The collapse of another European insurer – Gibraltar-based Enterprise Insurance – has again focused attention on the sustainability of the Irish motor insurance model. A further 14,000 Irish customers are affected, on top of the 90,000 or so stranded when Setanta Insurance failed in 2014.
The industry has been quick to play the “consumer” card, worrying that the cost to Irish insurers of covering claims by unprotected foreign companies means higher premiums. But the problems of the insurance sector run far deeper than the question of who should foot the bill for unprotected claims. And with motor premiums rising at almost 39 per cent in the year to June and accelerating, according to the Central Statistics Office, consumers are seeking answers.
Insurers complain about the cost of fraud, the rising number of claims and the size of awards, and increasing legal costs. Insurance Ireland says legal costs now amount to more than 60 per cent of compensation in litigated cases. But more than two-thirds of claims are settled by insurers among themselves and there is no transparency on the terms of such payments.
More fundamentally, as former Central Bank governor Patrick Honohan noted, Irish insurers adopted an overly optimistic view on the future economic outlook and followed what he called an "imprudent pricing and underwriting approach". Companies have also overestimated likely investment returns – both the return they can expect on their own funds and the investment performance of sums awarded for long-term care in cases of catastrophic injury. The courts last year said carers should not have to take "unnecessary" investment risk and cut the assumed interest rate to one per cent from three per cent previously, sharply increasing claim costs.
And while increased regulatory costs under the EU Solvency II Directive are also cited, this has been coming down the tracks since 2007. Insurers made little advance provision for the increase in financial reserves required.
The kernel of the Setanta case still proceeding through the courts is who should pick up the tab – the Insurance Compensation Fund or the Motor Insurance Bureau of Ireland. The bottom line, of course, is that in either case, it is ultimately the consumer who pays. The distinction is even less relevant following recommendations of the ongoing review of the insurance sector which proposes the abolition of a ceiling on third party claims.
There is a case to be made that any EU state licensing non-life insurers that can sell across national boundaries should be obliged to have a local compensation scheme in place in the event of company failure.
However Ireland’s motor insurers have shown little ability or inclination to address risk. And that is precisely what they are supposed to do.