Oireachtas Joint and Select Committees
Wednesday, 10 October 2012
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Quinn Insurance and Insurance Compensation Fund: Discussion
We will now deal with No. 6 on the agenda, Quinn Insurance and the State's insurance compensation fund, the ICF. I welcome Mr. Michael McAteer, joint administrator, Mr. Aidan Cassells, chief executive officer, Quinn Insurance Limited, QIL, Mr. Patrick Dillon, advisory services partner to Grant Thornton, and Mr. Aidan Sherry, QIL. From the Department of Finance we have Mr. Aidan Carrigan, assistant secretary, Mr. Pat Casey and Mr. Cathal Sheridan. Representing the Central Bank of Ireland are Mr. Domhnaill Cullinan, head of general insurance division, Mr. Faheem Mirza, deputy head of general insurance division, and Mr. Tom Cleary, general insurance division.
The format of the meeting will be that Mr. McAteer, Mr. Carrigan and Mr. Cullinan will make opening remarks which will be followed by a question and answer session. I understand members of the committee have been issued with the witnesses' full statements. I propose that the three opening statements be confined to a maximum of ten minutes each. If the witnesses exceed that time I will cut them short. I ask them to prioritise the main points they wish to make in their presentations.
I remind members, witnesses and those in the Visitors' Gallery that all mobile telephones must be switched off and not put on silent mode. This meeting is being broadcast live by UPC on channel 207 and if a mobile phone is switched on it will interfere with the broadcast, sometimes to the extent that the broadcast is seriously disrupted and those watching it cannot follow the questions being asked or answered.
I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If witnesses are directed by this committee to cease giving evidence in relation to a particular matter and they continue to do so they are entitled, thereafter, only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him or her identifiable. Finally, members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
Before we hear the opening statements I remind members of Standing Order 57 and the matter of sub judice. The topic before the committee today is Quinn Insurance and the State's Insurance Compensation Fund. Members are advised not to stray into other matters which are before the courts. I call on Mr. McAteer to make his opening statement who will be followed by Mr. Carrigan and Mr. Cullinan.
Mr. Michael McAteer:
On an application of the Financial Regulator on 30 March 2010 to the High Court an order appointing myself and Mr. Paul McCann as joint provisional administrators to Quinn Insurance was made. A further order on 15 April 2010 for the formal administration of the company was made, and this was not contested by the company.
Separate to the appointment of provisional administrators, on 30 March the regulator also directed the company to cease writing all lines of business in the United Kingdom. As officers of the court we have reported, and continue to report, to the President of the High Court on matters arising in this assignment. To date, we have lodged over ten reports with the court which have kept the president informed as developments occurred. We also appeared in person earlier this year and answered questions the president wished to put to us. The court also oversees and approves the fees and costs associated with the administration.
The administrators share the dismay of all Irish citizens that the current estimate of deficit in the insurance compensation fund has risen to €1.65 billion. It is important to point out that while it took approximately 18 months from the date of our appointment to uncover the €1.65 billion deficit level, this deficit always existed and neither the actions or lack of actions by administrators have contributed to this number. Furthermore, the nature of insurance claims means that while we are comfortable with the adequacy of the provisioning now in QIL, the final deficit number will only be known with certainty when the last claim is settled, a process which will take a number of years to complete.
I will now set out some of the background information which I hope will assist this committee but in particular I will deal with the financial position of QIL upon our appointment, subsidiary companies, the under-provisioning of reserves, and the sale to Liberty Insurance.
On the financial and operating position upon appointment, when we were appointed the task as set out in the relevant legislation was to put in place a plan to return the business of the company to a sound commercial and financial footing. Prior to our appointment, discussions had been ongoing between the board of QIL and the company's auditors, PwC, with regard to finalising the audit of the financial statements for the year ended 31 December 2009. The draft unaudited financial statements for that year indicated a loss of approximately €47 million. However, the auditors actuarial review of the provision for claims suggested an under-provision of €68 million by the company, thereby indicating a maximum loss for the year of €115 million.
These draft 2009 accounts presented a picture suggesting the company, while loss-making in 2008 and 2009, had been historically profitable. Figures indicated there was a surplus of assets over liabilities of €338 million before the 2009 loss was posted. This is if one ignores the impact of the guarantee issue, which I will detail. This surplus was after the Quinn family and connected parties had extracted approximately over €200 million by way of gifts in the previous two years. However, it subsequently materialised that these draft accounts and the historical audit accounts did not reflect accurately the true financial position of the company, for the reasons we will highlight today.
We concluded quickly the sale of the business was the most effective solution and we moved to achieve this through fundamentally restructuring QIL. This required the following actions: the recommencement of certain lines of business in the United Kingdom with substantial price increases; a significant redundancy programme; and the adjustment of the cost base of the company. As part of our oversight during this period, we unearthed significant operational issues, in particular, inadequate file reserving practices, and poor underwriting and pricing controls. As a result, we carried out a comprehensive review of these claims and underwriting departments, which resulted in a fundamental change to the claims controls and estimation practices and significant improvements in underwriting controls and pricing policy, particularly in respect of UK business and, to a lesser extent, Irish business.
With regard to subsidiary companies and guarantees given, at the time of our appointment, QIL had over 20 subsidiary companies, which held assets such as hotels in Sofia, Krakow and Cambridge, a wind farm in Derrylin, a landfill site outside Newry and a number of commercial properties located in Ireland and the United Kingdom. At the time in question, these assets had a net value of approximately €450 million, which was consolidated into QIL's balance sheet and which formed part of the solvency assets of QIL. While there was no legal impediment prohibiting these asset types from forming the asset base within an insurance company, it would be fair to state this asset type would not typically be held by insurance companies.
Unlike QIL, which was a regulated entity, these companies were not regulated. An issue had arisen approximately seven days prior to our appointment when the board of QIL became aware of the existence of guarantees which had been given by a number of directors of subsidiary companies in 2005 and 2006 as security to loans provided by banks and bonds that funded the wider Quinn Group. As soon as the board of QIL became aware of the existence of these guarantees, it notified the Central Bank. These guarantees were for a total of €1.3 billion. Had these guarantees been called upon, the effect would have been to reduce the net assets of the insurance company by approximately €450 million. The discovery of these guarantees by the regulator was a factor in deciding to appoint administrators to QIL.
While there is some doubt over the validity of these guarantees, due to how they were executed, legal opinion was obtained by the joint administrators which confirmed that, notwithstanding that proper board meetings had not been convened to approve the signing of the guarantees, it would be difficult to prove their invalidity and that, therefore, they were enforceable by the banks and bonds. Following a significant amount of work and negotiation, the banks and bonds agreed to a payment of €200 million in full and final settlement, thereby generating a saving for the Irish taxpayer of €225 million.
With regard to the under-provision of reserves, it should be noted the company engaged a third-party actuarial provider, Milliman, to calculate the claims reserves for 2009 and preceding years. The company did not have any in-house actuaries. One of the key points upon our appointment was to use the services of Grant Thornton in London to provide assistance in that regard. During the pitch process for the sale mandate of Quinn Insurance, it was identified to us that we should complete insurance-reserve due diligence. In this regard, we appointed an actuarial firm called EMB to complete the exercise. This commenced in July and, by late August, EMB gave us its initial findings, which indicated under-reserving to the tune of €400 million. The company continued its work and finally, on 5 November, this position was confirmed to us. We then re-engaged the services of both Milliman and PwC to complete the 2009 accounts. Eventually, the two companies moved to the EMB estimates.
During mid-2010, we continued to notice an ongoing trend indicating an increase in case reserves. We requested a full and detailed review of claims departments to ensure adequate case provision. The various file reviews added approximately €230 million to claims reserves. Prior to our appointment, there was reluctance to reserve large cases adequately. These findings resulted in our reporting to the court in October that the deficit had increased from an original €600 million to €738 million. That increased again to €775 million in December 2011. We decided to appoint a new auditor, Deloitte, for the year ending 31 December 2010. As part of the exercise, the auditor recommended that we make a new provision called an adverse-deviation provision of €300 million for unknown claims that could occur. In addition, we provided a further €250 million in regard to the fact that all our claims were then in sterling and that we are reliant on the ICF in euro to fund those claims.
A further adjustment of €278 million was required on the case reserves in regard to prior-year adjustment. It is important to note that over 90% of these actual reserve movements were in respect of policies incepted prior to the appointment of the administrators and that they had the effect of eliminating substantially all the profits that QIL made in the previous five years prior to our appointment. Some significant loss areas included professional indemnity insurance, in respect of which premiums of €93 million were earned, and projected claims to date of over €333 million. It is important to note that all these loss areas featured before the incurring of operating expenses and the costs of running the business.
We have now carried out a review of prior-year reserve movements. It indicates that, in the accident year 2006, the reserves were underestimated to the tune of €215 million. In the accident year 2007, the figure was €168 million. In 2008, it was €299 million and, in 2009, it was €264 million. This indicates that a total of €936 million in claims had been under-reserved prior to our appointment.
With regard to the sale to Liberty Insurance, in June 2010, having concluded an extensive selection process, we appointed Macquarie Bank to advise on the sale of the insurance company. Initially, 91 parties expressed interest in acquiring QIL. By the time of the deadline for submitting formal expressions of interest, this had reduced to eight. In November and December, following access to the data room, this number reduced to only a handful. By late 2010, it became apparent to us that there was a real possibility that no sale would occur, which would result in the loss of over 1,500 jobs and an even greater call on the ICF.
Following extensive negotiations in the intervening period, we managed to secure a purchaser for the Irish business. In 2011, Liberty was selected as the preferred bidder. This is because it was a new entrant that would ensure the preservation of the maximum number of jobs. It was willing to take over the Republic of Ireland reserves, which would derisk the exposure to the ICF, and there was to be a goodwill payment of €88 million. It also gave us a solution for the remaining UK claims, a solution to the guarantee issue, which attracted a saving of €225 million. It allowed QIL to take indirectly a 25% stake in the new enterprise and it allowed IBRC a further direct stake of 25% meaning that, should the company be successful, the Irish State would benefit.
While the proposal was extremely complex, we announced the sale on 14 April. A significant number of operational issues still had to be addressed. As is normal in such cases, the agreement contained a number of material adverse conditions, MAC clauses, which, if breached, could have allowed Liberty to terminate the agreement. By the time we were in a position to complete the sale in October 2011, both macro and micro-conditions had deteriorated which put the whole deal in jeopardy and led to a renegotiation of the terms of the deal.
A significant attraction of the Liberty deal was the fact that it ensured that the joint administrators had a robust solution for the run off the UK claims book which remained with QIL in a going-concern environment through the execution of a transaction service agreement. We are confident, based on third-party expert advice, that the run off the UK book in this fashion will ultimately result in significant savings for the ICF.
We remain convinced that the deal involving Liberty Insurance represented the best deal available for all stakeholders, including the over 1,500 employees of the companies and the Irish taxpayer through the funding of the ICF. We are confident we now have appropriate controls and procedures in place to ensure the remaining business of QIL is managed in as efficient and cost-effective a manner as possible. This includes the appointment of a full-time executive team, including a new CEO with extensive experience in the insurance industry, to oversee the operation of the TSA and particularly the settlement of claims. In conjunction with the Department of Finance, we have availed of the expertise of Mr. Ciarán Breen in the State Claims Agency. He sits on our claims advisory committee, which has been set up to guide and advise the joint administrators and QIL management on future claims strategy policy.
Mr. Aidan Carrigan:
I apologise as I will have to depart early for a flight at 4 p.m. Mr. Casey will be well able to cover for me in my absence.
I thank the Chairman for the invitation to appear before the Joint Committee on Finance, Public Expenditure and Reform to outline the Minister's views on the increased call upon the ICF resulting from the Quinn Insurance administration process. Before doing so, let me outline the main elements.
On 31 July, the joint administrators presented their tenth report to the High Court. That report set out that the potential call on the ICF would be up to €1.65 billion, representing an increase of €875 million from the amount of €775 million set out in the application to the High Court of 14 December 2011. The joint administrators indicated to the High Court that the main reasons for the increased call on the fund are: an increase in the best estimate of the ultimate claims by Grant Thornton actuaries - €208 million; a new adverse-deviation reserve for potential claims in Ireland and the United Kingdom - €300 million; a contingency reserve to protect against currency fluctuations - €215 million; and a further reduction in asset values in the investment portfolio and revisions to trading estimates - €152 million.
The administrators pointed out in their report that the projected call on the insurance compensation fund, ICF, now includes considerable contingencies and that it is hoped these will not be called upon. They made the point that poor claims handling and reserves practices as well as a culture in Quinn Insurance Limited, QIL, of suppressing estimated claims all contributed to an under-provisioning for claims. The joint administrators have undertaken several actions relating to claims settlement which could reduce the ultimate claims cost. They have indicated that were they to remove most of the accounting adjustments and use a best estimate calculation, the call on the fund would more likely be in the range between €1.1 billion and €1.3 billion rather than the €1.65 billion for which they have provided.
The Minister is mindful that there is concern among Members of the Houses of the Oireachtas that they were not made aware of the increase in the call on the ICF at an earlier stage. The Minister understands this concern and believes it is important that some explanation should be provided. The committee is aware that the joint administrators are court appointed officers and have a duty to update the High Court at regular intervals on developments relating to the administration. In circumstances in which they believe there is likely to be a significant increase in the call on the ICF, the joint administrators must be in a position to demonstrate that additional funding will be available, otherwise the court will not be in a position to approve the release of moneys from the fund.
In preparation for their court application, the joint administrators drew the attention of the Department to the possibility that there was likely to be a significant increase in the call on the ICF in April 2012. At that stage the information provided by the joint administrators was still provisional in nature and was provided to the Department in confidence as part of preparations for their High Court appearance. We were advised that the information was preliminary and still had to be confirmed by their internal procedures. The Minister was concerned about the scale of the proposed increase at that stage and advised the joint administrators accordingly. In the following weeks, the 2010 QIL annual accounts were finalised and the administrators determined that there was need for a contingency reserve against currency fluctuations, leading to a further increase in the potential call on the fund. On receipt of this information in July, the Department wrote to the joint administrators on behalf of the Minister expressing his frustration, especially with the fact that the call on the ICF could reach €1.65 billion. This correspondence was produced in the High Court by the joint administrators as an exhibit for their court appearance of 7 August 2012 and, as such, is in the public domain. At that stage the joint administrators had yet to inform the court and it would not have been appropriate for the Minister to have brought the details into the public domain in advance of it being presented to the High Court.
The Minister shares the committee's concern about the significant increase in the potential call on the ICF from €775 million to €1.65 billion as reflected in the correspondence with the administrator. This increased call is significant from a budgetary perspective because while the contributions to the fund will be recouped, they still cause short-term strain on the economy at a time when a range of competing financial demands are being placed upon the Exchequer. The reduced best estimate calculation of between €1.1 billion and € 1.3 billion represents small consolation but it is a target which the Minister is keen the joint administrators should work towards achieving. The Minister has consulted the Central Bank about his concerns at the increasing call on the ICF and at the conduct of the administration. The bank has made the point that reserve calculation by its nature is a difficult and complex process heavily dependent on several factors, including a firm's claims handling process and its approach to reserve setting. The bank indicated its understanding that the adverse loss development was related to business written prior to the firm being put into administration. In other words, in the bank's view, the joint administrators have not conducted themselves in a way to cause any losses to increase.
The Minister has emphasised to the joint administrators the importance of taking appropriate measures to ensure cost-effective management of the claims settlement process and to ensure everything possible is done to minimise the call on the ICF. To achieve this objective, the joint administrators have informed the Department that as part of a new enhanced governance structure, a claims advisory committee has been set up to guide and advise them and QIL management on future claims strategy and policy. They have indicated to the Department that the claims advisory committee is devising a strategy for managing the settlement of outstanding claims as quickly as possible and at the lowest possible cost. Further, to protect Exchequer interests, the Minister has ensured the State Claims Agency is more involved in the administration process, especially in the claims management area, which is critical to keeping the call on the ICF down to its lowest level. It should be noted in particular that, at the Minister's request, Mr Ciarán Breen, director of the State Claims Agency, has been appointed as chair of the claims advisory committee. The Department proposes to continue to work closely with the joint administrators and to use the services of the State Claims Agency to monitor progress with a view to ensuring, in as much as it can, that the most cost-effective outcome to this process is achieved.
It is hoped this overview is helpful to the committee's understanding of the call on the ICF. The Minister shares the concerns of the committee at the escalation of costs. I assure the committee that the Minister will continue to pay close attention to the matter. We are open to any questions the committee considers appropriate.
Mr. Domhnall Cullinan:
I thank the committee for inviting me and my colleagues from the general insurance supervision division of the Central Bank to discuss the insurance compensation fund and Quinn Insurance. The insurance compensation fund was established under the Insurance Act 1964. It is maintained and administered under the control of the President of the High Court acting through the accountant of the High Court. Only the High Court may make payments from the fund. The fund is financed through contributions received from non-life insurance companies up to a maximum of 2% of their gross written premium. The contribution is collected by the Revenue Commissioners and forwarded to the fund through the accountant of the High Court.
The role of the Central Bank in respect of the fund includes carrying out an annual assessment of the financial position of the fund and determining an appropriate contribution to be paid to the fund by non-life insurance companies. The Insurance Act 1964 states that the High Court may pay out of the fund to the administrator of an insurer such amounts as are required to enable the administrator to carry on the business of the insurer. Quinn Insurance Limited, QIL, is required to comply on an ongoing basis with its obligations under the Insurance Acts and regulations. Of particular note in this regard is the obligation that each insurer shall establish and maintain technical reserves in respect of all underwriting liabilities assumed by it. The amount of technical provisions must be sufficient at all times to cover any liabilities arising out of insurance contracts as far as can reasonably be foreseen. The amount of any item in the accounts must be determined on a prudent basis. It is the obligation of insurance companies to ensure compliance with these requirements on an ongoing basis.
Throughout 2008 and 2009, the Central Bank continually engaged with QIL in respect of its business and financial performance. The Central Bank was concerned there were gaps between the technical reserve calculations of Milliman, QIL's signing actuary, and PricewaterhouseCoopers, QIL's external auditors, because Milliman's calculations were lower than those of PricewaterhouseCoopers. The Central Bank advised QIL during 2009 that these gaps were unacceptable. We required QIL, Milliman and PricewaterhouseCoopers to attend several meetings in the Central Bank to discuss the issue. The last of these meetings took place on 24 March 2010. At this meeting the Central Bank informed QIL that the €68 million gap between Milliman's estimate and PricewaterhouseCoopers's estimate for 2009 was unacceptable. In addition, since May 2008, monthly returns submitted by QIL showed that the company had only complied from time to time with the required solvency margin.
Submissions made to the Central Bank by QIL during the early part of 2010 showed its financial position had deteriorated to such an extent that the company's solvency margin was only 107%, considerably below the 150% level required. There was no satisfactory plan in place for QIL's recovery and on 19 February and 23 March 2010, the Central Bank informed QIL that consideration was being given to applying to the High Court for the appointment of administrators. Then, on 24 March 2010, the Central Bank was advised that previously unknown guarantees against properties of QIL valued at €448 million were in place against Quinn Group debt. In addition, the Central Bank was advised that an amount of €35 million, in respect of which the Quinn Group had given an absolute commitment that it would be injected into QIL by the end of that week, would not be made because the consent of Quinn Group's lenders was required for such a payment and this had not been forthcoming.
The Central Bank's decision, therefore, to apply to the High Court on 30 March 2010 for the appointment of the joint administrators was based on the emergence of the guarantees, a significant concern that QIL's technical reserves were insufficient and that the manner in which the business of QIL was being, and had been, conducted had failed to make adequate provision for its debts. The appointment of the administrators was confirmed on 15 April 2010, after the board of QIL consented to the permanent appointment.
The Central Bank understands and shares the concern about the level of the potential call on the insurance compensation fund by QIL and in particular that the projected call has increased from €775 million to €1.65 billion. Reserve calculation by its nature is a difficult and complex process heavily dependent on several factors, including a firm's claim handling processes and its approach to the setting of reserves.
The joint administrators have kept the Central Bank informed of developments in this regard during the course of the Central Bank's ongoing supervision of the firm. The Central Bank understands that, in broad terms, the source of the increase can be divided into four distinct parts: first, there has been an increase of €207 million in the estimated reserves that the joint administrators believe are needed; second, the joint administrators have made a provision for adverse deviation of €300 million; third, the joint administrators have added a contingency reserve of €215 million to protect against exchange rate exposure; and fourth, there has been a fall of approximately €150 million in the value of QIL's assets.
The joint administrators have undertaken a number of reviews in order to identify and correct any shortfall in the case reserves of the company. It would appear that the joint administrators have undertaken a robust review in arriving at their revised estimate of the call on the fund and that the increase in the potential call arises essentially from businesswritten by the firm prior to the appointment of the joint administrators. It is essential that the joint administrators make and continue to make adequate provision for QIL's debts to ensure that the rights and interests of QIL policyholders are protected, and the Central Bank will ensure that the joint administrators continue to do so.
In conclusion, I assure the committee that the Central Bank will continue to monitor QIL's compliance with its statutory obligations to make provision for its liabilities and adopt a prudent approach in doing so. Thank you for your attention, Chairman. We are now happy to take questions from the committee.
Thank you, Mr. Cullinan. Is it agreed that the witnesses' opening statements be published on the committee's website? Agreed.
Every insurance policy in Ireland, apart from health insurance, now carries a 2% levy. This relates to a debt of €1.6 billion incurred by QIL, with the levy raising approximately €65 million per year. This is predicted to be spread over a ten to 15-year period. Every insurance policy holder listening to this debate wants to know what can be done to reduce the debt and the period for which the levy will be in place.
Mr. Michael McAteer:
What we are trying to do falls into two categories. One relates to the management of claims and trying to ensure they are settled for the lowest amount possible. That involves the initiative of the claims advisory committee and taking a robust stance to ensure claims are settled for the lowest amount possible. The second relates to reviewing the professionals who were involved in the company prior to our appointment and seeing if there can be any recovery in that regard.
Mr. Michael McAteer:
I would not like to go into detail with regard to any potential claim without professional advice. That is something we are currently reviewing and is before the court. With regard to the claims themselves, we have identified a number of initiatives to move the claims back into the best estimate category of between €1.1 and €1.3 billion.
When news broke early in August of the dramatic increase in the potential call on the Insurance Compensation Fund of up to €1.6 billion, I wrote to the committee inviting our guests to come before us and take questions. I welcome the witnesses and thank them for being here.
Administrators were appointed to QIL in April 2010. In April 2011, when the sale to Liberty Mutual was approved, it was estimated that the call on the fund would be about €600 million. In September 2012, the Minister for Finance came before the Oireachtas and said the estimated call was €738 million. The Minister gave that figure in good faith. In December 2012, the administrators informed the High Court that the estimate was €755 million and at the end of July 2012, the estimate given to the High Court was, "anything up to €1.65 billion". The original estimate was given one year into the administrators' work. It was not a back-of-the-envelope exercise. It was a considered estimate given when the administrators had been in situ for one year. That estimate has increased almost threefold since that time.
For whatever reason, there was a catastrophic miscalculation of the potential losses. Given that ordinary policy holders will be paying this levy for quite some time, they are entitled to know how the administrators could have got it so wrong. In the first year, the administrators estimated a call on the fund of €600 million, and that has increased almost threefold since then. How could they have got it so wrong?
Mr. Michael McAteer:
The estimate of €600 million was based on the information available to us. We had completed the 2009 accounts and the actuaries had gone through the work. Using the information presented to me by EMB, which had been independently brought in by ourselves, PwC and Milliman, that was the best estimate at the time.
Because we were concerned about the continuing movement in case reserves on a week-by-week basis, we took a further review of the case files, of which there are approximately 26,000 at any one time within QIL. Part of that review process resulted in what the actuaries felt was continued volatility in the case movements. For every euro of case reserve level the actuaries, based on their experience, tend to add on another €1.5, on average. For example, current reserves in the UK model are €1.3 billion. That is made up of €485 million of case reserves at company level, plus €588 million, which is the actuaries' estimate of where that €465 million will end up. The final component of €300 million is an adverse deviation provision which the actuaries and auditors have recommended to us as a prudent way to take into account unknown unknowns that may occur over the next ten to 15 years in settling those claims.
Is Mr. McAteer saying that, given the information the administrators had in their first year in the company, it was not possible to come up with a better estimate than the figure of €600 million? As information became available subsequently the figure was revised.
Mr. Michael McAteer:
Our focus in the first year was to ensure that the company would be sold and that as many jobs as possible would be secured. Our focus was not so much on looking backward as on looking forward to ensure that a sales process would be completed and the company put into the hands of a new insurer as quickly as possible. It was when that sales component had been completed that some of the other factors came into play.
The sale to Liberty Mutual was agreed on the basis that the State would take care of any residual losses in Quinn Insurance. At that stage the estimate was €600 million. It was on that basis that the State agreed to the sale of the company. Now we know the losses are almost three times greater. The terms of that sale, and how good a deal it was for the State, are very much open to question.
Given that these payments are funded by the 2% levy on home insurance, motor insurance and commercial insurance policies, which raises about €65 million per year, how long does Mr. Carrigan estimate the levy will continue in place? The Minister previously advised it would be in place for 11 or 12 years. What is the current estimate of how long we will have to live with this levy?
If the total call is €1.65 billion, which is 25 years at €65 million per annum, a levy lasting 15 years would be far short of the potential call on the fund.
This is the core of the issue and it is what people will want to know. If the levy is collecting €65 million a year and the potential total call is €1.65 billion, is my calculation of 25 years correct? People want to know how long we will have to live with this levy.
Mr. Michael McAteer:
The total fees for the administration in the year 2010 was €3.6 million, with an additional fee of €1.9 million paid to the actuaries, Grant Thornton in London. In 2011, the fees were €3.5 million, with actuarial fees of €2.7 million. The estimate for 2012 is €1.5 million with a further €1 million to the actuaries in London.
Mr. McAteer referred to potential claims and litigation. Is this solely in respect of professional firms in place under Quinn Insurance or does it include firms engaged by Mr. McAteer in respect of his work as administrator in calculating the potential losses since his appointment as administrator?
Mr. Michael McAteer:
I do not accept any such responsibility in the sense that it has taken us a substantial period of time to understand the nuances of the insurance company and the claims on a case-by-case level. I do not believe any of the actions we have taken have led to one cent of an increase in the ultimate cost of the claims. In fact, I would say the opposite in that some of the actions we took have led to a significant reduction in what would have been the ultimate cost on the claims front.
My final question is for the Central Bank representatives. How can we be reassured that this situation will not occur again? This is not the first time that ordinary policyholders have been hit by losses incurred in the insurance industry. It also happened in the past with PMPA. Has the Central Bank reviewed how it regulates and deals with insurance companies to ensure such losses are not allowed to accumulate?
Mr. Domhnall Cullinan:
Absolutely. Since the financial crisis - we include this as part of that crisis - there has been a substantial increase in our resources. The model we use is more pointed. It is an impact risk-assessed model whereby the resources are devoted most to the places where they might have the greatest impact on the taxpayer. Where previously we would have had a limited amount of resources covering more than 300 companies, we now have substantially more and we dedicate more of them to what we refer to as the high impact companies. There are seven non-life insurance companies in Ireland which we consider to be high impact, which we consider would have a significant impact on the fund if a repeat situation were to happen. There is considerably more engagement with those firms now. Each of them has a specific team charged with its supervision. An actuarial partner from our actuarial team is assigned to assisting each firm in the supervision of the company. We have close and continuous engagement with each firm throughout the year to ensure we would spot any problems earlier.
I say to Mr. McAteer that I am astounded at the level of fees that have been paid for what, on the surface, appears to have been a job not very well done. The original estimate was almost one third of what the final call from the insurance fund will be. It strikes me as very bad value for the taxpayer. Will Mr. McAteer review those fees? Does the Department or the Central Bank have any comments to make on what, in my view, are exorbitant fees paid to a professional firm and firms engaged by Mr. McAteer for a job that has not been done well?
Mr. Michael McAteer:
I would take issue with that view. I do not believe that the job was not well done. The ultimate cost to the taxpayer would have been substantially more if we had not delivered the deal which took a substantial amount of time to achieve. It involved a team of more than 50 people working during all of 2010 to 2011, day and night, for a long number of weeks, six to seven days a week. I take issue with the view that the job was not done correctly.
Before I ask questions I wish to make a statement. In so far as there any good guys, I regard Grant Thornton as having come out of this situation reasonably well, relative to the others. It is clear that Quinn Insurance was managed in a chaotic manner. It is clear there has been a regulatory failure which is not dissimilar to the catastrophe in the banks over the same period. The result is that non-personal insurance policyholders will have to pay more than €1 billion over the next number of years.
My first question is for the Central Bank representatives. Did alarm bells not sound when the Central Bank saw the Quinn Insurance profits in the year 2006 or thereabouts? Was the Central Bank aware that some of the country's largest insurance brokers refused to sell Quinn's policies. Did the Central Bank engage in any communication with the UK financial regulator or the Bank of England about Quinn Insurance and its selling practices such as its undercutting in the English market? It is stated that since 2008, monthly returns submitted by Quinn Insurance Limited, QIL, showed that the company had gaps in its returns. What did the Central Bank do? What procedures are in place since then to ensure there will not be a recurrence? It seems the regulatory section in the Central Bank was asleep on the job in this case. Did the Central Bank have similar concerns about any other companies during this period?
I refer to the potential claims in Ireland and the UK. This issue was also referred to by Grant Thornton. Is there a division as between claims in Ireland and in the UK? Mr. McAteer mentioned that an additional €300 million was added during his review. Is a breakdown available between claims in Ireland and in the UK? I note there was a reduction in asset value of €152 million in the investment portfolio of Quinn Insurance. What is the composition of this investment portfolio? How much of this investment portfolio was contained in original Quinn companies belonging to Quinn Group?
Mr. Domhnall Cullinan:
On the question of alarm bells sounding, the Central Bank requires non-life undertakings to provide the bank with an annual statement of actuarial opinion which opines on whether the company has made adequate provision in its reserves. As referred to in my opening statement, that statement was provided to us by Milliman, a well-respected global actuarial consulting firm. If a signing actuary is unable to provide an unqualified opinion to us, the actuary must act as a whistleblower and inform the Central Bank. At no point did we receive a whistleblower report. PricewaterhouseCoopers was the auditor. It is part of the work of any auditor to audit the work done by the signing actuary. PwC raised some concerns regarding the difference in the estimates - to which I referred in my statement - but equally, PwC was willing to sign off on the reserves on the basis that these were, in its view, within a range of best estimates. While I am very conscious there were rumours about the performance of the company and that people were concerned, very few came forward to the Central Bank to provide any concrete evidence. Our safeguards include the statement of actuarial opinion and this was being returned to us as an unqualified opinion. The United Kingdom's Financial Services Authority raised some concerns with us about the firm, but when we requested the provision of specific data, it was unable to provide any. We had a good level of engagement with the FSA because Quinn Insurance had a branch in Manchester and also a presence in the North of Ireland.
I have referred to the arrangements for the future such as the new engagement model with the firms. Our powers have been greatly extended by means of the Central Bank Reform Act 2010 which provided the bank with new powers with regard to fitness and probity. It also amended the Insurance Act 1989 to allow authorised officers other than employees of the Central Bank to be called upon to carry out investigations on behalf of the bank. Further powers for the bank are planned in the Central Bank (Supervision and Enforcement) Bill which is currently before the House. This will provide even further powers with regard to what we call skilled persons reports whereby the bank can commission another party to carry out an investigation on its behalf, the cost of which is charged to the firm under investigation.
In other words, significant additional measures have been and will be taken.
Mr. Domhnall Cullinan:
It essentially reflected the types of rumours circulating in the Irish market at that time to the effect that the company was undercutting market participants in the United Kingdom. It should be noted, however, that other than the professional indemnity market for solicitors, the company had not made any significant inroads in terms of the overall United Kingdom market. It is difficult to quantify.
Mr. Michael McAteer:
In regard to the asset write-off, the €152 million figure is broken down into two components. In our calculation for the Insurance Compensation Fund, we had previously estimated a return on our investment in Liberty Insurance of €92 million. For the sake of prudence, however, we have written off that investment in our 2010 accounts. If we do get a return on our investment, it will ultimately reduce the €1.65 billion call on the fund. That accounts for €92 million of the €152 million. The remaining €60 million relates to the large number of property assets on the company's balance sheet. It is normal accounting practice to value those types of assets every year. They would have included the buildings in Cavan, Fermanagh, Dublin and Cork, a hotel in Cambridge, an office block in Manchester, a hotel in Krakow and a hotel in Sofia. These property movements would be reflected in the audited accounts based on the current valuation.
Mr. Aidan Carrigan:
I will respond to that question, given that it was initially addressed to the Minister. To clarify, the latter has no role in regard to the day-to-day operation of the administration, which is carried out by the administrators under the oversight of the court. As such, that question is properly addressed to the administrators.
The Department of Finance submission indicated that poor claims handling and reserve practice and a culture of suppressing estimated claims contributed to an under-provision for claims. Will Mr. McAteer indicate whether the same claims-handling staff remain in position in the company, notwithstanding the charge that has been aimed at them? What experience does the State Claims Agency have in managing the types of claims that Quinn incurred? Mr. Cullinan referred specifically to professional indemnity for solicitors. Does the agency have experience of dealing with such claims?
One of the issues that strikes me as unusual in all of this is the indication in the Grant Thornton submission that the actuarial firm EMB discovered in late August 2010, having been appointed only the previous month, that there was an under-reserving of €400 million for 2009. On receipt of this analysis, Milliman and PricewaterhouseCoopers revisited their draft 2009 reserves. How did they get it so wrong, given that it took EMB only six weeks to identify the issue? What did EMB present to Milliman and PricewaterhouseCoopers that made them revise their earlier, incorrect estimates?
My understanding is that Liberty Insurance is administering the legacy claims. Is there an agreed price for this project and who is paying Liberty Insurance to carry it out? The delegates mention in their submission that the Quinn family and connected parties extracted approximately €200 million over the previous two years by way of gifts. Do we have a breakdown of that and can the delegates indicate who the beneficiaries were?
Mr. Michael McAteer:
I will take the last question first. Note 22 in the published 2008 accounts for Quinn Insurance Limited shows that the company made gifts to Barlow Financial Services Limited, a company within the Quinn Group, amounting to €75 million. In 2007, the company made gifts totalling €135 million to Quinn Group Family Properties Limited. That was in the 2008 accounts. I will ask Mr. Cassells to deal with the Deputy's other questions.
Mr. Aidan Cassells:
On the question regarding staff, many of the people who worked in that capacity in Quinn insurance Limited continue to administer our claims, although some of the senior management have left the building. In terms of governance, we have utilised the services of two United Kingdom-based experts to review file handling in our claims operation. The response from them has been encouraging and positive, which gives us reassurance that the files have been handled efficiently. That has been endorsed by the chairman of our claims advisory committee, which gives us comfort looking ahead. We will continue to monitor the issue very closely.
On the question of experience within the State Claims Agency, I will leave that for my colleagues in the Department of Finance. My interaction with the head of the agency has shown him to be a very experienced professional and we are very keen to have him working with us.
Under the transitional service agreement, we have outsourced all of our services to Liberty Insurance, not just the claims side, at an estimated cost in 2012 in the region of €25 million. This includes financial compliance and risk management as well as claims. It is a significant cost but one which we constantly monitor to ensure we are getting adequate value for it.
On the question regarding the actuarial activities of Milliman, PricewaterhouseCoopers and EMB, that is an issue we are examining from the point of view of legal redress. As such, I cannot go into too much detail at this point.
Cuirim fáilte roimh na finnéithe go dtí an coiste. I am astonished at some of the contributions I have heard. It does not surprise me, however, that the call on the insurance fund has gone up. If one looks back at the transcripts of the committee from September or October of last year, when the legislation was being rushed through the Oireachtas, this issue was flagged up by Sinn Féin and others. What happened in this instance was unique, with a requirement for members to submit amendments to legislation before Second Stage had even taken place. In the Seanad, all Stages were dealt with within 24 hours of the Bill being published. This is what happens when that type of legislation is rushed through the Houses.
The potential call on this fund is €1.6 billion. I am aghast at what we have heard from the professionals, the Central Bank and the Department. What has been described is almost like a game of Monopoly, with no acknowledgment that we are dealing with real people's money and real people's lives. We have six witnesses representing three of the agencies directly involved, yet there has been no apology or admission that they got it wrong.
Yes. There are no representatives of the company here today, that is, no representation by the culprits who incurred these losses.
The issue is that the State sold an insurance company without full knowledge of its status. Last August, Mr. Justice Nicholas Kearns described the escalation in the cost as "truly shocking". He said the courts were informed in the first instance that there would be no call on the fund at all.
Is Mr. McAteer in a position to confirm whether that is accurate? Did somebody inform the courts that there would be no call on the compensation fund in the context of Quinn Insurance?
Mr. McAteer has outlined the amount of money that has been paid to his company in respect of this process. Grant Thornton stated in 2010 that there would be no call on the fund. At the time of the sale of Quinn Insurance, it indicated that there could be a potential call of €600 million on the fund. When the Dáil was passing legislation last October, it stated that the call could be as much as €738 million. When the matter came before the courts again in December, the amount had risen to €775 million. Now it stands at €1.65 million. I accept that Grant Thornton might not be in possession of all the correct information but there is a time when one indicates that one got it wrong. Mr. McAteer should state that his original assertion to the effect that the taxpayer would not be obliged to cover the costs relating to this matter was completely wrong. Mr. McAteer and his company have been paid millions of euro to carry out work in respect of this matter. He indicated that his priority was to sell Quinn Insurance. However, there must be due diligence in respect of the call on taxpayers.
Almost everyone in the State has an insurance policy. It is ordinary citizens who, if we are to believe the officials from the Department of Finance, are going to be obliged to pay the price in respect of this matter for the next 15 years. There is a time and place to accept responsibility and state that one got it wrong. In my opinion, there has been far too much of this kind of behaviour in the past. I am reminded of comments to the effect that ours would be the "cheapest bailout in history". As we are aware, the cost of the bailout continues to increase. The figures produced by Grant Thornton in respect of this matter have gone through the roof. It must be held responsible for the fact that it got it wrong over a very short period.
In the context of the Central Bank, Mr. McAteer indicated that his company called in the auditors in respect of a dispute regarding a discrepancy of €68 million between audits. If we were only talking about €68 million, then the country might be in a much better position. I am aghast by what has taken place. Reports indicate that Mr. McAteer has been directly responsible for supervising this company since 2006. When a financial regulator from another member state indicates its view that a problem exists, then something must be done. I presume that financial regulators do not engage in loose talk in respect of different companies. It is shocking that a financial regulator from another state had to bring to the attention of the company the fact that it had failed to go through the accounts and identify some of the losses.
It was stated that some of the additional losses relate to the fact that QIL's €450 million of assets are deteriorating in value. Why was this fact not factored into Grant Thornton's original assumption in respect of this matter? Why were currency fluctuations not taken into account? We are aware that the purpose of the 2% levy relates to products that are available in the North and Britain. Why were currency fluctuations not taken into account in the context of the original estimates and why are they only being thrown into the mix now?
The officials from the Department of Finance indicated that the amount of money required in respect of Quinn Insurance will be in the fund by 2015. It is difficult to accept the figures the Department - and indeed the Minister for Finance - have provided in this regard. The Minister for Finance informed the Dáil that this fund would be in place for between 11 and 12 years. That was his estimate and I presume the Department supplied him with the relevant figures. We now know that he was basing his assertion in this regard on losses amounting to €738 million. As we are aware, those losses may eventually amount to €1.65 billion or more than double the amount originally communicated to the Minister. Our guests from the Department have indicated that the fund will only be in place for three years. It was stated that assets and asset sales are being taken into account but why were these not part of the equation when the Minister stated that the fund could be in place for 11 or 12 years? Did the Minister just ignore the position in this regard? Our guests are playing around with figures, while we are concerned about people's lives and their money. It is very disappointing that we have not received very honest and forthcoming presentations from them at this meeting.
Will the officials from the Department indicate when the State will get its money back? The administrators referred to action being taken against certain professionals. Will they indicate the individuals against whom they propose to take legal action? What are the chances of recouping any, if not all, of this money from the professionals who provided the administrators with dodgy advice in the past? This matter has arisen in the past in respect of the banks, when auditors presented books indicated that certain institutions were solvent when, in fact, they were insolvent. The State lost billions of euro as a result. However, those to whom I refer just walk away and are later given other State contracts and-----
Mr. Michael McAteer:
When we were appointed, approximately 2,600 people were employed by the Quinn Group. When the sale was completed, the figure was approximately 1,550. It is important to point out that the claims existed on the day on which we were appointed. The claims were always there. If we had not sold the company, the claims would still have had to be met. If it had not been sold and had gone out of business, we would have no company in place to process those claims and over 1,500 would have lost their jobs. In such circumstances, the amount of the claims would have been substantially greater than €1.65 billion because we would not have had the infrastructure in place to collect them. As stated previously, the figure of €1.65 billion comprises several numbers which may or may not be required to be used. What is important for the Department of Finance from a budgetary perspective is that those components are built in.
The company is not a normal trading company. That is one of the reasons why the actuaries and the auditors have requested that €300 million be set aside as an adverse deviation provision. This does not relate to a specific case within the Quinn Insurance caseload, it is a buffer to move the actuaries from a 50-50 review - which they would normally carry out on a trading basis - to 80-20 cover. That is a provision the actuaries have put in place in the sense that the company is in run-off.
We identified that hedging was required, we sought it and we expected to obtain it. Unfortunately, when we approached the banks in respect of it, they indicated that they required a letter of guarantee from the Minister for Finance. The Minister was not in a position to give such a letter and we do not have a hedging facility as a result. It would be irresponsible for us to predict whether sterling would go up or down. The figures were, therefore, calculated on the basis of a spot rate. We disclosed to the court that the number was based on a €1 to £0.83 exchange rate and was exposed to currency fluctuations. The €215 million is based on an exchange rate of €1 to £0.70. Luckily, sterling has weakened since our appearance before the courts in August. As a result, we may not require the full €215 million. Some €515 million of the €1.65 billion relates to provisions which may or may not be required.
I agree that the claims existed beforehand. Grant Thornton was appointed and paid a great deal of money to do its job. Mr. McAteer admits that the call on the fund rose from zero to €600 million to €738 million to €775 million. Does he admit that all of those figures were wrong?
Mr. Michael McAteer:
I will accept it from €600 million upwards. It is important to note the we indicated that the call on the fund would be zero within six to ten weeks of our appointment. At that stage, we had been presented with numbers which showed this company to be a solvent financial enterprise. We had engaged the services of EMB but we had not yet received its report. When the report appeared, it provided the first indication that there was something wrong in the context of the reserving of the business. With regard to the figures of €600 million up to €775 million, I am an officer of the court and it is my duty to inform the court at any particularly time of the information that has been presented to me. When the figures of €738 million and €775 million became available, I immediately informed the court about them. I did not wait to see whether they would rise or fall. I kept the court informed as the information was becoming available to me, which is my duty.
Mr. Aidan Carrigan:
I reiterate that the Minister is not involved in the day-to-day operation of the administration. In the context of the estimates on which he must report, he is obliged to rely on the information provided to him by the administrators. As I indicated in my opening statement, the Minister is considerably frustrated at the increases in the call on the fund. Such increases have occurred despite the amount of actuarial expertise which has been applied to assessing the position during the past two years.
There was no mention of 2015. However, we assessed that it would take 15 years to raise the money.
Obviously when we are looking into the future and we are trying to calculate what we think it will cost over 15 years - there are a number of moving parts - but our assessment is based on the best estimate figure of €1.1 billion to €1.3 billion. I am being a bit optimistic and hoping we can get to the €1.1 billion, which takes account of asset sales and the fact that some of these contingencies that are provided for are worst case scenarios that will not come true.
It was quite late in the day when the hedging issue was brought to the Minister’s attention. It might have been helpful if it had been raised earlier but when it was brought to our attention it was indicated to us by the administrators that they could do hedging but only if the Minister gave a further guarantee on any risk around that. There was sufficient exposure to the State in this particular instance without the Minister giving further guarantees. I understand that other approaches are being made to resolve the hedging issue and we are facilitating consideration of that by providing the expertise of the National Treasury Management Agency to work with the administrators to see if they can work a solution.
The Minister said in the Chamber that it was important that he was satisfied that the appropriate systems and processes were sufficiently robust to ensure that the call upon the fund is kept to an absolute minimum. In light of that he asked the State Claims Agency, which has specialist skills in the area, to undertake a review of the process in Quinn Insurance Limited. He was satisfied. The State Claims Agency review was also wrong because it led to the increase from €600 million to €738 million, which is just half of what could potentially be called upon. The Minister did have direct involvement. He wanted to be satisfied and he was given either wrong or inaccurate information. In light of the fact that this figure has been revised upwards on five occasions, how can we be satisfied that this is the final figure and the final call upon on the public in regard to Quinn Insurance Limited?
Mr. Aidan Carrigan:
I repeat that the Minister shares the Deputy’s frustration on the increasing figures. We are doing everything we can to oversee the process to ensure that costs are kept to a minimum. We are relying to some extent on the Minister’s appointment of Ciarán Breen from the State Claims Agency as chairman of the claims advisory committee to achieve progress on the matter. The initial engagement of the State Claims Agency was at the request of the Minister also but it did a preliminary and short review of the risk assessment and the reserves requirement. It was the State Claims Agency that put a flag up saying that in its experience this seemed to have been considerably underestimated and needed to be reviewed further. That resulted in the administrators engaging further and digging deeper into the issue and finding an increased hole in reserves.
We are not involved on a day-to-day basis but we have an interest in protecting the taxpayers’ interest. We will meet regularly with the chairman of the claims advisory committee, Ciarán Breen, from the State Claims Agency, and with the administrators to satisfy ourselves that everything that can be done is being done.
Mr. Domhnall Cullinan:
In terms of our engagement with the FSA, and how the concerns expressed were brought to our attention, that would have been in the context of our ongoing supervision with the firm. It would not be unusual for us to have a relationship with a supervisor in another country where they have a physical presence, which is the case both in Northern Ireland and in Manchester. The concerns were expressed in that context. I hope I did not leave the committee with the impression that we did not act on the concerns, as we did, and explanations were sought from the company and answers were provided. There were a lot of rumours circulating about the company but, unfortunately, when one needs to act and go before the High Court to apply for administrators one must have firm, tangible evidence. When that was available, we did act.
Deputy Doherty asked a question of my colleagues about the certainty around the €1.65 billion. It seems to me that what has caused an awful lot of the anguish is the jump from the €775 million to €1.65 billion. As I said in court last month, the work the administrators have done is based on a robust process. One will not see anything like that size of an increase again but reserve estimation is not static. I would not like anyone to leave the meeting with the impression that the amount could not go up incrementally again. Everyone is working towards reducing the call in so far as it is possible. The administrators are judging their performance on keeping the amount to within the range of €1.1 billion to €1.3 billion. From my perspective and that of the protection of the policyholders of Quinn, it is very important that they make adequate provision, whatever that will be. As Deputy Doherty said, the claims were there on the day the company went into administration. The frustration has been in trying to get to that and to get to how bad it was. We are where we are now but there is no absolute certainty. One cannot have absolute certainty on the final figure but I sincerely hope it does not reach €1.65 billion.
One of the frustrations is that the losses relating to Quinn Insurance Limited exist and there is not much we can do about that at this point. I am sure many other people share my frustration that the agencies of the State failed to recognise what was happening and failed to act appropriately in advance to limit the losses or the liability of the State. We have had problems with the banks and now we have the insurance company. There is nothing to indicate that this scenario will not repeat itself. If one looks back on history we have had banks in the same situation 20 years ago as they are now and levies being imposed on people. We have a regulator to regulate them but it failed to see a potential €1.65 billion loss. What went wrong and what will be done to ensure that difficulties will not arise in the case of another insurance company, bank or financial institution that the Central Bank regulates, and that the witnesses will not be put in front of a committee to say that PricewaterhouseCoopers gave them a report and that an auditor gave them another report? What is in place to satisfy people at home who are being screwed as a result of the financial institutions that what has happened will not happen again and that the agencies of the State are robust enough and have sufficient manpower and tools to make sure this does not happen? Does the Central Bank need anything or could assurances be provided that it is sufficiently strong and robust to ensure this will not happen in the future?
Mr. Domhnall Cullinan:
The situation with supervision in the country is well documented. We have had reports from Nyberg, Watson and Regling and Professor Honohan’s own report. As an organisation we were under-resourced by any standard. Now we are at a place where we are at least in keeping with best practice internationally. I referred previously to the engagement model we now have with firms. The capacity of the office has been increased massively. The capability and the specialists we now have within the organisation have been increased substantially. In terms of our supervisory powers, some have already been amended and others are currently before the Houses of the Oireachtas. Again, it is a little like the reserves, I cannot give an absolute guarantee. Nobody can ever guarantee that nothing will happen. We have seen insurance failures in the past in other jurisdictions and it is well documented that things were hidden from supervisors. If people are so minded, that can be done and there is very little a supervisor can do in that regard. We have close, continuous and ongoing engagement with the firms based on their impact category and the potential impact they could have on the Exchequer. A lot of work has been done. It would be wrong of us to ever conclude that we are there now. We should always try to improve our processes. We are considerably better equipped and empowered to do the job we are statutorily obliged to do than we were prior to the crisis.
Reference was made to resources provided to the Central Bank. I am of an age with those who were affected by the PMPA. Reference was made to brokers not working with Quinn Insurance Limited and inquiries were being made from outside the State.
For the Central Bank to say it was under-resourced and that it could not act unless there was firm evidence does not hold with the public, and it certainly does not hold with me. It happened previously. The flags went up but the Central Bank was slow to react. Those are the facts. We let a PMPA type situation happen again on the Central Bank's watch, and what I am hearing disgusts me. It is not about the jump but that it happened at all.
Deputy Doherty asked a question but it was glanced over. The statement that it stays in the administrator's historical audited accounts has turned out not to be accurate. The term "looked into" was used. What exactly are the witnesses looking into? What kind of action are they considering? What measures do they intend to take. What is happening now because of those historical inaccuracies in the audited accounts? What steps have the Central Bank and the administrator taken in that regard?
Mr. Michael McAteer:
I can tell the Deputy that we are reviewing, with our legal advisers, all of the activity that would have occurred in 2007 and 2008 in the auditing and actuarial process at that time. We are reviewing those files and based on that outcome and the legal advice we get, we will inform the court of those findings, and we will inform the development stakeholders on this side whether action is recommended to be taken.
Mr. Michael McAteer:
It is not a case that we will make a decision straightaway but we have set a number of milestones in terms of whether we have substantiated at first level to go again for the second part of the review and the third part of the review. It is intended that by the end of November of this year we will have a first level of an assessment to see whether we should then go to a second level after that.
Mr. Domhnall Cullinan:
To be clear, the Central Bank never used them as agencies. We relied upon their work but they were appointed by Quinn Insurance to carry out the work.
In terms of PricewaterhouseCoopers, PwC, we have made a report to the Chartered Accountants Regulatory Board, CARB, in regard to this matter and I understand it is investigating it.
Surely it will come back to the Central Bank. If the Central Bank made a report on PwC to the CARB, surely it expects to get an answer or be notified of the outcome of its investigation. Mr. Cullinan must have made those inquiries.
On that point, Deputy Humphreys, the committee is dealing with the Central Bank (Supervision and Enforcement) Bill 2011 which is due before the committee on 15 November. It might be a suggestion, arising from this committee, that some supervisory regulation is put in place with regard to this matter. I ask the clerk to inform the Minister for Finance of this lacuna that has been raised this evening and request that his Department give that consideration. I thank the Deputy for raising the matter.
Yes, but wherever it falls we must address it. Quinn Insurance Limited, QIL, was operating in the insurance market in England. What regulation did the United Kingdom authorities impose when dealing with QIL?
Mr. Domhnall Cullinan:
We were prudentially responsible for the undertakings. We are responsible for the prudential supervision of any entity authorised by the Central Bank. Equally, if someone is authorised in the UK, they are prudentially supervised by the Financial Services Authority, FSA. When one passports, as it is called, into another jurisdiction, one is subject to the local host regulator's conduct of business rules. In the same way that the Central Bank has a consumer protection code, anyone authorised in another member state who passports here must comply with our consumer protection code. Equally, QIL would have had to comply with the conduct of business rules that pertain in the UK.
It is more of a statement. On the liabilities regarding the company's activities in the UK, would it have been good practice to hold the money in sterling for the liabilities when policies were taken out? What would be the norm in that regard?
Mr. Michael McAteer:
The money was held in sterling to meet sterling claims, but under the deal that was done with Liberty Insurance when the Republic of Ireland claims moved across there, all of the cash reserves, including sterling, moved at the same time, leaving us with no sterling. There was an actual hedge when the company was trading.
We were doing the top-up. It was mentioned in the report that the 20 subsidiaries were dealt with as a reserve but there was no regulation within those. Has that gap been closed or is it intended to close it?
Mr. Domhnall Cullinan:
There are certain rules within the regulations on the types of asset classes one can have to cover one's technical reserves. They were within the limits on that but we had conversations with those concerned prior to the administration about getting out of some of the property assets and putting them into more liquid disposable type instruments.
Mr. Domhnall Cullinan:
They formed a sub-committee of the board to do just that. In terms of the closing of the loophole, what we are in a position to do now with our increased resources is ensure that if any insurance companies have subsidiaries, we get a copy of the subsidiary's financial statements and if there are any issues regarding contingent liabilities in those, they should be disclosed.
This is not where my expertise lies but Mr. Cullinan said they formed a sub-committee to examine the 20 subsidiary companies.
Were the delegates happy enough with the formation of the sub-committee to examine this?
Mr. Domhnall Cullinan:
It was all part of ongoing discussions on implementing a proper financial recovery plan. As I stated in the presentation, a satisfactory one was not in place but there were ongoing discussions with the company about putting one in place. The sub-committee was part of that plan. As to whether we were satisfied with it, no-----
I extend my best wishes to the Chairman on his new role. I hope the delegation will agree that this is a pretty sickening episode in the pretty awful recent history of this country. On top of all the other crises concerning the banks and financial system, we have the mess in Quinn Insurance. Hundreds of thousands of ordinary families and householders are on the hook again, this time for €1.6 billion. If I understand Mr. Cullinan correctly, we cannot say for certain that the figure will not be higher. We could be forgiven for being alarmed by that thought given that the estimates have been revised upwards fairly dramatically in recent times.
The main cause of this is obviously the cowboy capitalism in which the Quinn family was engaged, driven by nothing but greed. Will the delegates from the Central Bank state how this could have happened? That a company could be engaged in this sort of reckless mismanagement, and falsely declaring profits when making losses, represents a catastrophic failure of regulation. There was massive under-provisioning against potential losses or claims, and none of this was spotted. Could the delegates from the Central Bank explain the nature of the supervision, or the lack thereof, during the period in question? What was the nature of the relationship and how was the supervision carried out? If the delegates were under-resourced, did they tell this to the then Government or state it publicly? Did they state they were worried that they did not have sufficient resources to carry out the necessary supervision of people such as Mr. Quinn? If the Central Bank was not complaining about this, it was also culpable. It is not good enough just to pass the buck, although I do not doubt the Government has to take some responsibility. The public would like some accountability. Who was to blame for the fact the Central Bank was under-resourced? Was it because of the ideological commitment to light touch regulation of the previous Government? Is that why we are paying the €1.6 billion? Was it because of the failure of the Central Bank itself to ring the alarm bells about its lack of resources or power to regulate the industry properly?
On the issue of profits which were actually losses, profits were taken out of the firm by the Quinn family, which was the sole shareholder. Gifts were mentioned. Some €135 million was given to Quinn Group Family Properties, or just to the Quinn family, and some €75 million was given to Barlo Financial Services. What precisely is that company? Is it just another front for the Quinn family? Do these sums comprise the same €200 million that Mr. Quinn described as adding to the personal wealth portfolio of his children? Did he not give €200 million to his children a few years ago?
How much profit did the Quinn family make when it was declaring profits falsely and were there more gifts than those I have mentioned? What is the Central Bank doing to get the money back off the Quinns? Is there any action that can be taken to limit the call on Irish policyholders and the fund by getting back the money that was essentially robbed from the company by-----
I call on the Deputy to be more measured in his language as some of these matters are actually before the court. While people may agree with the sentiments of the Deputy, I ask him to be more prudent in his choice of language.
I will try to contain my indignation. The false declaration of losses as profits and the reckless mismanagement that underlay this practice are pretty criminal by any public or objective standard. What is the Central Bank doing or what can it do to pursue the money that was handed out to the Quinn family?
If I understand the delegates correctly, they are saying they had not adequately got to grips with the problem of the Central Bank's failure to recognise the degree of under-provision for the losses in the Quinn company because of the urgency of selling Quinn Insurance. As one who opposed the sale of Quinn Insurance and who still fails to see the logic of selling it, I do not see the logic behind the people covering the losses, bailing out the company and then handing to Liberty Insurance what could, I presume, be a profitable enterprise. Why was there a rush to sell the company rather than nationalising it such that potential profits could be used to cover the losses we have incurred? Who made the decision to sell? Was pressure exerted by the Government or was it the Central Bank's decision? I would like to know the circumstances surrounding the matter.
Let me consider the question of fees. Some €14 million was paid over three years to the administrators. This is a pretty sizeable sum. How many people were working on this case to account for remuneration at that level? Is this another cost for ordinary insurance holders and people who have already had a big burden imposed on them unfairly? Could the delegates attempt to justify the payment of €14 million over three years as a reasonable cost for the work they have done?
Mr. Domhnall Cullinan:
The Deputy's opening remark hinted at the alarming thought that the liability could be higher. I accept Deputy Humphreys' point that it is not just a question of the jump. The rise from €775 million to €1.65 billion was exponential; the sum has more than doubled. I do not expect that again but I would not like anyone to leave with the impression that the €1.65 billion is absolutely static. We all hope the figure will be much lower. Claims concerning people with brain injuries, for example, develop over time so one cannot know the absolute cost until the end of the process. It is important that whatever we can say in this regard is understood.
A couple of points were made on gifts. They were really what I would describe as dividends. One might ask the difference. It was just a mechanism for paying money up through the group for what I assume were tax-efficiency purposes.
As for anything to do with adding to the personal wealth of anyone's family or anything else like that, I have no idea. We were the supervisors of Quinn Insurance Limited and not of the Quinn Group or any particular individuals or individual shareholders of that group. Barlo Financial Services Limited was the group treasury function of the Quinn Group and, in that regard, it would not be unusual for dividends to go to a group treasury function.
As for the supervision, I have spoken about this previously in terms of the under-resourcing and similar issues. I have spoken about the additional powers we were given and I do not wish to repeat myself on that point, given the time available to the joint committee. One important lesson learned, which has been picked up in respect of both fitness and probity and in the acquisitions directive that came into force in 2009, is about dominance. It also is very important that we have good governance within all these companies, which is a vital point to understand.
On the issue of the failure of regulation, the explanation given by Mr. Cullinan is it had to do with under-resourcing and the lack of powers and he has stated these issues are being addressed. Did the Central Bank complain, publicly or privately, about its lack of power and resources in supervising adequately sectors such as the insurance sector or other sectors that were chronically unregulated?
Mr. Domhnall Cullinan:
Forgive me, I should have answered that. I am afraid I do not have much of an answer for the Deputy in that regard as at that time, prior to the crisis, I was not in a position where I would be demanding such things in respect of resources within the Central Bank. Certainly, in my own personal capacity, I absolutely raised the issue of resources in the context of my ability, as a member of the insurance supervision team, to supervise the extent of companies we were obliged to supervise and to do so adequately. While I am aware this was passed further up the line, beyond that I simply do not have the knowledge to state where it went after that point.
Mr. Michael McAteer:
Perhaps we will take the sale question, which was one of the questions raised by the Deputy. No insurance company remaining in administration is a long-term viable enterprise because people seek certainty when picking an insurance company. Consequently, it was critical that we had a sale and that a sale occurred because, otherwise, I note the company's sales were declining during the period of administration because a company being in administration does not provide customer confidence. In addition, administrators cannot make strategic decisions on items such as capital expenditure and so on because the company was loss-making at the same time. Consequently, it was necessary to sell the company and to do so as quickly as possible. We were also faced with a clear possibility that there would be no sale. This was not a case in which a queue of people was lining up to purchase the company. We did the best deal possible to secure the 1,500 jobs and had we not achieved the sale, they would have been lost. The Deputy also raised the question of benefit to the State and what is important in the future is that, both directly and indirectly, the State has a 50% interest in Liberty Insurance. That company is now run by professionals, in the sense that they are from the fifth largest insurance company in the world. They run the business and have the expertise and the access to capital. They have all the know-how to run an insurance company properly and the State has an indirect 50% stake in that business in the future. If that business is successful, the Irish State will benefit.
Mr. Michael McAteer:
I will try to break down the number for the Deputy. It would have entailed more than 50 people at various stages over the past three years. Of the €14 million, more than €6 million of it basically was paid to our firm in the United Kingdom in respect of a full actuarial division of up to 15 actuaries at any one time working on the case because Quinn Insurance had no in-house actuarial division during the time it was trading. Consequently, €6 million of the figure of €14 million relates to the UK payment for actuarial fees. As for the total of €8 million, we also had a property portfolio, if one wishes to call it that, of more than €448 million. We had asset management and were obliged to get buildings ready for disposal. We sold the hotel in Cambridgeshire for £35 million last August. We have fundamental issues to walk through to get each of those assets ready for sale and to maximise the value for the taxpayer. It takes substantial time and effort to get the assets to its maximum value for sale. The figure of €8 million involves tax, forensics and asset management, as well as the core administration team that was involved in the day-to-day operation of the company itself in respect of both running it and on the sales side.
Members sometimes lose sight of what they are dealing with, which I perceive to be a spectacular collapse of a major player in the insurance business. Whatever about business failure in itself, business failure that is engineered because of deliberate mismanagement, maladministration and greed is something the joint committee must address to ascertain how the pieces can be picked up. In that sense, I note the witnesses before members today are not the bad guys in many respects, although I have some critical questions I wish to ask. In the very first paragraph of his opening remarks, Mr. McAteer stated the company did not contest the appointment of an administrator. For the benefit of members, he might elaborate further on the reception that awaited the administrators when they arrived at Quinn Insurance Limited. The fact the company did not object to the appointment of an administrator might appear to suggest it was prepared to work with Mr. McAteer in a spirit of co-operation to try to secure the employees and the business in the future. Mr. McAteer might elaborate on this and whether this was the position. In that context and in respect of the administrators' preliminary reports to the courts, with hindsight, does Mr. McAteer think there was an excessive reliance on senior management with regard to the guesstimate he was in a position to make at an early stage? Was there an excessive reliance on senior management as to what the call might be on the insurance fund?
Mr. Michael McAteer:
On the Deputy's first point, I must state that on a professional basis, when we went to Cavan, the majority of both the staff and management within Quinn Insurance Limited acted in a professional manner. Neither I nor any of my staff were treated with disrespect in any way and the Quinn Insurance staff should be commended in this regard because of the uncertainty they faced regarding their own livelihoods and future. As for the estimates one puts before the courts at any time, it is fair to state we based those estimates on the information provided to us from both internal and external sources. In hindsight, an over-reliance on those numbers is one reason the figure is where it is today.
I refer to Quinn Insurance Limited, QIL, and the subsidiary companies in particular, to which I will revert later on the guarantees and so on. In respect of the fees and staff to which reference has been made, Mr. McAteer should give members an indication of what has been spent on security in QIL and its subsidiary companies.
Mr. Michael McAteer:
I do not have that number to hand. Such numbers would be an additional cost and expense within the actual insurance company itself. While there is one significant asset belonging to Quinn Insurance on which we have 24 hour security, I would prefer not to mention that here today.
As for decisions made prior to Mr. McAteer's arrival and with the benefit of knowledge he has been in a position to glean subsequently, did the board of Quinn Insurance function effectively with regard to its obligations under company law and so on? For example, I refer to the issue of guarantees that were given and the stage at which they were notified to the regulator. Were all directors of the company party to those decisions made in respect of guarantees?
Mr. Michael McAteer:
No, and that is one of the contentious issues contained within the assignment.
It would appear the guarantees were signed by a certain number of the directors of Quinn Insurance at the time. The information of which I am aware is that there were a number of directors who did not know of the existence of these guarantees. While I was not involved beforehand, my understanding is that when the former board of Quinn Insurance, which was made up of a number of non-executive directors, became aware of the existence of the guarantees, it immediately contacted the Central Bank. It would appear these guarantees had been in existence for several years before that.
Okay, I do not want to digress on that issue.
Did the under-reserving in respect of claims and the issue of the €200 million withdrawn from the company’s balance sheet adversely impact on the necessary reserves that should been in place?
Will Mr. McAteer elaborate on practices at the coalface in respect of case management? How would the management of individual claims and cases at Quinn Insurance been at variance with best practice in the industry? How can what appears to be a calamitous and deliberately engineered systemic under-provisioning be explained in individual cases? For example, if I were to break my leg, my insurance company would have a process which marks down that this could cost a certain amount including higher costs for surgery. There must be a process by which case management filters upwards regarding the amount of reserves required as individual cases are managed.
Mr. Aidan Cassells:
I only joined the company in December, so most of the action had taken place. In terms of the accuracy of the reserves and the level of certainty one can build around reserving, as Mr. Cullinan stated it is not a precise science. The core foundation is the file estimates. When a file comes, say, for an injury, one has a snapshot of what is involved. If one has the right balance of experience and knowledge in the organisation, one can give a reasonable estimate of what the claim is likely to cost.
One of the issues in Quinn Insurance is what is described as a culture of optimistic or aggressive reserving. If a more conventional view was a figure of X, Quinn Insurance would tend to target a much lower number on the estimate. If the estimate were low, then the actuarial reserving on top of that would miss it. This would lead to a compounding of the error and the error in the file estimate. There was a culture of aggressive reserving while processes and controls were not strong. This was backed up by the State Claims Agency when it went into the company. There were some examples of deliberately under-reserving which led to sanctions against some individuals in the claims department. There was a foundation around the file estimation of the company which was not up to the standards one would expect.
In fairness to the administration, much of that was done in the first 18 months. How long did it take to find this? It took three exercises at different stages with different degrees of pressure to get the file estimates up to the level that was regarded as satisfactory.
When one is trying to project into the future the cost of any claim, one is dealing with the potential deterioration in the injury that the individual has suffered, external environmental issues, changes in legislation and the decisions of the courts. It is a complex area and is not amenable to a precise figure. Hence, when we give the committee a figure that we consider is robust and prudent, we are 80% certain about it but there is 20% risk depending on what happens in the external environment.
There was a culture in the company of aggressive reserving and there was probably not the right skills set within the company for managing, particularly the more complex claims. These two issues together created a scenario in which there was much under-provisioning of the files which the actuarial provisioning then accentuated the problem as it did not adequately pick up on that. I do not want to go into it too much further because there are issues there where we feel some of these matters should have been picked up. We will be examining that in the context of legal action. Another difficulty is that some of the claims go back to 2000 and it takes a long time for the more complex claims to settle.
Broadly speaking, there was a culture of aggressive provisioning and lack of adequate experience, knowledge and controls. These have now been addressed and we have adequate reassurance from our investigations that the situation today is satisfactory from our perspective.
In respect of the estimated call of €1.6 billion, there is provision therein for an exchange rate exposure of approximately €215 million. What is the timeframe envisaged for this provision? Is it ten years or 12 years? Is it exclusively for euro-sterling fluctuations?
Mr. Michael McAteer:
It is exclusively for euro-sterling fluctuations. The reserves are carried at an exchange rate of €1 to £0.83. which was booked at the last audited accounts. The figure for €215 million is on the assumption that these reserves had to be paid out at £0.70. Every time one pays out the current rate of €1 to £0.80, there is a saving of some of that provision.
Mr. Michael McAteer:
There are a number of key assets which we plan to dispose of this year. We have already disposed of the hotel in Cambridge, which came to £35 million. This week, we retained agents for hotels in Krakow and Sofia with a view to selling them in 2013, one in the first quarter and the other in the second. There are other assets coming to €5 million which will be disposed of in an orderly manner during 2013 and 2014. The largest single asset is a wind farm in Derrylin which we are planning to dispose of in the last quarter of 2013.
In Mr. Cullinan’s presentation he referred to meetings between the Central Bank and Quinn Insurance, the last of which took place on 24 March 2010.
At this meeting the Central Bank informed Quinn that the €68 million gap between Milliman's estimate and PwC's estimate for 2009 was unacceptable. That was the end of an engagement which, according to the presentation, began in 2008. Over a period of 27 or 28 months, as Mr. Cullinan presents it to the committee, they were in the last chance saloon. I put it to Mr. Cullinan that four months after the appointment of the administrator they were in a position to quantify, through the involvement of EMB, that there was an under-reserving of €400 million. Twenty-seven or 28 months after the Central Bank began exploring the extent of its concerns, it was arguing over a figure of €68 million. Given that Quinn did not have in-house actuarial experience and that the UK financial regulatory authorities had been in contact with the Central Bank, and notwithstanding the fact that the Central Bank did not have in-house expertise but had at all times the option of availing of external assistance in this matter, does Mr. Cullinan accept that that is a fairly shoddy record of regulation?
Mr. Domhnall Cullinan:
We directed the company in April 2009 to establish an in-house actuarial function, which was not complied with until such time as the administrators were appointed. By way of reassurance, however, all of the other major high-impact companies operating now in the country have in-house actuarial resources. Throughout the noughties, the actuarial resources available to the Central Bank varied between zero and two, and they were almost exclusively devoted towards the development of the Solvency II directive, which is coming from Europe and is probably the biggest piece of legislation ever in the insurance arena.
Outsourcing was not an option for us. The Insurance Act 1989, under section 60, provides for the appointment of authorised officers. It was only through appointing an authorised officer that we could go in and conduct the level of investigation that would be required in order to carry out a reserving exercise of the type that EMB undertook. It was not until the Central Bank Reform Act 2010 that the Act was amended to allow us to appoint third parties. Outsourcing the function and getting the capability from outside the Central Bank was not an option.
I thank the Acting Chairman. This afternoon's proceedings are a bit of an eye-opener.
As a taxpayer and somebody who pays the 2% insurance levy for this compensation fund every year, the issue of Quinn Insurance Limited is one of those subjects that has been moving around in the back of my head for a long time. The amount of money we are talking about is staggering.
Mr. McAteer, in his presentation, set out the facts and the financial and operational position upon his appointment. He had to go in and deal with what was there. According to what was revealed here this afternoon, it was not a pretty picture.
There was mention here that the Quinn family extracted €200 million in 2007 and 2008 by way of gifts. It appears these gifts were money transfers to internal property companies within the Quinn Group. The Central Bank representative described these as perhaps not gifts, but tax efficiencies. Is it the case that there was tax evasion?
It has been revealed here that the practices the company was engaged in were at best questionable and at worst, perhaps, reckless. It could be described as Wild West capitalism and some have described it as that. It is alarming that a major insurance company in Ireland was engaged in siphoning off more than €200 million and using it for internal companies - it now appears the money was used mainly overseas to buy up property - at a time when its balance sheets were in a precarious state. What I want to know is what the regulator or the Central Bank was doing. Who was supposed to be protecting the small people such as us who pay their 2% levy and their PAYE every week, or why were we not being protected?
What I want to know is whether anybody here from the Central Bank or the Department can tell us who at the time was looking after the interests of those who had insurance policies with Quinn, those who may not have had policies but were paying the 2% levy, and those who, whether self-employed or PAYE workers, were paying their tax every week? It is not only the insurance compensation fund that the taxpayer is being hit with. The activities of companies such as this, associated companies and banks have landed us in a considerable mess in this State. Who was supposed to be protecting us during all of this time?
Mr. Domhnall Cullinan:
The gifts were, as Deputy Stanley stated, transfers out. I want to clarify that in the context of a great deal of media speculation about people and everything else. These were proper - for want of a better expression - inter-company transfers and I have no reason to believe for a second that there was any tax evasion involved, particularly not on the part of Quinn Insurance at that time. I want to clarify the issue of gifts. Sometimes, what items are described as in the accounts are not necessarily what they might appear. I have no reason to believe there was any tax evasion.
The responsibility for complying with the insurance Acts and the regulations, which are in place to fundamentally protect policy holders and, more widely and indirectly, the wider taxpayer, rested squarely with Quinn Insurance and those charged with the management of that company. The role of the Central Bank is to ensure as far as possible that such companies comply with the requirements and, indeed, to act when they do not do so. I have already explained why certain things were not done in the past as well as they might have been and how we feel we have rectified and will continue to improve that in the future.
Mr. Cullinan states it was the Central Bank's role to ensure that Quinn Insurance regulated itself, but it does not appear that was happening. Given the figures outlined here today and the types of practice that were being carried out within the company, it is clear that it was not happening. What I am really concerned about is whether I can be sure, walking out of this room today, that some other insurance company or outfit are not involved in leading us into a situation like this again. What guarantees do we have in this regard, and what is the Central Bank doing about it? Perhaps someone from the Department of Finance might like to reply as well.
Mr. Domhnall Cullinan:
I will repeat what I stated about the increased engagement model. Our resources are dedicated towards those firms that could have the highest impact. We have increased capacity, we have increased capability and the resources are directed towards those companies that could have the highest impact. There are seven other high-impact insurance companies out there. I do not believe Quinn Insurance was a proxy for those other companies. I think they believe in a better way. They must all comply with the corporate governance code requirements and the various other requirements that are in place. They all have in-house actuarial functions. There is considerably more reassurance we can take with regard to those other entities, both in terms of their own compliance and in terms of our increased supervision of those entities.
I will be as discreet as I can. I acknowledge the good work that has been done in maintaining so many jobs in the current climate.
In regard to the industry’s processes, as a layperson it is extraordinary that an insurance company would not employ actuaries. The actuarial process seems to be at the core of the insurance business. Did the auditors have actuarial experience? The reserve account was underestimated by €250 million over a four year period. How could an auditor allow that to happen?
Mr. Domhnall Cullinan:
Under the Insurance Act 2000, which is one of the three Acts at the centre of insurance legislation, life assurance companies are required to have what is known as an appointed actuary, that is, an actuary who is always available. There is no equivalent provision for non-life companies. I concur with the Deputy that it appears extraordinary but, as I noted earlier, I do not necessarily see Quinn Insurance as a proxy for the rest of the industry. The rest of the industry did employ actuarial functions. Under the solvency II directive, all insurance companies are required to have actuarial functions. If there is a deficit from a legislative perspective it will be addressed by means of that directive.
In regard to the Deputy’s second question, it is the case that auditors have actuarial functions.
If they had an actuarial function it is extremely regrettable that they did not identify the lack of actuaries in Quinn Insurance.
Mr. Cullinan stated that the Central Bank was largely dependent on whistleblowing. Clearly in this case not only was no one blowing the whistle but there was not even a whistle to blow. Does the Central Bank contain a dedicated separate division for the insurance industry, given that it is the regulator for the banking and insurance sectors?
Mr Cullinan acknowledged that in recent years significant resources have been provided to support his work. The period we are discussing is between 2006 and 2009, which was a period in which this country had more money than ever before and, perhaps, ever again. Mr. Cullinan’s comment that the Central Bank was under-resourced is significant and should be borne in mind by the committee. I presume the same could be said of banking supervision. The insurance industry was supervised by a specific division. At a time when the Government had unlimited capacity, did Mr. Cullinan seek the resources that could have saved the Irish taxpayer €1.6 billion?
Mr. Domhnall Cullinan:
I was not in the same management position during that period. I made representations on resourcing and how it needed to be increased in respect of the role I was carrying out at the time. The head of the insurance supervision department at the time also made representations in that regard. I cannot answer the Deputy in regard to where it went beyond that because I was not involved in such representations or decisions.
Mr. Cullinan approached the person who was in charge of the insurance division and requested additional resources. From what he has stated, that person also requested additional resources. What happened when they did not get the resources?
I am not sure it is appropriate to identify specific individuals by name but does Mr. Cullinan believe the person in charge of regulating our insurance industry went to the Government to request additional resources?
In other words, resources could be moved from the banking sector. Clearly, resources were not being lashed out for the banking sector during this period. I am not being facetious in that regard. Are the people who can answer that question still working in the Central Bank? Alternatively, can one of the departmental officials tell us whether a request was made to the Government for more resources to regulate the insurance industry during the period from 2006 to 2009 and, if so, was the request refused or partially granted?
Would it be appropriate to get an answer to this simple question at some point? Given that the Irish taxpayer is required to pay out €1.6 billion, an allegation has been made by the person in charge of insurance regulation that a request was made for more resources but we do not know whether that request was denied or submitted.
Mr. Domhnall Cullinan:
With respect, I do not think there is anything new in what I am saying. I have already commented on the Nyberg report and the Regling and Watson report, as well as Professor Honohan’s report on the state of supervision in the Central Bank. That information is available as a matter of record.
I have to welcome this significant improvement but given the strength of the economy at the time, it is outrageous that the Central Bank sought increased resources and did not get them. I would like clarification.
In fairness to Mr. Cullinan, he was not the person who made the request nor did his colleagues and, therefore, we have no alternative unless the Department has knowledge as to whether a request was denied by the previous Government.
A few years ago before the cabal of speculators and parasites crashed the economy and put the burden on everybody else, there were serious allegations regarding Quinn Insurance, which emanated from a whistleblower who had left the company, about unorthodox and unacceptable methods of pressurising claimants to settle on terms that were favourable to the company. There were allegations, for example, of retired gardaí being used to visit claimants in their homes, etc. Did the Central Bank look into that? It was widely reported at the time. Will Mr. McAteer give an assurance that nothing like that is happening in the new manifestation of the company?
Mr. Domhnall Cullinan:
I want to be a little careful about what I say in this regard because I think it is related back to a Sunday Tribune report, if memory serves, and the company may have taken some sort of action. I do not know where that lies, particularly given the newspaper is no longer with us. Many people spoke about the model that company had. The real problem with Quinn Insurance was the large claims. We refer to the smaller claims as attritional claims such as the fender benders and the slip and trips. The model they had for that is probably more the model to which the Deputy is referring. With any model like that where the cost is €10,000 and one settles for €7,000 and somebody views that as a €3,000 profit, there is a danger in that one of the basic principles of insurance is to indemnify people in order that if they lose, they are compensated for their financial loss. It is equally wrong to overcompensate them but they should be in the same position after the claim has been settled as before it. That is the fear in that type of model. What I can certainly say to the Deputy is in terms of complaints about Quinn Insurance claims settlement and the company's compliance with our consumer protection code and the rules, there were no significant issues and there was not a significant level of complaints, certainly as compared to their peers. While I am aware of the allegation, it did not manifest itself in a manner within the Central Bank that I could make any comment on beyond that.
Mr. Aidan Cassells:
In terms of the current operation, we are very conscious of the issue raised by the Deputy about the ongoing activity, which relates primarily to the UK. There are significant codes of practice laid down relating to the operations of people who interface with customers relating to settlements of attritional claims. They are onerous and good and something we would want to fully adhere to. As chief executive officer, I definitely would not have any truck with the activity of approaching claimants with a view to forcing them into settlements that are not fair and reasonable relative to the injury they have suffered. The Deputy can take it for sure that as far as we can governance will ensure people are treated fairly as regards claims.
I welcome the delegations. I refer to the accounts and the financial operation position upon appointment. It states, "The surplus was after the Quinn family had extracted approximately €200 million over the previous two years by gift". Is that from the QIL group? How was that reflected in the accounts? Was it as a director's loan or inter-company loans? What was the money used for? It seems an extraordinary amount, equating to €100 million per year.
Mr. Michael McAteer:
With regard to two transactions that were recorded in the accounts in 31 December 2008, as was mentioned previously, it is recorded in accounting legislation as "gifts". I would guess this but gifts usually mean that the money was written off between companies. Money was owed by Barlo Financial Services to the tune of €75 million and then written off and, therefore, treated as a gift.
Mr. Michael McAteer:
Our role is threefold. First, the remaining liabilities and claims due to UK policyholders have to be managed and, while Liberty Insurance carries out the day-to-day management on our behalf, it is our job to oversee that process and ensure the minimum cost possible to the Irish taxpayer occurs. The second part of our role is there are still significant assets, circa €200 million, that will need to be realised over the next two to three years. These are legacy assets that were previously in the insurance company or its subsidiary companies. Finally, it is part of our role to evaluate to whether redress actions can be taken against other parties to minimise the call on the fund by taking compensation.
In that case I will ask the following question. Does it fall within Grant Thornton's remit to follow the money trail of moneys that would have been given by way of intercompany loans from the Quinn Insurance company?
The €1.3 billion guarantee is listed under guarantees given to subsidiary companies. What was the value of loans given by financial institutions? The €1.3 billion was the guarantee but how much money was actually involved?
Mr. Michael McAteer:
That €1.3 billion represents loans given to the wider Quinn Group, secured on assets within the wider Quinn Group and also secured by guarantees given by the subsidiary companies of Quinn Insurance. So it was €1.3 billion lent to Quinn Group and not to Quinn Insurance but secured on subsidiary assets of Quinn Insurance.
There was €450 million at the end. Mr. McAteer said there was an agreed settlement of €200 million, generating a saving of €250 million. I ask Mr McAteer to link that €450 million back to the €1.3 billion.
Mr. Michael McAteer:
The €1.3 billion was a wider loan given to the Quinn Group of which part of the security were of the assets that fell under our remit. Those assets had a value of €450 million. If the €1.3 billion had been called upon, technically all of that €450 million could have been called upon by the banks and bondholders. In lieu of not calling in that €450 million, a payment of €250 million was made.
I have questions for the representatives of the Central Bank. Can Mr. Cullinan explain how QIL was able to operate with reserves, which appeared to be significantly less than other insurance companies were providing in the market? Clearly, anecdotally or otherwise, it was significantly undercutting other insurance companies and gaining significant market share. The purpose of regulation is to ensure there is a level playing field. How did it happen that QIL was clearly operating with smaller reserves than other companies? I ask Mr. Cullinan and to explain the regulation that allowed that to continue. Shortly after Mr. Elderfield had been appointed as Financial Regulator he moved to put the group into administration. I believe that related to pressure on the QIL group in terms of guarantees and so forth. How was the QIL group allowed to operate with reserves so much smaller than other insurance companies?
Mr. Domhnall Cullinan:
Non-life insurance companies are required to provide to the Central Bank on an annual basis a statement of actuarial opinion, where essentially the signing actuary certifies that the reserves are adequate. That statement is also subject to the audit of the company's auditors. If the signing actuary cannot provide an unqualified statement, he or she must whistle-blow to the Central Bank. We never received a whistleblowing report in respect of QIL from its signing actuaries. During its interaction with the company, PwC highlighted to us that there were some differences between the calculations of Milliman, the signing actuaries, and PwC. In 2009 and at the beginning of 2010, we facilitated a series of meetings between these bodies and informed QIL that it was unacceptable that these gaps existed. So we were aware that there was arguably an element of deficit in the reserves, but not to the extent that subsequently transpired.
I wish to revisit one or two points Mr. McAteer made. I appreciate he is much more knowledgeable on matters of accounting, disclosures and rules than I am. My understanding is that the €200 million was actually cash that left the company and was not the cancellation of intercompany balance.
While I am open to correction on this matter, cash may only leave the group in a number of ways. It can happen by way of director's loan or director's salary. It was hardly motor expenses - it would be a bit high. The other way is through inter-company loan. Does Mr. Cullinan believe that this went out to individual directors of the company?
No, but at the end of the 2006-07 accounts was there a balance in the inter-company loan? Obviously there was and then it was written off. It was an inter-company loan that was effectively written off.
I am dealing with a different area. I do not want to lose track of the regulation side. Is Mr. Cullinan saying the regulator would not have conducted its own checks or done its own inspections of the levels of reserves of insurance companies such as Quinn Life? Did it rely entirely on the actuarial report and the auditor's report?
Mr. Domhnall Cullinan:
The simple answer to the question as to whether we went out and did any re-reserving exercise within insurance companies was that we did not. We did not have the capability of doing it. Throughout the 2000s, as I said earlier, our actuarial capacity was between zero and two, and they were almost exclusively devoted towards working on the Solvency II directive that was coming about in Europe. Ideally what one would do in those circumstances would be to outsource it. That was not an avenue that was open to us because of the way section 16 of the Insurance Act was drafted.
I am assuming the Central Bank would have done some sort of risk analysis and review of the reserves of different companies it regulated. Clearly it should have come to light that Quinn was carrying lower reserves. On a risk analysis basis would that not have set off alarm bells in the Financial Regulator's office?
I will only say what is in the public domain. It has been reported by informed journalists who had carried out analysis and who reported on what was known in the public domain. Quinn Insurance Limited had descriptions on its balance sheet when PwC was addressing that balance sheet. I am not sure if it was for 2007 or 2008, but it related to balances on deposit. On further examination it turned out that those balances on deposit were in fact inter-company and group holding balances which had been "borrowed from" Quinn Group Holdings for Quinn Insurance Limited.
When the matter was looked into, the regulator and the auditors said it had to be rectified and it was done over a period of about nine months by equal instalment repayments to the group holding company and back into the insurance company. A fine of €3 million was imposed on the company, the largest fine in banking and financial history in this country. However, it was not even a slap on the wrist. If the amount had been €400 million, as it was at one stage, that would have amounted to three quarters of 1% for what had been a raid on cash reserves. Flags were waving, multiple alarms were sounding and orange lights were flashing, yet complacency seemed to follow and again there was drift, which was extraordinary.