Mr. Kevin Thompson:

I thank the Chairman and the members of the committee for giving me and my colleague, Mr. Michael Horan, an opportunity to present evidence before the joint committee on behalf of Insurance Ireland, which is the voice of the insurance sector in Ireland. Our members make up 95% of the domestic market and over 80% of the international life insurance market in Ireland. Our role is to represent and support the development of our sector in the interests of our members and their customers. To put the insurance sector in context, the overall tax contribution from the insurance sector to the Exchequer is approximately €1.8 billion. Almost 28,000 people are employed directly or indirectly in insurance. We welcome the work of the joint committee in the area of motor insurance. We eagerly await the publication of its report. The committee's efforts are in the interests of consumers and of the sector itself. We believe these interests are very much aligned. We have watched the proceedings to date with interest. We believe we can best serve the committee's work by focusing on two key questions. What is causing the volatility in the market? How do we address it?

The motor insurance industry is acutely aware of the concern and frustration that exists with regard to rising premiums. We want solutions, but if we are to find solutions we have to recognise the fundamental concepts of insurance. In essence, insurers price risk and liability; that is, the likelihood of something happening and how much it could cost to address it if it happens. At present, risk and liability are increasing. I emphasise that an annual rate increase in excess of 30% is not in the interests of the Irish motor insurance industry. This steep rate of increase is causing motor insurance to become unaffordable for some motorists. This is resulting in higher levels of uninsured driving, as evidenced by the recent figures from the Motor Insurers Bureau of Ireland. Would any sector reasonably wish to have to impose such price increases on its customers in the knowledge of the irritation and hardship this causes for consumers and businesses as they seek to go about their daily business? I cannot emphasise enough that as an industry, we are not happy with the current market dynamic. Consequently, we have been working for the last 18 months to call for structural reforms. We believe the proposals in our driving for change document, when taken with the cost restructuring undertaken by each of our member companies, will remove the volatility from the Irish motor insurance market.

Some commentators have made the point that the current situation is primarily attributable to two factors: previous under-pricing by motor insurers and the fall-off in the performance of investment returns. On under-pricing, a long-established underwriting cycle that is common to every insurance market and not unique to Ireland dictates that, following a soft market, there has to be a period of correction when rates are adjusted upwards to reflect the cost of providing the insurance. We have publicly acknowledged that this was the case in Ireland, with rates driven too low by over-competition in the market and insurers fighting to maintain market share. This process was accelerated by new entrants to the market. The subsequent collapse of some of these companies left a financial burden on customers, the State and prudent insurers. While we do not deny this was a factor - rates had become too low and a correction was needed - we stress that under-pricing on its own does not explain the level of premium increases we have seen.

With regard to the decrease in the performance of investments made by insurers, the low interest rate environment has an impact on the performance of insurers' investments. In the main, these are low-risk investments which are adequately matched against liabilities, including current and future claims. The reduction in yields has contributed to premium increases, but it is not the main reason for them. We have made it clear that the main factors we believe are leading to the current steep increases in premiums are the extreme volatility in the claims and compensation environment and the significant increase in the associated legal costs. The compensation situation was further compounded by the changes in court limits in 2014, which required insurers to increase reserves for claims in the pipeline and carry such costs into current premiums. The consequences of recent insurance liquidations such as the liquidation of Setanta Insurance may be added to this. The proposed solution is forcing responsible insurers to pick up the tab for the failings of less responsible companies. Put simply, there are more motor insurance claims and they are costing more. This is not solely my view or the view of my members, it is borne out by independent data sources, which we are happy to discuss with the committee. Details of those independent sources are included in our notes.

We believe the key factor in halting the upward spiral in the cost of premiums is achieving consistency and reasonableness in the awards regime. We have called for certain things to be done to that end. We believe there is a need for consistency in awards to help reduce volatility in the market. Inconsistent awards increase volatility, which is reflected in pricing. We think there is a need to tackle whiplash. Eight out of every ten motor injury claims in Ireland are for whiplash. Awards here are three times higher than those in the UK. The average award here is €15,000, compared to €5,000 in the UK. As premiums are a function of the cost of claims, high awards mean higher premiums. We believe the powers of the Injuries Board should be reinforced to resolve more claims and reduce costly legal fees. Insurance Ireland supports the Injuries Board and its good work, including the swifter settlement of claims, but it needs new powers because the claims environment has changed. For example, claimants should be compelled to provide loss of income information and to attend medicals. Insurance Ireland first made these points in 2014. They should be legislated for as a matter of urgency.

We believe the book of quantum should be internationally benchmarked. There is a need to ensure it is reviewed on a regular basis. As part of this review, the Judiciary should have a role in drafting the contents of the book of quantum, which is what happens in the UK. The size of awards should be internationally benchmarked. We believe there is a need to fix Setanta Insurance. The Government’s proposed policy response to address the claims of an insurer in liquidation poses a systemic risk to the motor insurance market. This policy exposes insurers to unlimited liabilities of competitors. This would have to be factored into pricing. No other industry has to do this. It is the equivalent of Dunnes Stores bailing out Tesco. We believe there is a need to reduce legal costs. The National Competitiveness Council has said that legal costs are at a six-year high. Injuries Board costs are 6%, versus legal costs of 60% in litigated cases. We think there is a need to act to ensure fraudsters are deterred. Suspended sentences are not an adequate deterrent. Insurance Ireland believes that convicted insurance fraudsters should face the full rigours of the law in terms of custodial sentences. We believe the resources given to road traffic enforcement should be further increased because there is no substitute for enforcement.

High premiums are not in the interests of insurers because they raise the threshold of affordability, which leads to more uninsured driving. Our strong preference is for a more consistent and reasonable level of premium, sustained by a reasonable level of claims costs. We acknowledge that insurers also have their part to play. Rates had become too soft and returns from investments had declined. These factors alone do not explain what has happened with premiums. It is our view that the majority of the premium increase that we have seen in the motor market is due to volatility in the claims environment. As an industry, we have responded in the past when policies were put in place to reduce the cost of claims and we will do so again. In addition, the issue of industry data has been mentioned. We acknowledge that work must be done on this issue and we are committed to doing this. We thank the committee for the invitation to appear before it. We look forward to assisting the committee with its work.