to higher court awards and vice versa.

In Crilly v Farrington, the £150 (€191) cap on daily hospital payments for road traffic accident victims was removed, which is expected to result in sharp increases in costs for insurers. And the planned increase in the Circuit Court limit for awards from £30,000 to €100,000 is expected to push up award levels.

While costs are increasing well ahead of inflation, the low interest rate environment has seen a drop in the return on reserves.

Hibernian, the largest company in the general market and part of the CGNU group, is no longer interested in big business risks - annual premiums of €150,000 or more - because it is difficult to do it at a profit, according to director of underwriting Mr Dick O'Driscoll.

He said claims inflation had driven up costs sharply. But he said part of the premium increases for some businesses come from the correction of previously understated levels of turnover, employee numbers or payroll costs. Premium charges for public and employer liability cover are based largely on company size and risk profile - assessed on turnover, staff numbers and payroll, and the type of business/sector involved.

Between 1995 and 2000, the rapid expansion in some businesses was not reflected in the details returned to insurance companies, he maintained. When these business figures were updated, the effect, in some cases, was very sharp increases in premiums.

Hibernian premiums will rise by an average of 20 to 25 per cent across its book this year, he said. But how do these averages of 20 to 25 per cent fit with customer complaints of premium increases of 50 to 100 per cent plus?

As well as updating records where businesses have expanded, risks have had to be reassessed in particular companies or sectors, he explained. Companies likely to have had significant increases in premiums include large pubs, restaurants and entertainment complexes in larger urban areas because their exposure to public liability claims is high, along with firms in the building, contract cleaning, high-risk manufacturing and service areas, as their high labour content makes them susceptible to employer liability claims. Haulage and car rental companies have suffered from big increases in motor insurance rates.

The collapse of Independent has resulted in a number of "distress cases", Mr O'Driscoll agreed. Independent came into the Irish market offering lower rates and taking on sectors perceived as high risk by other insurers. Its collapse meant its customers are looking for cover.

Some have not been able to get any cover, while others have been quoted rates more than 100 per cent above what they were paying Independent.

Hibernian was not interested in much of this business because it could not be done profitably, according to Mr O'Driscoll. Complaints that employers with no previous claims were being hit with very high premium increases were understandable, according to Mr O'Driscoll, but arise because insurance is based on spreading risk across the market.

Mr O'Driscoll rejected any suggestion that insurers were over-reserving to depress profits and support their case for price increases.

Despite the decrease in the number of insurers, he insisted there was still active competition - and that customers could shop around for cover.