The disclosure last week that the non-life insurance industry here made combined profits of €689 million last year raises any number of questions. Perhaps the most pertinent is what is an appropriate level of profit for the industry?
Is it the case, as the industry itself holds, that its performance is highly cyclical and thus the very large profits recorded in what might be considered good years are needed to offset losses incurred in years when claims are very heavy? The Irish Insurance Federation argues that the record profits made in 2003 and 2004 must be seen in the context of the heavy losses incurred in the period between 2000 and 2003.
The alternative view, as advanced by the Consumers' Association of Ireland, is that the industry is profiteering by failing to pass on the fruits of the substantial fall in insurance costs brought about by a sustained programme of reforms. These reforms were instigated in response to a huge jump in insurance costs between 2000 and 2003. The reform process passed another significant milestone last week with the publication by the Personal Injuries Assessment Board of its first report, which revealed strong progress towards reducing the cost of settling personal injuries claims.
The cynicism of the consumers' association is easy to understand. Just look at the motor insurance industry which has been the focus of the Government's efforts to bring down both the cost and the incidence of claims. Profits rose by 55 per cent last year despite a 10 per cent fall in premiums.
As with most situations of this sort, the truth probably lies somewhere between the extremes and, in this case, it is further obscured by the complex accounting used by insurance companies. An accurate picture is unlikely to emerge until the industry has been through a full cycle, after the implementation of the insurance reforms.
But if, in the meantime, the industry is to be given the benefit of the doubt with respect to the cyclical nature of profits, it cannot be allowed to have things both ways. It follows that the huge surpluses built up last year and the previous year are to tide the industry through the tough times ahead. Insurance companies will have to pick up a bill in the region of €33 billion for the damage wrought by Hurricane Katrina. The multinational nature of insurance companies and the global aspect of the re-insurance market means that Irish insurance companies will share some of this burden. Any attempt to pass on these costs to consumers by way of higher premiums will be very hard to justify against a background of two, if not three years, of extraordinary profitability.