Oireachtas Joint and Select Committees

Thursday, 6 October 2016

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Rising Costs of Motor Insurance: Discussion (Resumed)

10:00 am

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Today, we are dealing with the rising cost of motor insurance. I welcome Dr. Cyril Roux, deputy Governor, Ms Sylvia Cronin, director of insurance supervision, and Mr. Bernard Sheridan, director of consumer protection at the Central Bank of Ireland. The committee concludes its public hearings today on the rising costs of motor insurance. I have also asked Dr. Roux to comment on the recent remarks made by Mr. Ed Sibley, director of credit institution supervision, on the non-performing bank loans and in particular the statement that "engagement with banks has already shown some evidence of a return of more aggressive lending practices and cultures". However, we will confine the main part of our meeting to the topic under discussion. The witnesses will make opening remarks which will be followed by a question and answer session with the members.

I advise witnesses of the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They 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, her or it identifiable.

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 House or an official either by name or in such a way as to make him or her identifiable.

I now invite Dr. Roux to make his opening remarks.

Dr. Cyril Roux:

I thank the committee for the invitation to meet with it today. General insurance protects people from financial loss that would disrupt their lives or businesses. Having the appropriate insurance in place, which pays out when needed, enables consumers and businesses to conduct their business on a day-to-day basis.

Before I delve into insurance pricing and supervision, let us remember that behind the cold numbers of motor insurance premiums and claim costs that show up in insurance accounts and in the bills we receive, lie the losses suffered in road accidents. On the one hand, rising insurance premiums affect consumers and businesses. On the other, we know how devastating road traffic accidents can be for the lives of victims and their families. Reducing the number, severity and cost of road accidents is a worthwhile policy goal in itself. As a secondary benefit, it would provide ground for sustainable insurance premiums. Low premiums with high payouts cannot last and ultimately result in failure and further consumer detriment. It is against this backdrop that I would like to set out the role of the Central Bank in the area of insurance and then to give an overview of the motor insurance market in Ireland. I will also briefly cover areas of focus for the bank, together with some thought on how to address the challenge of increasing costs.

The Central Bank of Ireland has two specific mandates as regards insurance. It is responsible for the prudential supervision of insurance companies authorised in Ireland. It is also responsible for the supervision of conduct of business in Ireland, also referred to as consumer protection. We describe this dual role and how we discharge it in our annual performance statement, which has been provided to the committee.

Prudential supervision seeks to ensure that insurance firms remain solvent, that is to say, that insurers are able to pay claims in full, as they fall due. Given that claims are paid long after the premiums are set, this requires a forward looking assessment with respect to the entire business of the insurance and reinsurance company of its state of solvency, the establishment of technical provisions, and its assets and capital. The Central Bank is responsible for looking after the solvency of insurance companies incorporated in Ireland, whether or not they belong to international groups. However, when they do, supervision takes place in an international college of supervisors chaired by the supervisory authority of the head of the group. Such is the case for all major domestic insurers such as AXA, Allianz and RSA, with FBD being the exception.

Insurance directives have prescribed for decades that prudential supervision of insurance undertakings, including that of the business they pursue through branches or under the freedom to provide services, shall be the sole responsibility of the home member state. As such, foreign insurance firms such as Aviva and AIG, in the United Kingdom, Zenith and Enterprise in Gibraltar, Qudos in Denmark or Setanta in Malta, are incorporated, authorised and subject to prudential supervision by foreign authorities, and not by the Central Bank.

In the area of business conduct, the Central Bank has put in place a consumer protection framework to protect the interests of consumers in dealing with insurers. The consumer protection framework also applies to European insurers selling in Ireland on a freedom of establishment basis or a freedom of services basis. The consumer protection framework includes codes and regulations which set out standards for firms when dealing with consumers, including when selling insurance policies, handling claims and renewing policies as well as the provision of information and dealing with complaints.

The Central Bank does not have a role in the setting of premiums, and like all supervisory authorities in the European Union, EU, is explicitly prohibited by European law from having one by Article 181 of the Solvency II directive. This is a long-standing prohibition carrying over from Solvency I. In carrying out their dual mandates of prudential and conduct of business supervision, insurance regulators throughout Europe, including the Central Bank, cannot intervene on premium rates, but must rely on other instruments.

This is because the European single market for insurance has been set up by EU legislators on the basis of free market principles. This is in keeping with the guiding spirit of the Treaty of Rome. The contention underpinning this institutional choice is that over the medium term, the free play of market forces brings benefits to consumers which outweigh their costs. However, it also means that the volatility of prices for insurance services cannot be constrained by insurance regulators including the Central Bank.

Insurance rates are driven by the money coming into insurance companies relative to the costs they subsequently experience, in a similar way to any other commercial concern but year-to-year insurance rates are also strongly impacted by the competitive environment faced by insurance firms. Prices are affected by the underwriting or insurance cycle which plays out over a number of years.

Insurance firms may fail when poorly selecting risks or underpricing their policies, which is known as "underwriting risk". This, together with limited shareholder support, is likely to have been the main driver of the failure of Setanta in Malta and Enterprise Insurance in Gibraltar, although only their local prudential supervisors are in a position to tell. The Central Bank has adopted an intrusive, forward looking and proactive supervisory approach, including in relation to underwriting risk. Our supervision is conducted through a combination of approaches, including off-site activities and comprehensive on-site inspections. When we are not satisfied with the governance, monitoring and management of risks, including underwriting risks, we issue time-bound requests for remedial action.

Such requests can include revised business and capital plans, forms of contingent capital such as parental support and strengthened reinsurance cover.

In discharging its statutory objective in consumer protection to ensure that, in regulating firms, the best interests of consumers are protected, the Central Bank has focused on: clarity of price disclosure by firms; strong suitability requirements to ensure that any product sold is suitable for the consumer's needs and that any product recommended to a consumer from a range of products is the most suitable from the range available; and ensuring that consumers get relevant information sufficiently in advance to equip them to shop around.

Let me now turn to the motor insurance market and the way it operates in Ireland. The Irish motor insurance market is concentrated across eight firms, most of which are part of large international groups. There is also an active intermediary sector selling motor insurance on behalf of the insurers. These non-life firms sell a variety of property and casualty insurance policies - there are no pure motor insurance companies among them. These firms receive premiums from policyholders and investment income from their investments, while they pay out claims to policyholders and injured third parties and pay commission to their distributors, expenses to their staff, interest and dividends to their capital providers and premiums to their reinsurers.

For non-life insurance companies in Ireland, the balance of costs and revenues has been off kilter for several years. Premiums and investment income have decreased while claim costs have increased, leading to sustained losses. Regulatory returns submitted to the Central Bank for companies subject to prudential regulation in Ireland for Irish motor risk show combined underwriting losses of close to €700 million for the years 2013 to 2015, inclusive.

The returns submitted to the Central Bank by companies subject to prudential regulation in Ireland or operating as a branch show that the gross premium for Irish motor business was a little less than €1.3 billion in 2015. This represents a reduction of 25% from the 2005 gross premium. On the other hand, in 2015 gross claims incurred were €1.3 billion. This represents an increase of more than 40% from 2005, with much of this increase arising since 2012.

The non-life insurance industry has also been significantly impacted by the prolonged low interest rate environment. Non-life insurers balance their underwriting results with investment income, mostly interest income from investments in government and highly-rated corporate bonds. In a low interest rate environment, a much lower investment income cannot compensate underwriting losses to nearly the same extent.

The bulk of the insurance firms' payouts are through claim costs. Injury claim costs account for the majority of motor claim costs and, due to the length of time it can take to settle these claims, the true or final cost for an insurer does not emerge for a number of years after it has set the premium and sold a policy. However, there are a number of changes in the claims environment in recent years contributing to a greater overall cost. These changes include an increase in claims frequency as a result of increased economic activity and miles travelled. Average claim costs are also increasing, particularly for bodily injury claims because of a number of factors, including changes in court limits, the introduction of periodic payment orders and the potential impact of lower discount rates. The Aspiro judgment is an additional factor of claim cost inflation.

In the face of increasing premium rates, the consumer protection framework provides that consumers must be given at least 15 working days' notice prior to renewal providing an opportunity to choose an alternative provider. Based on external market research, it is clear that price is the main driver of consumer switching behaviour.

Let me turn to the supervisory action of the Central Bank and provide a few examples. Last year, the Central Bank conducted a bodily injury review to investigate the trends in frequency and severity of these claims and the quality of firms' approach and governance around the issue. We found a clear, if disparate, trend towards both greater frequency and cost of bodily injury claims. We also found slower settlement rates, uneven data management quality, and instances where boards exercised less monitoring and oversight than required. This highlighted that some firms were lagging behind peers in taking the full measure of emerging claims in their technical provisions and estimates of ultimate claim costs. We issued recommendations to individual firms and made clear our expectation that up-to-date claims data inform reserving as appropriate.

This year the Central Bank undertook a sample review of motor insurance underwriting and pricing to investigate each firm's governance of its underwriting and pricing methodology, assumptions and decision-making around pricing. We found that there was a significant time lag between increasing claim costs being experienced and the revision of pricing assumptions. Some of this was due to firms underestimating the extent to which claim cost increases were structural and not cyclical, and some was due to firms taking commercial decisions to delay increasing prices in order to hold market share in the face of some competitors pricing much lower than break-even. The delay in incorporating fully in premiums rates the current trends in claims experience contributed to suppressed premium increases, followed by a large upswing in premiums. Had prices risen earlier and more gradually, some of the heavy losses firms have experienced here over the last few years, in particular, those firms that engaged in very low pricing, would have been avoided, and consumers would have started to pay higher premiums earlier, albeit at a more gradual pace.

In addition, given the patchy experience of foreign firms selling motor insurance into Ireland on a freedom of establishment or freedom of services basis, the Central Bank is engaging directly with the relevant home state regulators to ensure that they have a full understanding of the issues affecting the Irish market and to request they act accordingly. The Central Bank is strongly proactive in this regard. We provide our counterparts with clear information about claims in Ireland and remind foreign regulators of their responsibilities towards Irish policyholders. Indeed, as already mentioned, the Solvency II directive squarely places the sole responsibility of financial supervision of foreign firms on foreign regulators, and prescribes that the home state regulator verifies for the entire business the state of solvency, its assets and its technical provisions.

As I mentioned at the outset, average premium rates over the cycle are driven by the overall claims charge, if not exclusively. Policy actions that would result in a reduced level and uncertainty of claims would contribute to reducing the rise of average premium levels or might even reverse the trend.

This committee has heard the many strands that would contribute to that worthwhile goal. Let me start with comments which are relevant to the topic but which lie outside the remit of the financial supervisor. All actions that would reduce the number of road traffic accidents would be welcome. Typical among those are improved infrastructure, stringent enforcement of road safety rules or continued enhancement of public awareness about the preventable causes of accidents. The committee has also heard about the extent of fraudulent claims and the levels of uninsured driving that are said to prevail. Policy actions that would help reduce either would also help reduce the claims charge that is ultimately to be borne by premiums. Finally, the committee has heard about the role and effectiveness of the injuries board, and how it has contributed to speedy and fair settlements that avoid unnecessary legal costs.

I would now stress that greater certainty and reduced volatility of the claims factors would benefit consumers and create a more stable reserving environment. Multiple decisions over the last three years, although taken for valid reasons, have had an opposite side-effect. Since insurance companies need to book reserves with a risk margin, the greater the uncertainty, the greater the claims estimates. In that regard, I can only welcome the publication of the revised book of quantum and hope it will steer broadly compensation settlements and decisions in the future. All these policy actions would give a foundation for more sustainable insurance premiums.

On foot of the many strands of work involved, the Department of Finance is leading a multi-departmental insurance policy review. The Central Bank contributes to this work and shares what information it has at an aggregate level to assist the Government to decide on next steps.

The Central Bank will continue to focus on the adequate protection of policy holders and beneficiaries in accordance with its dual role of ensuring the solvency of Irish interests and adherence to the consumer protection framework. The Central Bank recognises that the significant increases in the price of insurance have an impact on consumers and is committed to working with the committee, the Department of Finance working group and other stakeholders as is appropriate to the mandate of the Central Bank.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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I thank Dr. Roux for his presentation and for coming here. What level of profits and losses did the motor insurance industry make during the past 15 years?

Dr. Cyril Roux:

Maybe I will concentrate on the Irish motor business because it is good to remember that the business we regulate is very large, and comprises €70 billion in premiums per year. Irish motor insurance is less than 2% of business written in Ireland. Most of the business we supervise is life insurance business and most of the non-life business we supervise is abroad. The vast majority of motor insurance business written in Ireland covers foreign risks. When I give answers, I have to not look at published accounts of these firms, given that the published accounts will cover much more than domestic motor insurance. I must examine statistics in lines of business that cover Irish risks. These are not strictly speaking accounting returns. I can point towards the underwriting profit or loss.

During the past ten years, firms made declining underwriting profits until 2008. From 2006 to 2008, it was €700 million. Since 2009, with a blip in 2011, they have made an underwriting loss every year. In 2008 and 2010, they made losses of a little less than €100 million. There was a loss of €34 million in 2012, €189 million in 2013, €230 million in 2014 and €333 million in 2015, and we expect there will be a loss this year.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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How do they relate to table 15 of the Central Bank insurance statistics, which relate to the motor vehicle Irish risk insurance business? There are two categories, namely, undertakings with their headquarters in Ireland and undertakings with their headquarters in other EU states. What accounts for the difference? Dr. Roux said some risks that are not in the State are included in the figures published in table 15.

Dr. Cyril Roux:

The table is from our statistics department. They received the data from Insurance Ireland and these are internal data from firms. The table represents our views of this risk and we have taken it not from table 15 but from table 22. They are interim statistics.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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I will get back to Dr. Roux on it. Can he explain, in two sentences, the difference between table 15 and table 22?

Dr. Cyril Roux:

I will come back to the Deputy. These are statistics data, not supervisory data. They are less relevant to the work we do. While they give a sense, they are not the primary sources we use. They are more statistics data that are used by the other half of the house.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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Dr. Roux stated the legal reality that:

The Central Bank does not have a role in the setting of premiums, and ... is explicitly prohibited by European law from [doing so] ... This is because the European single market for insurance has been set up by EU legislators on the basis of free market principles ... The contention underpinning this institutional choice is that over the medium term, the free play of market forces brings benefits to consumers which outweigh their costs.

Is this not just an act of faith? Is there any evidence, regarding the motor insurance industry, to back it up for people in Ireland who must have motor insurance?

Dr. Cyril Roux:

In a sense, it is an act of faith, the same way that creating the Single Market or the EU is an act of faith. It is an expression of the political will of the member states and the way the EU has been constructed. There are other acts of faith that we will come back to later. Any supervisor in any member state of the EU is able to supervise business conducted anywhere. It is an act of faith to say a person can establish a company in Gibraltar or anywhere else and can do any kind of business anywhere in Europe and be supervised by the local supervisor, that local supervisors are in a position to supervise business written far and wide in a different legal environment and a different language. This, too, is an act of faith.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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Weighed against the evidence we have, this is the article of faith that was implied in terms of banks and property lending by the Central Bank according to the rules under which it operates and the consequences of a €60 billion loss for the State. Regulatory returns submitted show combined underwriting losses of €684 million for the years 2013, 2014 and 2015. It is accepted and I agree that it appears in the statistics. Motor insurance companies make losses in a number of years and a consequence is that they increase prices to try to return to profitability. However, in the preceding years when they made profits, the profits were not carried forward. The profits are distributed whereas the losses are not. Does it not place an unfair burden on those who have to get car insurance? If there are profits, they are taken by shareholders, whereas if there are losses, the companies do not look to the shareholders but to those who need car insurance.

Dr. Cyril Roux:

The tide turned in 2009 in terms of underwriting profit and loss. The shareholders shouldered all the losses sustained since the beginning of the decade. As the losses were removed from the wealth of the companies, they resulted in a net loss for shareholders and the value of the businesses was reduced. The solvency of the firms was eroded and shareholders were asked to put more money into the companies. During recent years, hundreds of millions of euro was put back into these companies through capital increases by the shareholders. In a sense, they have covered the losses. In the years when companies made large profits, one could say policyholders were paying too much for cover. However, during recent years, they have not been paying break-even prices.

What is the situation with premiums charged today? We will know only in a few years if they are over or under break-even. Our sense is they may be barely breaking even, given the claims cost and charges.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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One of the jobs of the Central Bank is looking after the solvency of insurance companies. I presume that includes a level of profit. Is there any level of profit the Central Bank would consider excessive for insurance companies?

Dr. Cyril Roux:

The most comfortable position for everyone, which everyone would like to see, is a market where there are stable or decreasing claim costs, which would be even better. It would have stable premiums, a level of profit that is neither too high nor loss-making - as a company must be a sustainable business - and no sector is seeing losses year after year that are eroding the capital base. That is what we want to see. When there are loss-making businesses, we get nervous because it erodes the solvency position. When there is a very high profit margin, that is where the act of faith referred to by the Deputy comes into motion. The presumption is that in a market where there is a very high profit, new entrants will come in and drive down premium rates. That is what we expect to see.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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I have a question about young drivers. The report published towards the end of last year relates to the private motor insurance statistics for 2013. The point is made in it that younger policyholders continue to present the highest average surpluses. Will the witness unpack that? Is that indicating the extra amounts being paid by young drivers, on average, for their insurance is above what is justified by the extra risk associated with young drivers? Is that a fair summation of its meaning?

Dr. Cyril Roux:

I am a bit stuck by the fact that this surplus moniker is a statistic and not an actuarial, regulatory or supervisory term. My sense is if that is the case, one might expect some insurers to bring down the prices for young drivers. That is what one might expect to see. It would not go to the average level because young drivers have more accidents. This goes back to my point on uncertainty. When a person looks for insurance cover and there is a long history of being insured, the insurers know more about that person and can price more precisely about risk. A young driver does not have a claims history and the insurers build in a greater margin for uncertainty. They do not know if a young driver drives safely because there is no history on which to build. One would expect a greater margin of uncertainty.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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Insurance companies deal in averages and big numbers, although they deal with individuals as well. The definition of average surplus per policy is the average earned premium income per policy less average claim cost per policy. If it is the case that the Central Bank is saying that younger policyholders continue to present the highest average surpluses, it indicates not just that they are paying more in line with the increased risk but they are paying more on top of that again. Surely that is what is stated in the report? It is not just saying that young drivers are paying more.

Dr. Cyril Roux:

I understand the point. I would expect there to be a greater margin for uncertainty for young drivers but for me the point is that if the Deputy is right, we would see competitors entering that segment of the market and driving down prices. My colleagues have told me there are fewer insurers offering policies to young drivers. That segment has less competition, and as there is less competition, one would see higher margin.

Photo of Paul MurphyPaul Murphy (Dublin South West, Anti-Austerity Alliance)
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Will the witness provide the profit figures in written form and circulate them to the committee? It would be helpful to be able to compare them.

Dr. Cyril Roux:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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In the presentation, the witness stated that low premiums and high payouts cannot last. When did the Central Bank become aware that this scenario existed or of that truism?

Dr. Cyril Roux:

Of course we were always aware of that. As the Deputy said, this is a truism and is the insurance or underwriting cycle. Looking at the history of insurance here or in the UK over decades, one sees multi-year insurance cycles where for a time insurance is profitable and capital is built through profit. Through the build-up of profit, excess capacity or capital-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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This is a nice fluffy phrase but the Central Bank is the regulator of these insurance companies. We have seen insurance companies go bust and the Irish people having to pick up that tab. We have seen insurance companies under the Central Bank's watch erode their capital base. When did it dawn on the Central Bank that insurance companies were acting imprudently in their underwriting and pricing?

Dr. Cyril Roux:

It is a right of companies to make losses if they have the wherewithal to do that. It is not that we do not see the figures or companies making losses. We monitor solvency and when it is threatened or we see a trend that cannot continue, we act upon it. We cannot prevent shareholders from deciding they will stay in the market. What happened in the Irish market, until the failure of Setanta, was that at least one actor was always willing to underprice. At that stage the commercial decision by other actors was either to price themselves out of the market - suffering losses for another reason because of their cost or expense base as there is not sufficient business to absorb it - or to make the opposite decision to stay in the market and ask for less than break-even prices. We let this play out, because that is the insurance cycle, until there is a risk for the solvency of firms. When there is a risk for the solvency of the firms, we act and we have done so.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We will touch on the action the Central Bank could deploy. The witness's analysis is as if this were an unregulated entity.

Dr. Cyril Roux:

Absolutely not.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We have the Central Bank telling us that a number of insurance companies acted imprudently, built up unsustainable overheads and, in doing so, eroded their capital bases. This puts the risk of solvency right at the heart of it. The Central Bank watched all of this happening, but it did absolutely nothing. As a result, there has been a dramatic increase in prices for consumers who saw increases of 28% last year and increases of 70% in recent years. Rather than acting properly, the insurance companies took people on a peak-to-trough rollercoaster ride as they tried to follow the market. Was it not the job of the Central Bank to say that this policy was imprudent? The companies' underwriting was imprudent because they were building up unsustainable overheads. As a result, they eroded their capital base. Was it not the job of the Central Bank to step in at some point in time and say that this was not in line with its view of best risk management practice for this industry?

Dr. Cyril Roux:

This is what we have done.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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When was it done? That is the first question I am asking. When did the Central Bank cop on that the insurance companies were acting imprudently in relation to underwriting and policy premiums?

Dr. Cyril Roux:

We have done that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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When did that happen? Was it last month, last week or last year? Was it 2013 or 2010? When we know that, we will be able to figure out what actions the Central Bank took to try to stop this.

Dr. Cyril Roux:

Can I go back to the Deputy's points? He is saying we should have acted in a way that would have caused prices to increase earlier. This would have meant that policyholders were paying more at an earlier stage. There would have been a more gradual increase. We cannot act in such a manner. Firms have requirements and we monitor against those requirements. When we were under Solvency I, as we were until the end of last year, firms had to respect a solvency margin because of the minimum harmonisation directive. Rather than asking for the solvency margin, the practice in Ireland was to ask all firms to have between 1.5 and two times the solvency margin. We decided we were not comfortable with the EU rule and we decided to set the Irish rule at a much higher level. As long as one does not reach a requirement, one does not reach a requirement. We are talking about actions that force commercial entities to do certain things. We do not have the power to run these companies. They either adhere to these requirements or they do not.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Yes, but-----

Dr. Cyril Roux:

We take a forward-looking approach. As long as the companies do not reach a requirement or are not likely to reach it, or we cannot see a path that would enable them to reach it, we do not act on that front.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We have seen how the Central Bank's non-action has resulted in insurance policyholders having to pick up the tab for Quinn Insurance, a €1 billion company that went bust under the Central Bank's watch.

Dr. Cyril Roux:

No, it was not-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Can I finish my point?

Dr. Cyril Roux:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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In its latest report, the IMF has pointed out numerous areas in which the Central Bank can increase its supervision and regulatory powers over the insurance sector. We have a very bad reputation for companies passporting into this country, or companies domiciled and operating in this country going bust. As we know, people are picking up the price for that. One of the recommendations suggested by the IMF is that the Central Bank should use its macroeconomic tools to develop its own stress test, in line with the European stress test, to look at extreme but plausible cases and stress them in terms of capital adequacy. The IMF has pointed out that the Central Bank has the power to do certain things it has not done in the past.

I will repeat my original question. When did the Central Bank become aware that, as the former Governor, Professor Honohan, wrote in a letter to the Minister for Finance, companies "built up an unsustainable overhead and followed an imprudent pricing and underwriting approach across most business lines"? According to Professor Honohan, this "resulted in companies' business plans becoming less resilient to downside risks such as an increase in frequency and severity of claims"? He went on to say "in effect, by failing to charge premiums sufficient to cover claims costs and expenses, several Irish general insurance companies have eroded their capital base". The Central Bank is responsible for making sure erosion of the capital base does not happen. I am asking when the Central Bank became aware that insurance companies in Ireland were acting imprudently, which I define as having no due regard to the consequences of their actions.

Dr. Cyril Roux:

This is our daily job. It is not the case that one wakes up on a particular day and realises that this is happening. We engage with firms day in and day out. We supervise them. I do not agree with the Deputy's presumption that our job is to ensure there is no erosion of the capital base. Erosion of the capital base is allowed in the insurance cycle. Shareholders have a right to engage in that behaviour as long as we are satisfied that the company's solvency is not at risk. As a result of our actions, since I arrived I have not seen any of the actors we regulate going bust. They did not go bust because we monitored them. We asked for and demanded parental support, reinsurance cover and capital injection. This was done in due time so that during the period in question, none of the Irish policyholders suffered. The only people who actually picked up the tab during that period were the policyholders.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Which companies is Dr. Roux talking about? Does he include Quinn Insurance in this context?

Dr. Cyril Roux:

I am really sorry, but I cannot talk about Quinn Insurance because it is a separate case. I do not think it is related to the question of increasing motor claims. It is not.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Some people would argue that it is related, in the sense that the company came in and tried to drive down premiums and others followed. I would like to repeat my main question for the final time. The former Governor of the Central Bank, Professor Honohan, was able to tell the Minister in writing that insurance companies were acting imprudently. When did the Central Bank become aware that this was the case? I am not asking for a date or a time. I am asking whether this was happening in 2010, 2012 or 2014. Can Dr. Roux tell me what was the earliest point in time when the Central Bank was generally of the view that insurance companies were acting imprudently?

Dr. Cyril Roux:

It is a mixture of things, including the claims development. I point again to the figures I gave earlier with regard to gross underwriting profit or loss. If the Deputy wishes, we can put ourselves back in 2012, for which there was a gross underwriting loss of €34 million. There had been an underwriting profit of €68 million the year before.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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In 2011-----

Dr. Cyril Roux:

In 2011, it was €68 million. I am looking at-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Perhaps Dr. Roux can tell us what the loss was in each of the years for which he has figures. Can he make his chart available to us?

Dr. Cyril Roux:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We might copy it and give it to members for their use during this meeting.

Dr. Cyril Roux:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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What year is Dr. Roux going to start at?

Dr. Cyril Roux:

I am looking here at 2011.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Okay.

Dr. Cyril Roux:

In 2011, the underwriting profit for the business was €68 million. In 2012, the underwriting loss was €34 million. That is a very small loss. It was known about at the back end of 2013. It gets serious in 2013. In 2013, there was a loss of €189 million. That was the first year-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Could Dr. Roux repeat that figure?

Dr. Cyril Roux:

Sure. In 2013, the underwriting loss was €189 million. That is a loss. It was the first year in the underwriting cycle in which there was a large loss. That 2013 figure would have been known about towards the end of 2014. We had acted long before then. We had detected the trends.

This was in 2014 when the first reliable information that claims were not just bobbing up and down and trends were being sustained emerged. That is when it became clear that the underwriting cycle was becoming acute, but we had acted by then. We asked the firms to take the actions for which we were allowed to ask, namely, to revise their business plans, explain to us how they could sustain their business models with the discrepancies between premiums and claims, set a budget for the losses that they were willing to take via distribution channels and explain how their reinsurance cover would work. The actions have worked. These companies are solvent. The parental support, reinsurance cover and capital injections have worked.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I take that on board. I am not suggesting that the companies are not solvent - ensuring they are is the Central Bank's responsibility - but the Irish people are on a rollercoaster ride. Individuals are being forced off the road and into parking up their cars. Businesses have not been able to expand because of the dramatic increase in insurance premiums. It is because of this boom-bust cycle of premiums going high, low and then high again. There does not seem to be a proper approach to ensuring that premiums are based on risk. If they were, they would not have been able to dip to an unsustainable level and they would not be where they are now. Customers are the ones dealing with it. There is a big difference between a 40% increase in a premium and a 2% increase year on year over a longer period.

I wish to ask about investment income. I thank the Central Bank and Ms Cronin for writing to me earlier this year in respect of this matter. Investment income has created a major loss for insurance companies that, in previous years, made up the loss in underwriting from investment returns. I commend the Governor, Professor Philip Lane, on calling on insurance companies not to chase risky investment. That was prudent. According to the IMF report, investment income in 2015 was down by two thirds compared to 2011 and, as a result, motor insurance premiums in particular increased by 20% in some cases last year. The IMF has made a direct link between the fact that quantitative easing has resulted in bond yields dropping to negative territory in some cases and low rates in others compared with where they were previously and insurance companies - having taken significant losses on their books - trying to make up for those losses in underwriting. Is this Dr. Roux's view?

The committee has heard about a number of factors that might address the rising cost of premiums, for example, insurance claims, the courts and the book of quantum that we debated yesterday, etc. Where do investment losses, as a factor of the increased premiums, stack relative to the other factors that have been mentioned heretofore?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Deputy has gone over time. If anyone has a mobile phone on a desk, it is interfering with the sound and transmission quality.

Dr. Cyril Roux:

Deputy Pearse Doherty is right to say that invest income plays a role in the economies of insurance companies and that the fact that it is lower today than it was means that the business model must be realigned. Where one can supplement one's premiums with investment income, one sets those premiums at a different level than when one cannot supplement them with investment income. That is an economic factor for insurance companies. They operate in a world in which, if they stick to prudent investment, Government bonds and highly-rated corporate bonds, they will have low investment returns. To pay for claims, expenses and commissions, they cannot rely nearly as much on investment income, so they need to increase premiums, which they do. When their investment returns increase again, they will be in a position to reduce premiums. That is not something on which they have much of a handle without chasing returns, as the Deputy mentioned, and opting for riskier assets. If one keeps everything stable except claims, commissions, legal fees and so on and one reduces investment income, one must raise premiums.

How much does investment income account for in the profit and loss account? Typically, the motor insurance line of business has two years of premiums on its balance sheet, which means that it will have two years of income to add to the premiums. If one has a 5% return, one has a 10% investment income in one's profit and loss account. If one loses that, one will have to raise premiums by 15%, for example, to compensate. That is not specific to motor insurance in this regard. The effect is even greater for longer lines of business. It is a liability. This situation is not specific to Ireland either, as it happens throughout the eurozone and other advanced economies.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I wish to ask about enforcement and the European Insurance and Occupational Pensions Authority, EIOPA, stress test in 2014. Through a freedom of information request, I received the documentation that backed up the results of the stress test. How many people participated then and how many are participating in the current stress test? Will Dr. Roux clarify whether motor insurance will be examined in the current stress test?

In reply to a parliamentary question, the Minister for Finance, Deputy Noonan, stated, "For the low yield scenario exercise, it was found that the Irish sample was not particularly vulnerable to either of the low-yield stresses." There are low yields and insurance companies have lost approximately €100 million in investment returns over a three-year period. As a result, they are not becoming insolvent, but they are pushing up premiums. Did the stress test get it wrong? Did it fail to identify some of the weakness in terms of a sustained low-yield environment? Will the Central Bank take on board the IMF's recommendation and develop its own stress test, one that would examine an extreme but plausible scenario using its macroeconomic tools?

I have a final question.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Time is up. We must-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It relates to the IMF report, which identified that the Central Bank's enforcement staff level was 20% below what had been sanctioned. Some 72 staff positions are sanctioned for 2016, yet only 58 staff members are in place. The report also mentioned that the Central Bank was not considering taking summary proceedings, those being, criminal proceedings, against insurance companies and had instead opted for administrative sanctions. Dr. Roux stated that there was a high cost to proving criminal cases and a low fine was imposed as a result, but is the Central Bank seeking for the fine to be increased in legislation? Were there situations in which the Central Bank could have pursued criminal sanctions against the insurance industry?

Dr. Cyril Roux:

Many questions were asked. EIOPA designed its stress test to examine major risks to the insolvency and sustainability of insurers in the eurozone. A major risk is posed by those insurers that offer long-time guarantees on returns.

The firms are not Irish. In the main, they are continental insurers that offer guaranteed returns over a long period when the investment income is way below it. The gist of the European Insurance and Occupational Pensions Authority, EIOPA, stress test is to look at insurers, located mostly on the Continent, that offer long-term guarantees and consider whether they will honour their commitment to their policyholders when the investment returns fall far short of the guaranteed return. This is what is at stake. It is not something that has a direct bearing on our industry. There are no long-term guarantees in non-life because one can change premiums every year. In life, most of the Irish industry offers unit-linked products. The continental companies would have a serious problem in Europe and this is what the EIOPA stress test tries to address.

I am sorry but I did not jot down the next points.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I asked about enforcement staff operating at 20% below what had been sanctioned and about the administrative level.

Dr. Cyril Roux:

One question is on our enforcement stance and the other question is on staff.

There are two issues about staffing in the Central Bank. We operate below complement in enforcement and in other areas and this has gone on for years. If our complement was increased then our staff number would increase. We operate below the number of people required to do our job but it is not just a question of having enough people. Our staff members are very dedicated and work well beyond their contracted hours. Some of them have been with us for a sufficient length of time and are experienced but not many. What we experience, and Ms Cronin and Mr. Sheridan can say, is that at any point in time, more than half of our staff will have been in their positions for less than two years. That is not the right make-up for supervision, as one needs expert judgment but that can only be gained by experiencing an insurance cycle. One needs to see what happens when times are good and bad. Unfortunately, we do not have that expertise and, therefore, rely on a few experienced supervisors to train the younger staff.

As far as the triage of cases between the administrative sanctions procedure and the criminal cases is concerned, the situation has changed with the August 2013 Act because before that, we could only do a small amount of fines and enforcement. The enforcement action of the Central Bank, while exemplary for being made public, would not have made a difference financially. Now that we have revised legislation, and I thank the Oireachtas for having passed the Bill, is we need to show, during settlement or inquiry, the burden of proof, and the level of fine and speed, and that all points towards using our enforcement powers. It is not to say that at times when we see criminal action that we will send it to criminal action but my barristers have told me that it is not often the case. One needs a high bar and then one goes through a lengthy process but, unfortunately, one sees little. We will not shy away from taking action. When we see a case for it we will do it.

Ms Sylvia Cronin:

If I could close out a point that Deputy Pearse Doherty raised about stress testing in terms of the non-life industry. Basically, Dr. Roux undertakes stress tests on a biannual basis that focus primarily on the life industry and, in 2017, we intend to undertake a stress test on non-life business.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I seek clarification about information that Dr. Roux has given us here. He has watched a gross underwriting loss from 2009 to 2012, with the exception of 2011, jump from €189 million to €213 million and, in 2015, to €333 million. I shall question Dr. Roux on the matter later as members wish to finish asking questions.

The Central Bank operates below its full complement of staff. Is that a policy matter? Is it due to the bank's inability to find the right people to fill vacancies?

Dr. Cyril Roux:

All the public service, including the Central Bank, operates under FEMPI legislation. To ensure internal fairness in terms of staff, new staff are paid on the same pay scales as existing staff who are under FEMPI. We have a public service pay scale but the private sector pay scale has increased. As years go by, the gap increases between the pay the same person can get working for the Central Bank and working in the private sector. The nature of financial regulation means a number of our staff can work either with us or in the industry that we regulate by way of consultation work or in professional services firms or law firms, for instance. It is very difficult for us to sustain the discrepancy. The Central Bank is aware of the matter and has designed an alternative reward model. We know how we could pay our staff, were we put outside of FEMPI legislation. That is all done but the decision to place the Central Bank outside of FEMPI is not for us to make. If that decision were taken, we know how much to pay staff.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Who makes that decision?

Dr. Cyril Roux:

Legislators and that is the law.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Dr. Roux has said that the Central Bank mentioned a model that operates outside of FEMPI.

Dr. Cyril Roux:

FEMPI applies to the Central Bank. As long as the law is such, then we operate under FEMPI.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the Central Bank operate a different model?

Dr. Cyril Roux:

No.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the Central Bank operate within FEMPI?

Dr. Cyril Roux:

Yes.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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From what Dr. Roux said it sounded like there was a different model.

Dr. Cyril Roux:

Yes. Let me rephrase. We know how we could operate. We have a model that we could deploy if we were to operate outside of FEMPI but we operate under FEMPI.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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How long has the Central Bank not had a full complement of staff?

Dr. Cyril Roux:

Years.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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What is the difference in percentage terms in the pay scales paid in the private sector and the Central Bank?

Dr. Cyril Roux:

It depends on seniority and qualifications.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I would like to hear a rough estimate.

Dr. Cyril Roux:

Some of our senior staff, not very senior, can leave and receive a 50% increase in pay.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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As much as 50%?

Dr. Cyril Roux:

Yes, easily. That is not to say we would ever think of aligning Central Bank pay with private sector pay. People who work for the public good will be paid less and that is as true today as it will be tomorrow, whatever the situation.

That is a choice people make, but there is a point at which people come to us and say that their spouse or children do not understand. Why would I deprive myself of a better life if I have an offer that means I will be paid 50% more? At some point people just leave. That is reasonable. People build their lives.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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I thank Dr. Roux for being here today. We looked forward to his visit with much anticipation. I believe he is the final witness. I will start with a few brief questions. In terms of the raw data available to the Central Bank of Ireland, is Mr. Roux satisfied he has all the raw data he needs from the insurance industry, and is he satisfied with the integrity and the timing of that raw data?

Dr. Cyril Roux:

It is always a mixed bag. We are just at the cusp of changing our data. I will explain. Until the end of last year, we were operating under Solvency I, which means that the data we received was based on Solvency I reporting. Solvency I reporting was not unified. We had our forms under which we collected information, and that was under-developed compared to what can be found in other markets. Certainly, we collected less data than the financial provider I know best, by a significant margin. That was the data we were operating under until the end of last year but as of this year, we are operating under Solvency II, and in that regard we have a changed world in terms of the quantity of data we are asking for, and the built-in integrity of data will be much higher. We have moved from asking templates that I can print and give to the members to a different world where the data we collect is not something I can put on a sheet of paper. It gets into a database and I can query it. I am no longer able to say, "Fill in this template". That is no longer the world in which we operate. That data will be coming in the course of this year, and especially at the start of next year because that will be the first full year. It will not just be for us. I stress that the important part of it will be made public as a report on solvency and financial condition. Members will see, in the spring of next year, each firm disclosing high quality data and high quality forms that will inform public opinion, views and public debate. They will see a sea change in that data.

There will be teething problems in the first year of operation of a new system, so I do not think the data we will get next year will be of the utmost quality. It will take two or three years so that in terms of all these teething problems, people will not make mistakes. We are moving to a different world.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Notwithstanding Solvency II, why has this data not been available before now? In terms of the Central Bank's consumer protection role, one person stated publicly last night that their insurance had increased from €1,200 to €7,000 in one year so it is of little solace to those people for Mr. Roux to say the Central Bank will get more data but it will not be available for a further two years. Had that data been available when everything started happening, does Mr. Roux believe it would have flagged to him earlier, as the regulator, the need to do further investigation into what was going on in the insurance industry?

Dr. Cyril Roux:

I will answer the Senator's last question first because it goes to the heart of the matter. It seems to me that the factors at play in motor insurance over the insurance cycle in Ireland are very directional. It takes time to see them emerging, but I think they became clear in 2014 and 2015. Better and more data would have enabled us to fine tune the weighing of the various factors but I do not believe they would have changed our supervisory engagement that significantly. I do not believe it has a direct or even indirect bearing on the current premiums asked of policyholders. I understand the difficulty faced by the Senator's constituent, but it cannot be related to the granularity of the data we do or do not have.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Has Mr. Roux ever been refused data from the insurance industry? Has he ever had a request refused?

Dr. Cyril Roux:

Not that I am aware of. We have powers, and the insurance companies know that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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In terms of this extra data Mr. Roux will be getting in, which will be very useful in terms of his supervisory role, is he concerned that he will not have enough resources within the Central Bank to be able to analyse it in the way it does? If he does not have enough now with the extra data, it will impose further pressures. What planning is he doing to ensure that there are sufficient resources within the Central Bank to be ready to do what needs to be done with that data?

Dr. Cyril Roux:

We asked ourselves the same questions. We established, under the chairmanship of Sylvia Cronin, an extensive Solvency II committee. The IT and data areas are something on which we spend a lot of time. It involves not only insurance supervision, but our IT colleagues opening online reporting to collect XPRL data, which is a different methodology. For me, the most difficult point, and this is not something about Ireland but in terms of all supervisors, is that when one moves from one referential to the other referential, one loses the time series. One tries to do pro formaof previous data, but ones loses a history or a trend. That is the most challenging part. People are being trained. We have put a good deal of resources into it. We will encounter hiccups, like all regulators, but I am not concerned that will hamper our supervisory action because the trends are clear. We will not lose sight of that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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That does not fill me with confidence that it will be done in a timely way. Mr. Roux flagged in a letter to Mr. Derek Moran that additional measures that could be taken to strengthen the supervision of non-life insurance included consolidation of disparate insurance regulations in a coherent whole, transposing without further delay the Solvency II directive. Has that happened?

Dr. Cyril Roux:

Yes. Our Department is always up against the clock to transpose Solvency II, but we operate under Solvency II and that has been transposed in time. That takes care of the first question.

With regard to consolidation, Solvency I was not consolidated in European terms. There were 14 directives, but Solvency II swiped that clean and replaced those 14 directives with one. We did the same, in a sense, so for all insurance firms operating under Solvency II, the transposing Act acted as a consolidator.

We have a handful of firms which are so small that they operate under Solvency I and we have not consolidated those. In the main, the insurance companies we are talking about come under that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Has the Central Bank looked for any other powers?

Dr. Cyril Roux:

On the powers given to us under Solvency II, we flagged the question of insurance groups. Deputy Pearse Doherty referred to the IMF, the International Monetary Fund, report which stated there are several powers under regulation which do not carry over to groups. At the same time, the IMF knew at the time that all these partially observed principles would be observed once Solvency II came into effect. They have come into effect. The transposing instrument of Solvency II has given us those powers because it has changed groups of provision.

In my opening statement, I stated most of our domestic and non-life insurance companies belong to international groups, such as AXA and Allianz. Groups of provision are much strengthened by Solvency II. When we are the group supervisor, we have those powers. When we are not, our counterparts have them.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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I do not think Dr. Cyril Roux has answered my question.

Dr. Cyril Roux:

I will try again then.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Are there other powers for which the Central Bank has looked?

Dr. Cyril Roux:

No, we have the powers we want.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Is it the case the Central Bank has all the powers it needs to be able to regulate the motor insurance industry in the way it needs to be regulated and to protect consumers?

Dr. Cyril Roux:

Yes.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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There are many who would disagree with Dr. Cyril Roux.

If a person chooses or is forced to pay their premium in instalments over several months, does the Central Bank have a role in the APR, annual percentage rate, set by insurance companies?

Mr. Bernard Sheridan:

We do not have a role in controlling the interest rates charged in such cases. Our role is with charges other than the interest rate. The APR is normally disclosed on the statement if one wants to pay by instalments. We have no control over that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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The insurance companies can charge anything they like.

Mr. Bernard Sheridan:

As I said, we do not control the interest rate per se. We have no powers to control that. Our role is in bank charges per se. They are free to charge whatever rate they want. It must be disclosed to the consumer, so he or she knows in advance what he or she will be paying.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Some of the rates being charged for people who can least afford it are absolutely shocking.

The Competition and Consumer Protection Commission said it cannot act in the field of consumer protection in this case and that it is the Central Bank's job to do it. Does Dr. Cyril Roux agree with that?

Dr. Cyril Roux:

On what?

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Is it the Central Bank's interpretation of consumer protection that it can only act in the interests of individuals on a case-by-case basis? The Competition and Consumer Protection Commission said it cannot act in this field of consumer protection. Does Dr. Cyril Roux agree with that?

Mr. Bernard Sheridan:

We have a role in terms of protecting consumers of insurance companies. We have various regulations and consumer protection codes with which insurance companies must comply. Our role is to monitor and enforce compliance with what we do every day. The responsibility lies with the Central Bank in terms of consumer protection. Unless the commission is referring to something else, we are responsible.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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One suggestion made by Dorothea Dowling when she was before the committee was that the Central Bank could operate a one-stop shop online portal where consumers could access a real-time, best quote for compulsory cover for each risk profile. Can the Central Bank do that?

Dr. Cyril Roux:

I really think it would be inappropriate for the Central Bank to do such a thing. It is a supervisor, not a one-stop shop. It is the role of insurance brokers to be price aggregators. This is a commercial pursuit. It is inappropriate for the institution of the Central Bank to do such a thing.

Mr. Bernard Sheridan:

In past years as the Financial Regulator, we had this role of informing consumers of costs, risks and benefits. That role has been passed to the Competition and Consumer Protection Commission. It produces various cost comparisons. Our role under law has been transferred to that authority.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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The Department has laid out its proposals to deal with the Setanta type issues in the future. Basically, the Motor Insurers Bureau of Ireland, MIBI, will cough up 35% but not necessarily straight away. Does the Central Bank have a view on whether that proposal will remove uncertainty for possible newcomers to the market?

Dr. Cyril Roux:

The overall proposal is a combination of elements. One element is that the insurance compensation fund would cover the claims in full. As the Senator knows, the insurance compensation fund would cover up to 65% of a claim or up to €825,000, whichever is the lower. The first building block of the Government's proposal is to ensure the insurance compensation fund now would cover 100% of claims. While it would increase consumer protection, it would be paid for with an increased levy.

The Government's alternative financing arrangement for the extra 35%, which would be added to actual insurance compensation fund, would have MIBI pay for it. The committee has heard the objection of the insurance industry about having to bail out their competitors for the consequences of them failing. Insurance Ireland stated to the committee that it is like Dunnes Stores bailing out Tesco.

There is a balance of view. It is the Government's decision whether or not to impose that 35% extra cost directly on the insurance industry - what the industry claims it would do it for them - or through an alternative route. There are pros and cons for several options. We will operate whatever the Government decides.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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Is the Central Bank concerned about the consequences for the wider economy with the reduction in people's spending power, particularly in rural areas, because of these huge insurance costs? Money is being sucked out of local economies. Is the impact of this on employment potential in rural areas a concern for the Central Bank?

Dr. Cyril Roux:

In one word, "Yes". Leaving aside my hat as Financial Regulator while putting on my Central Bank one, the Central Bank is part of the European system of such banks. Its mandate is to ensure price stability. When prices get out of hand in general, inflation affects people's lives. Inflation affects the poor disproportionately. That is why the European Central Bank is taking these actions, namely, to ensure price stability.

However, in the main, it has succeeded. Although price inflation is not exactly where the ECB wants it to be, it is very low. This means that, on average, price inflation is low. It does not mean that some prices do not increase. Insurance prices are increasing very sharply.

This raises the question as to whether rural parts of the country are suffering from local inflation in terms of their basket of goods and services. I do not know the answer to that but they suffer an increase in those prices and they also suffer increases in other prices. Health insurance premiums are increasing and the price of other items is also increasing, but the price of some items is decreasing. For example, energy and fuel prices are decreasing. In the main, overall, I am sure that some people noticed price inflation. The price inflation of the goods and services they buy is significant, but as to whether it is a significant problem across the board, I do not know. If that is the case, that is a matter for this committee and for the Oireachtas as a whole to decide whether and how to counter-balance the disproportionate effect inflation might have on some segments of the population.

I would add a further comment. The €1.3 billion in premiums that was mentioned by the Senator that is being taken out of the pockets of people is being given back in that claims are at the same level as premiums. That money is not given back only to policyholders and victims, because insurance companies have to pay their lawyers and their fees can account for a large chunk of the money. Claims have been increasing and sometimes that is to cover actual loss and sometimes it is cover questionable loss. With respect to claims, the Senator has probably heard that much of it is blanket money given to every person claiming they have suffered whiplash. Some people have suffered whiplash but the handing over of €15,000 to any person who says he or she has suffered whiplash is money that goes back into his or her pocket. In some cases such payments are warranted but in other cases they are not. Such payments act as a redistribution machine. A total of €1.3 billion in premiums is being taken out of people's pockets but €1.3 billion in claims settlements is being redistributed to other people's pockets.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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I understand that. Claims settlements have not increased by hundreds of per cent, which is the percentage increases reflected in people's premiums. I will conclude on that point as I know other members want to contribute.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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I welcome the delegation. Dr. Roux stated, "the Solvency II directive squarely places the sole responsibility of financial supervision of foreign firms on foreign regulators, and prescribes that the home state regulator verifies for the entire business the state of solvency, its assets and its technical provisions". Do all those regulators meet annually or how often do they meet?

Ms Sylvia Cronin:

We meet as a board of supervisors with the European authority and we meet-----

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Do they have differences of opinion?

Ms Sylvia Cronin:

We do, like all delegations, yes.

Dr. Cyril Roux:

I would like to add a comment. Ms Sylvia Cronin is a member of the board of supervisors at the European Insurance and Occupational Pensions Authority, EIOPA, representing Ireland. There we work together on finishing the single rule book, issuing technical standards, working on supervisory convergence and designing stress tests. The Senator's question points to something more practical about the actual supervision of individual firms. There are two elements. There are the supervisory colleges. When we supervise, say, AXA Insurance or Allianz, we are the supervisor of AXA in Ireland and there is a supervisor of AXA in Italy. The head of the group is in France, so the French supervisor brings together the supervisor of AXA in Ireland and our colleagues in Italy in the same room in Paris in France to discuss the issues we see, the problems we face and the risks these companies are taking on. We have a supervisory college where we discuss individual groups, such as AXA or another other group. The AXA college meets every quarter, I think, and there are teleconferences, so the process is very live.

In banking we have a single supervisor in the eurozone and everything that takes place is decided by the European Central Bank. In insurance, we do not have a single supervisor but we have a system by which the group supervisor takes the helm and drives the supervision of these groups. I will complete the answer by referring to something that is even more relevant. It relates to those firms that are not part of the group and are foreign firms such as Setanta and Zenith Enterprises. We have been extraordinarily proactive here. We have gone way beyond the polite practice of supervision and have written to our colleagues. We have gone to see them and have put on the table the issues we believe they should be aware of and upon which they should act. We have put their responsibilities squarely in front of them.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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That includes Setanta.

Dr. Cyril Roux:

That includes Setanta, absolutely.

Dr. Cyril Roux:

Yes.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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So the bank had interaction with that company.

Dr. Cyril Roux:

Very strong interactions.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Dr. Roux said earlier that the bank cannot advise shareholders what to do, but in that way the shareholders can accumulate losses. At what stage does the bank intervene and point out that they are trading recklessly, if they are racking up many losses? Does it issue warnings and has it imposed sanctions on companies? At what stage does it intervene to point out that they are trading recklessly?

Dr. Cyril Roux:

It is an ongoing dialogue and it has many strands. We have people who are in charge of supervising these firms, day in, day out. They meet the chief financial officer, CFO, the chief risk officer, CRO, the chief executive officer, CEO, the head of claims and the head of pricing throughout the year. We have risk governance panels where we bring all this together.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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There is no urgency about it.

Dr. Cyril Roux:

Yes, there is urgency. The Senator should have been in the room when I have told firms what they are going to do. We issue letters and make the process formal and we can even issue directions. We can direct them to stop writing business, but usually we do not need to do that. The writing is on the wall. It is better when people come to us, we tell them that we are not happy, this is what we want to see and that is what we see. They call it management action and everyone is fine with that. Management action, indeed, but we will have told them in no uncertain terms what we want to see happen. I refer to various actions that I mentioned earlier in this hearing about parental support, capital injections, reinsurance cover, underwriting discipline and reserving. We get into conversations and things change. This is how we operate.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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All the bank's interactions result in an increase in premiums. I would not say that any of them result in a decrease. The bank is always imposing extra responsibility on companies and further restrictions, which all add to their costs.

The Central Bank is always placing extra responsibility on companies and imposing further restrictions which all add to the cost and which invariably lead to an increase in premiums.

Dr. Cyril Roux:

No, I would not say that. Our actions will result in much stronger balance sheets and much more resilient firms. I have before me a list of the various capital injections. It is very broad and sustained. We believe the premiums of today may be break-even by reference to the claims of today. On the basis of the underwriting year, we believe the policies sold today are sold at break-even prices.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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In April, the Minister for Finance said the legal profession has been a major factor in the increase in insurance premiums. That was refuted here by the legal professions when its representatives came before the committee. The Central Bank has expressed no view on the part played by the legal fraternity in claims and so forth. Does Dr. Roux have a view on it? Are they too expensive?

Dr. Cyril Roux:

We are not better informed than members. The latter have listened to the various participants, including the Injuries Board, the industry and the legal practitioners.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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If Dr. Roux is no better informed than I, then the Central Bank would be as well to close up shop altogether. I am not well informed at all.

Dr. Cyril Roux:

Not on this topic. We are much better informed than all these people on the solvency of firms and the actual claims experience on their balance sheets.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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The Central Bank seems to be turning a blind eye to the legal profession.

Dr. Cyril Roux:

No, we look at the factors that are important. There can be several market equilibria. Market equilibrium existed before the establishment of the Personal Injuries Assessment Board. At the time, claims were adjudicated in court. Then, through the action of the Members of Parliament - the predecessors of the members of this committee - the Personal Injuries Assessment Board was set up and claims were settled there with reasonable speed and with avoidance of unnecessary litigation and legal cost. What we are told and what we see now is that people go to the Injuries Board with solicitors, for the most part. They pay their solicitors to go to the Injuries Board and, in a number of cases, they reject the settlements offered to them and go to court because they believe they can get more out of it. That is now the market equilibrium. It is not something we can adjudicate on. In a sense, it is an institutional and social choice.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Insurance levies are imposed on ordinary premium payers. Does the Central Bank advise the Government or the Minister for Finance on the levies to be introduced? Does it discuss that with the Department of Finance? How is it negotiated?

Dr. Cyril Roux:

Is the Senator referring to the levy of the insurance compensation fund?

Dr. Cyril Roux:

I have not been involved. The levy has been set at 2%. It will run until the claims have been fully paid and reimbursed. It is not my part of the house. I am sorry. The Central Bank looks at the finances of the fund annually and gives formal advice.

Ms Sylvia Cronin:

The cap is 2%.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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The road hauliers were before the committee. They outlined a particular problem. Many of them may have to re-flag in the United Kingdom or somewhere else because of the high cost of insurance. What is the response of Dr. Roux to Brexit? What does he believe will happen to the insurance business? Does he have a view?

Dr. Cyril Roux:

I will outline some thoughts on Brexit. It will have relevance to UK and Gibraltar firms operating here. Some UK groups operate here with a subsidiary, such as RSA. RSA Ireland Insurance is an Irish firm. My sense is that it will continue to operate as an Irish firm. Aviva and AIG are UK firms that operate here with a branch business under freedom of establishment provisions within the European Union. When the UK moves outside of the European Union, the status of UK branches will change. Perhaps there will be transitional arrangements or an agreement to enable UK companies to operate within the EU as a branch or perhaps not. This is not something I can foretell. We have seen UK firms operate on a branch or subsidiary basis and this has changed over time. I expect there is potential for change.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Most of those firms are UK-based. Does Dr. Roux believe there should be an EU presence here? Is the Central Bank courting any EU companies that could have a presence in Ireland?

Dr. Cyril Roux:

Apart from FBD all major operators are part of international groups. For example, RSA Ireland Insurance is an Irish firm that is part of a UK group. AXA Ireland is an Irish firm and part of a French group. Zurich is an Irish firm that is part of a Swiss group. The only non-life company operating in the non-life market that is an Irish firm and that is wholly Irish with no parent abroad is FBD.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Deputy Pearse Doherty referred to insurance companies and how they invest their reserves. Some concern has been expressed about the banking sector throughout the world. Does Dr. Roux have any concerns about insurance firms and where they invest their reserves in respect of the banks? Some of them are looking for growth and buying junk bonds to a great degree. This could destabilise the whole insurance market again. Does Dr. Roux agree? Is he concerned about it?

Dr. Cyril Roux:

When deciding on our supervisory areas of concern, we look at the various risks that companies are faced with. There is business model risk, counter-party risk, underwriting risk, which I mentioned, and there is investment risk, to which Deputy Paddy Burke referred. Firms can lose money on investments when they invest in riskier portfolios. However, what we see in the main from those actors is that they have traditionally been rather conservative in their investments. For the most part, they invest in Government bonds and corporate bonds. The corporate bonds they select are highly graded and rated. Then, there are some cash and cash-like instruments. The parts of their investments more exposed or riskier are rather limited. Thus far we have seen a conservative investment profile in these factors.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Can the Central Bank advise some of those companies on where they may have their reserves invested and whether they may be at risk? Does the bank have concerns about where they have invested?

Dr. Cyril Roux:

By moving from Solvency I to Solvency II we have changed worlds. Under Solvency I, firms had diversification forced upon them. Insurance companies could not invest in more than X% or Y% in each asset class and no more than X% or Y% in a given company. There was forced diversification. That was the world of Solvency I and it operated until the end of last year.

Solvency II is a different world. Companies invest as they like, and in the main can invest in anything they like. The price they pay for that is that the greater the risk of the investment, the more capital they need to hold against the risk of loss. That is the change of world, because the world changed on 1 January 2016. We have not seen companies turning around their investment all of a sudden and moving from the conservative, diversified world into something else since the beginning of the year. They have the potential to do so if they want to but they have not given an indication that they intend to do so.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I want to refer to a comment made by Senator Conway-Walsh on the information, the hard data, given to the Central Bank. We have been told by different groups of witnesses that the type of information that is needed to inform a company that may wish to come into the market is simply not available. On the other hand, we have been told by Insurance Ireland that the Central Bank has all the information that is needed to inform a company that might be looking to locate in Ireland. Which one of those statements is true?

Dr. Cyril Roux:

Let me put myself in the shoes of a potential entrant into the Irish market - as the Chairman knows I have worked in an insurance group for ten years. The publicly available information in Ireland combined with the knowledge of the market gained from the intermediaries that operate here is sufficient to enter the market. I do not think there is such a dearth of information that would prevent new entrants to the market. I do not think that is the case.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I want Mr. Roux to stand in his own shoes now. Which of these statements is correct? Does the Central Bank have sufficient information, hard data from Insurance Ireland, or is Insurance Ireland withholding information? Does he believe that Insurance Ireland has more information that it could give the Central Bank that would inform different stakeholders in the industry? That is what is being said.

Dr. Cyril Roux:

I do not know whether Insurance Ireland has data that it is not giving out. I do not know. I think that is a claim that has been made by Zenith Insurance. It came at a very particular time, just on the heels of the failure of enterprise. Zenith had been operating here and suddenly after the failure of enterprise the company said it did not have enough information, after having been here for years and gaining market share.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That statement did not come to the committee from Zenith. It may have come from Zenith at some stage, but I am referring to the statements that were made to the committee by witnesses such as Irish Road Haulage Association or other groups that came before us, who seemed to think that the Central Bank is not being given the full scope of information that is available to Insurance Ireland. What I would like to know is whether the Central Bank has a full and total handle on the insurance industry in Ireland in the context of the information that it should have and should be in the public domain.

Dr. Cyril Roux:

The source of information for us is not Insurance Ireland. Insurance Ireland is a source of information for the statistics department of the Central Bank, which publishes the figures that we looked over at the very beginning of this hearing. The supervisor, or the Financial Regulator, works on the basis of the supervisory returns. The supervisory returns come from insurance companies and everything we ask for we get from the insurance companies. That is the way it works. We ask for the supervisory returns and we get them.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the Central Bank have all the figures in respect of the claims histories of insurance companies, including claims-----

Dr. Cyril Roux:

Yes.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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-----settled in court and out of court?

Dr. Cyril Roux:

No, we do not have that detail. We do not require it. We do not need it. There are many ways to cut claims into different parts. The information we need to do our work is a separation between material damage and bodily injury damage. It is the settlement rates, a prori development. It is what is covered by arrangements or not. There are other things one would want to know about claims to inform public policy but this data is not information that is needed to conduct supervision and we are not allowed to ask for information that we do not need for supervision. We have very strong powers to force insurance companies to give us the data that we need, but we cannot ask for data that we do not need.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is it Mr. Roux's contention that there is sufficient information and data available for a company coming into the Irish market to inform it about the Irish insurance market?

Dr. Cyril Roux:

That company was not coming here. That company has been-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I am not referring to a specific company but any company that might come here looking at the market and analysing it. Mr. Roux is saying there is enough information-----

Dr. Cyril Roux:

Yes.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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-----publicly available and through the Central Bank to inform a company as to its decision.

Dr. Cyril Roux:

It is not through the Central Bank. It would be through Insurance Europe. My answer is "Yes" and it will be a double "Yes" in the spring of next year, when even more information will be published by each actor. There is no question that new entrants can come in and have sufficient information to come in if they want to.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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From reading Mr. Roux's opening statement, I take it that he believes premiums will remain high and may even go higher.

Dr. Cyril Roux:

There are two points. First, what is the equilibrium premium and, second, whether the high premium people pay today is the equilibrium price, that is, something which is sufficient to cover the claims that will come out of the policies that people buy. The jury is out because we will know in several years time but our sense, and it is very preliminary, is that prices are at barely break even level. If the claims were to stay where they are today, and if the investment income was to stay where it is today, then the equilibrium premium would be where they are or slightly higher. That is my contention.

There is an insurance cycle, so year on year premiums can be higher or lower. As this committee wants to achieve a significantly lower charge of claims, a sustainable lower charge of claims would be the way to give the ground for sustainably lower premiums. This is why the work of this committee is so important in looking at fraud, whiplash claims and roads safety. The book of quantum was published yesterday and the hope is that it will be used as judicial guidelines, although it is at the discretion of the Judiciary. All of that is very important. If the claims stay at the level at which they are now, however, and if the aggregate cost of claims stays at this point, there is no basis for a sustainable reduction in premiums. That is why it is so important that the overall cost of claims goes down.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is there anything Mr. Roux can do in the context of regulating the industry that will bring down those claims?

People looking for insurance feel they are being screwed, they feel that there is a cartel in place that will shoot these premiums up, and they look to the Central Bank to regulate all of those queries out of the system to be examined. They do not get that sense of confidence from the Central Bank.

Mr. Sheridan's title is director of consumer protection. I have to tell him motorists do not feel protected. In fact, they feel no one is being protected, except the insurance companies themselves, and that they are being thrown to the market. Dr. Roux must take note of this. As a result, the premiums that are being asked of individuals who have been insured are outrageously high. They have gone from €1,000 to €6,000 or €7,000. Insurance companies that cover the haulage sector are increasing their premiums to the extent that they are putting companies out of business. In fact, some of the hauliers will tell us - we heard it last night on the television and previously at this committee - that they insure now in a different country but those insurance companies abroad are linked to the same insurance companies that are represented here. One must ask why that is the case.

Senator Conway-Walsh raised a further question on the economy. Our economic development is being hampered and damaged by the high cost of insurance. Taxi drivers have made it clear to us that their insurance costs are driving them out. The Irish Road Haulage Association has come here and said the same. Individual insurance policyholders have come to members of this committee stating they cannot go to work because they cannot get insurance, and they are looking to these Houses. We are doing our best. They are also looking to the Central Bank. They are probably saying in their minds to Mr. Sheridan, "Where are you? Can you please defend us from these high insurance costs?" They are expecting an answer from the regulator and from their protector, the consumer protection section of the Central Bank.

Mr. Bernard Sheridan:

I know people who have seen these large spikes in premiums. This does feed in to how people conduct their lives. It makes it more challenging.

Back to our role in terms of pricing, I must stress that we cannot, through the consumer protection framework, undermine the fact that we are precluded from controlling the rates that insurance companies charge. Those are commercial matters for the insurance companies themselves.

In terms of consumer protection, consumers want and assume the insurance company will be there at the end of the day to pay out on claims and, as Dr. Roux mentioned already, claims are being paid out which represent the premiums that have been paid in over the years. We have seen the detriment that occurs when insurance fails and a key consumer protection function we have is ensuring those firms are solvent at the end of the day and can meet their obligations.

The framework in place in Ireland is ahead of that in most European countries in terms of what we are doing for consumers and in terms of the staff who work in insurance companies meeting minimum competency standards. We have rules in place and regulations, in terms of renewal notices and in terms of ensuring claims handling is fair and appropriate, and we also regulate the intermediary sector. We do a lot in consumer protection, but in terms of price control, that is clearly something we cannot intervene on.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Did Mr. Sheridan not say to Dr. Roux, for example, that the alarm bells rang in 2012 with €34 million of a loss, and then immediately, in 2013, it went to €189 million? Did Mr. Sheridan not say that from the experience in the banking sector, there is something definitely out of kilter here and the Central Bank had better take immediate action, as anyone else would do?

Mr. Bernard Sheridan:

We did.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Central Bank did not take effective action-----

Dr. Cyril Roux:

We took effective action.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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-----because the insurance premiums went up.

Dr. Cyril Roux:

Sorry?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The insurance premiums have gone up.

Dr. Cyril Roux:

The insurance premiums have gone up because they were below break-even. What does the Chairman expect?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Who is Dr. Roux defending? Is he defending the insurance companies or is he defending the consumer?

Dr. Cyril Roux:

I am not defending the insurers.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That is for sure.

Dr. Cyril Roux:

Consumers going to companies that are pricing well below break-even are now Setanta consumers. This is not protection. The claims have to be paid and they are paid by premiums. As long as the claims are €1.3 billion, premiums will have to be €1.3 billion or more.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The losses in 2015 were €333 million.

Dr. Cyril Roux:

These losses were covered by shareholders. The only way for these losses not to occur would have been for entrance premiums to have been higher earlier.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Dr. Roux is telling me that the shareholders of these insurance companies stumped up €333 million.

Dr. Cyril Roux:

They stumped up a lot more - close to €1 billion.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Have they paid it up?

Dr. Cyril Roux:

Yes.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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They are a decent bunch.

Dr. Cyril Roux:

They have had to. The regulator would demand it.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I would suggest to Dr. Roux that those paying the premiums have contributed a significant amount of money also.

Dr. Cyril Roux:

Yes, but less than the claims they received.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I do not know whether Dr. Roux is aware of it but the people I and many other Members of these Houses meet are telling us that the behaviour in the insurance market is such that one can have a premium offered at €1,000 and it can be reduced if one applies pressure, and it can go up beyond the scope of the finances of an individual for unknown reasons. We do not know why premiums go from €1,000 to €5,000. We do not know why a road haulage company could come in here and tell us that its insurance premiums have doubled. Nobody seems to be able to explain in rational terms the reason for that and what is being done about it, and everyone is pointing at somebody else.

Dr. Cyril Roux:

I will point to the Legislature.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is it our fault?

Dr. Cyril Roux:

In health insurance-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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No, let us stick to the topic.

Dr. Cyril Roux:

I will stick to the topic.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is Dr. Roux telling us that it is our fault in these Houses that insurance premiums have gone up?

Dr. Cyril Roux:

No. I am saying that it is within the gift of the Legislature to do in motor insurance or any insurance what is done in health insurance. If one wants to restrict the ability of insurers to move rates and to compensate for the young with the old on the rates, one must do what has been done in health insurance. This is a matter for the Legislature. I am telling the Chairman what we have been telling the Legislature for a long time, that a financial regulator does not have any purchase on prices. We are prevented from acting on prices, but the Legislature can.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Would the regulator like to act on the prices?

Dr. Cyril Roux:

The answer is "No". We cannot do this. This is not what we do.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Would Dr. Roux like to do it?

Dr. Cyril Roux:

No. This is not what we do. We look after the solvency of firms. This is not for us to do. It is for the Legislature to decide whether it wants to constrain prices in this area of insurance as it has done for health insurance. This is not a decision for the supervisor.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does the regulator offer advice?

Dr. Cyril Roux:

We offer advice on the matter we are responsible for, and we did. We stated that what is important on the matters that we know about, which is the uncertainty on claims, is that there are a number of policy actions that would help stabilise and provide certainty on the claims environment, and that includes the various elements we talked about. A number of these policy actions, one of which is the revised book of quantum, have started to come about.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The revised Book of Quantum is based on the claims that were paid, it was suggested to us, and it does not reflect the appeal court decisions.

Dr. Cyril Roux:

It is for the personal injuries board to say exactly what it took and did not take into account in its revised book of quantum issued yesterday. I do not know exactly the data source that the personal injuries board has used.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Has Dr. Roux given written advices to the Minister for Finance?

Dr. Cyril Roux:

The Governor has. That letter has been read.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is that it?

Dr. Cyril Roux:

We are part of the working group chaired by the Minister of State, Deputy Eoghan Murphy. We are not saying anything different from what we are saying to the committee. It is a matter of judicial discretion so the judges can decide to follow or vary from the book of quantum. I am told there are guidelines for the Judiciary in the UK, so judges stick to a narrow band. Perhaps that is appropriate for Ireland or perhaps it is not. I cannot tell. However, it brings that clarity, certainty and stability to the claims environment.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I am not really sure how I can follow all that. I thank Dr. Roux for his presentation. There is nothing in the section on working towards a solution other than fewer crashes and more enforcement. There does not seem to be anything the Central Bank can do to help. I think we all know that if everybody slows down and has fewer claims and if we got rid of fraud, we would have no claims, which would be fantastic but we know people will have crashes and injuries. It does not give me an awful lot of hope. A revised book of quantum is included in the section on solutions. There is quite a bit of talk that the revised book of quantum is purely reflecting what has happened and could lead to an increase in payouts as opposed to anything else. There might be a bit more certainty but the only certainty seems to be that the price is going up. That is what we have seen over the years.

People are looking at this and are clearly very exercised about it. I think this is the last scheduled session. We have had four and a half days of this stuff before this morning. We keep saying it is lack of data. The insurance companies say they give the data to the Central Bank. The Central Bank says it does not collect the data because it is either not allowed to collect them or is not entitled to ask for information it does not need. We would like to see visibility on the 70% of claims that, as far as I can see, are invisible. We do not know what is happening in that sector. We can see what is happening in the courts and we are told that court claims are not increasing. We can see what is happening in the Injuries Board stuff and that is not significantly increasing yet motor insurance premiums have increased by 70%. It is not a loss in investment income; it is a reduction in the amount of investment income earned. Many commentators talk about how they have lost all this money. It is just that they are earning less. We know that but we do not have any visibility. As far as I can see, the Central Bank does not have any visibility regarding the 70% of claims that are being paid out. We asked Insurance Ireland whether it gives everything to the Central Bank. It said "Yes" but then said that it only gives what is asked for. When we then asked it for figures, it basically told us that it does not even compile some of the figures we were hoping to get. There seems to be a significant lack of data available to us and regardless of whether it is the Central Bank's issue or someone else's one, we are not getting it. Many people here might think the Central Bank would be a sensible place for it. It might or might not be.

In his comments on supervisory areas of focus, Mr. Roux referred to slower settlement rates, uneven data management quality and instances where boards exercised less monitoring and oversight than required. That does not inspire a lot of hope in me or, I am sure, other members of the committee that the insurance industry is really serious about tackling the problem. It seems to me that it is quite happy or at least content to just pay out bigger claims and pass on the cost to the consumer and that is what we are seeing. There is the question of whether it is done in a cartel-like fashion. We talked about signalling with the Competition and Consumer Protection Commission. Can the Central Bank give consumers and the public any hope that this situation will be improved or is it just a case of "they were too cheap in the past. Get over it."?

Dr. Cyril Roux:

There are many questions. In the first half of the decade, prices were well below break-even. They moved sharply up so that they might be break-even today. To get a sustained decrease in premiums, you need a sustained decrease in claims and to get that decrease in claims, you need a number of strands and avenues. One is, as the Senator noted, fewer accidents, fewer claims and fewer fraudulent claims, while another is lower cost by claim. The incontrovertible fact is that claims must be paid by premiums and when you are in low-income or zero-interest-rate environment, there is no source to pay claims other than premiums.

We have the data we need to supervise and look after the solvency of these firms. The data we need as supervisors are sufficient. Why is that? It is because we are not a statistics office as a supervisor. We do not collect the data to give us answers. We collect data to enable us to ask questions. The spirit behind the data we collect is they will enable us and inform our supervisory engagement. With that, we go into firms, inspect, look at the IT and work alongside the firm to understand where it is coming from. We get other sources of data that are firm-specific. By themselves, the data do not speak. The data we collect are not for us to give the final view. All these actual data are always blurred. They are blurred either because you are looking at the accounts and then get the claims data from many different years all into the one place or because you try to look at the line of business and how things will develop. Here you need to do forecasts, look far into the future and make an educated judgment about the trends you can discern. You construct another blurred picture and mix all of that. On the fact that you are not getting clarity, nobody gets clarity. Carrying out supervision and getting a sense of where you want the firm to go is a complicated business. We have the data we need to conduct our supervision because we do not rely on them exclusively and we know that if there are some biases in the data of firm A or B, we know how to correct them silently and make them talk to other sources of evidence we have, so we have the information we need to execute our mandate in respect of solvency.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Could Dr. Roux elaborate on what is meant by uneven data management quality and where boards exercise less monitoring and oversight than required?

Dr. Cyril Roux:

It means that firms did not invest as much as they should have in their IT in the build up to Solvency II. Why is that? As I explained, it is because Solvency II is a sea change in the information chain. It relates to the information you need to collect and means those on the ground, such as people in claims centres, need to ask different questions which are put into different treatment chains. This is a major challenge not only for the supervisor in respect of getting ready but also for the insurers. In the build up to Solvency II, they spent effort and energy in building the new information chains while the old information chains were creaking a bit. You do not repair to the same extent something that you will abandon at the end of 2015.

In terms of governance, we wanted to carry out a public service by making available to the public the thing we saw and then by challenging boards to reflect on that and to contrast the situation of the information they got from the management to the information we give to them, as well as the situation of their firm to the situation of other firms.

We give that information and we use it to challenge boards to act upon it. The risk appetite statement and the way it is articulated is very important for us. It is important that the board monitors the risk the management takes.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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In terms of the information in table 22, are the statistics on the Irish risk motor business audited by the Central Bank or does the Central Bank accept whatever statistics Insurance Ireland gives it?

Dr. Cyril Roux:

I do not know if it is from audited accounts. It is not the one we use.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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They are not figures that the Central Bank interrogates. It accepts the figures.

Ms Sylvia Cronin:

No.

Dr. Cyril Roux:

We use supervisory returns.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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FBD seems to be the only really Irish motor insurance company. There are the other large five, six or eight companies and we were told there were 22 companies in total, of which 11 are based in Gibraltar. Do the figures in table 22 reflect the total Irish motor insurance business, whether they are incorporated in Gibraltar and supervised by somebody else?

Dr. Cyril Roux:

It is Irish authorised.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Are all 22 companies Irish authorised?

Dr. Cyril Roux:

No.

Ms Sylvia Cronin:

No.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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What does Irish authorised-----

Ms Sylvia Cronin:

The eight companies are Irish authorised.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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So it includes the AIGs which are UK based.

Ms Sylvia Cronin:

No, AIG and Aviva are branches of UK operated firms.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Are they in the figures?

Ms Sylvia Cronin:

No, it is just the Irish regulated entities.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Of the 22 insurance players in the Irish market, how many are Irish regulated?

Ms Sylvia Cronin:

Eight.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Do we know how much of the total market those eight occupy?

Dr. Cyril Roux:

It has dropped to 60% now.

Ms Sylvia Cronin:

Yes.

Dr. Cyril Roux:

It has dropped. It was 75% a few years ago.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Does that mean that all the stuff we have been talking about today and all the references people have made to losses in the industry only reflects 60% of the total trade in the jurisdiction?

Dr. Cyril Roux:

They do not reflect the losses made by Setanta for instance. As far as-----

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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What about AIG? There is a flaw there and perhaps it is our fault. It was on my list of questions from the start to ask what is in this table. The Central Bank supervises the companies and not the losses. Does the table of insurance industry losses that we are talking about only represent about 60% of the total jurisdiction?

Dr. Cyril Roux:

As the Senator has said, we do not supervise AIG prudentially or-----

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Is it potentially the case that those companies, which we do not have any visibility on through the Central Bank figures, could be making lots of money? Do we do know they are not?

Dr. Cyril Roux:

That would be very surprising because they charge competitive rates and face the same claims environment. If one looks at a niche player that would only concentrate on a particular age group or something like commercial vans, for example, they will have different economics. At Setanta I was mostly on private vans. I do not want to go into the specifics of firms but my understanding of Aviva or AIG business is that they are main players so their economics would be the same, at least for premiums and claims. Then one gets into something more tricky which is how branches are treated. A branch is not a company. The way a UK company, for instance, will allocate cost to a branch is something it does the way it wants. The cost of capital, the cost of re-insurance, expenses, IT, marketing, brand-----

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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It can charge logo fees and head office costs anyway it likes.

Dr. Cyril Roux:

It is whatever it wants.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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If the business is producing profits better than the average, it can charge logo fees, head office fees, marketing charges and whatever and then come out with a certain figure. It is not normal practice but it is common practice. We do not see the figures. The Central Bank does not see the figures anyway.

Dr. Cyril Roux:

A branch is an office. If one asks whether the Cork office is profitable, the question is moot. It depends how it is counted and a company counts it the way it wants because these are not accounts. It is pro formamanagement.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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The committee has met for five and a half days before now with everyone telling us the industry is losing a fortune-----

Dr. Cyril Roux:

It is.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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-----but we do not have visibility on a big chunk of that market. We do not have any visibility on the trend in claims or the 70% of claims that are being settled either pre or post Injuries Board. Does the Central Bank have any visibility on those figures?

Dr. Cyril Roux:

We see all the claims of the firms we regulate. These are the numbers that are here.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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What about the trend in the 70% of claims? We were told by the Injuries Board that its claims have been fairly static over a number of years. Court claims have been relatively static over a number of years. Premiums are going up by 70% in line with alleged requirements. We are trying to work out what has changed. Whiplash settlements are higher here than anywhere else and legal fees are higher than in many other jurisdictions where they do not have an at-fault culture. Our medical costs are different because they are not socialised the way they are in the NHS in the UK. If the court claims and Injury Board claims are not going up, it must be that 70% of claims that are going up. The investment income and the historic losses are part of that but we do not know what is happening to the 70% of claims that are being settled. If the witnesses have that information, I would like them to share it with us.

Ms Sylvia Cronin:

We have to be conscious that at any point in time insurance companies are looking forward. They always have to think what the cost will be for the accidents that happen today. If there are ten accidents today, what is the expectation of the settlement cost of those ten claims? From a supervisory perspective, we have looked at the assumptions the insurers are making. We have to be satisfied the assumptions the insurers are making include all the changes happening in the claims environment.

When we look at what has happened, we know for a fact that in 2014, there were increases in the limits for District Court and Circuit Court charges. Second, there was the recovery of social welfare benefits which took effect in August 2014. Third, the establishment of the Court of Appeal resulted in the appointment of new judges in October 2014. Nobody knows what impact that will have. It could result in an increase or decrease in claims costs. Fourth, the discount rate reduced from 3% to 1% as a result of the Gill Russell case in December 2014. They were four specific changes that happened in 2014. Those changes need to be reflected in the assumptions within insurance companies when they are looking at their claims. As a supervisor, we will be looking to see if they are included in the forecast of settlements in order that we have reassurance that companies have the reserves needed to pay out the claims.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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That is possibly some of the most interesting and concise information we have had in the past six days that the committee met. It brings into focus that they are the reasons or a chunk of the reason-----

Ms Sylvia Cronin:

They are part of the reason.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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They are part of the reason. Some of the reasons are the historic cost being allegedly too low or companies going out of business for whatever reason - bad practices, not insuring the right risk, not managing their business properly, charging too little and paying out too much relative to what they were charging. The Central Bank has put in place these new changes and it is effectively, as the supervisor and regulator, asking insurance companies to charge more.

Ms Sylvia Cronin:

We are asking-----

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I do not mean it in an overly loaded way. The Central Bank is saying that in order for the industry to be sustainable, it must take into account more expensive claims, greater volume of claims, greater traffic on the road, whatever it is, and in order for the industry to have enough reserves, it has to charge more.

Ms Sylvia Cronin:

We want companies to assess their risks and ensure they have examined and identified the risks, and we want them to confirm to us that they have identified them. With Solvency II, every company must hold a mirror up to itself through an annual report called the own risk and solvency assessment. Companies must identify their risks and indicate to us whether they have adequate capital reserves in place and confirm exactly what they will do about it if they have not.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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We were told 92% of premium payers were not making claims, while 8% to 10% were making claims. We are not saying people who should not be entitled to get a claim should get a claim. Is there any hope for the 92% of people who pay in more and more while their car is getting older, they are getting older and they are probably getting better at driving over time? Is there any hope there will not be a 70% increase? I know we are not talking about signalling. Is there likely to be more rather than less stability, based on all the changes the Central Bank has made to put more stability into people's balance sheets?

Dr. Cyril Roux:

There is precedent. Ten to 12 years ago, prices and claims were high and the Government and the Oireachtas took action to reduce them. There was an effective, multi-strand policy. Ireland has done it before and this should give us comfort that a multi-strand approach would work. Some decisions are judicial decisions that the committee and the Central Bank cannot do anything about. When judges say, for good reason, an insurer cannot continue to operate at a 3% discount rate but must operate at 1% discount rate because it is the new normal and is what they should expect, it is incumbent on firms to recalculate their claims taking into account a discount rate that moved from 3% to 1%. This means a higher claims provision, and we will ensure firms recalculate. It is a judicial decision and a fact of life. It is not a capricious judicial decision and is well reasoned but it has that effect.

On the legislative side, when the Government decides to ask insurers to pay for disability benefits, I do not question it. It is probably for a good reason. However, it will have an impact. It means insurers will need to pay with premiums. In everything we do, we must think about the balance of benefits for society and the impact it has. This is what Members of the Oireachtas do every day when they make decisions in the House. There is hope for greater stability. I hope the book of quantum will be used very broadly, including in court. We will have to see about that.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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In terms of regulation, is there any difference between Solvency I and Solvency II in terms of the regulation of insurance companies from Ireland?

Dr. Cyril Roux:

Does the Deputy mean any difference between what applies at European level and Irish level?

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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In his statement, Dr. Roux said, "the Solvency II directive squarely places the sole responsibility of financial supervision of foreign firms on foreign regulators". Has there been any change since Solvency I?

Dr. Cyril Roux:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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That is fine. Under Solvency I, insurers were required to invest in relatively risk-free investments. Am I correct?

Dr. Cyril Roux:

They could invest in a number of different classes. If my recollection is correct, they could not put more than 40% of assets in real estate with no more than 10% in any one building. The same kind of-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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What does Solvency II allow?

Dr. Cyril Roux:

Solvency II allows them to do whatever they like. Now, they have to pay for it. The more risky, the more capital they must hold against the risks they take.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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We are dealing with people on the ground and the problem is in some cases, motor insurance premiums have gone through the roof. Is some cases, they will not even quote for motor insurance. The new Solvency II came in from 1 January 2016. Dr. Roux said he had seen no discernible change in the profile of investments.

Dr. Cyril Roux:

Yes, absolutely.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Is it possible that insurance companies are effectively increasing motor insurance premiums to build up the reserves to enable them to change the diversity of their investment portfolios?

Dr. Cyril Roux:

I do not think this is happening at all. We have no indication that they want to change their investment profiles.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Do they have the reserves to change their investment profiles to more risky investments? Do they have the reserves available? What ratios of reserves are they required to have under Solvency II that would not have been required under Solvency I?

Dr. Cyril Roux:

The reserves are not linked to the assets or the way they invest. What has changed is the link between investment choice and the solvency margin. There is capital they need to hold. Under Solvency I, the capital they had to hold was irrespective of their investments. Under Solvency II, it depends on their investments.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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So it is a risk-weighted model.

Dr. Cyril Roux:

Exactly. There are two complications. One is that although risk weight is assigned to each investment class, the overall capital they need to hold is not the sum of it, as it would be calculated in banking. Given that insurers believe they are cleverer, they diversify away their risks. They can hold a diverse bunch of assets-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The devil is in the detail. As it stands, would the level of reserves the insurance companies are holding enable them to diversify their portfolios of investments to riskier types of investments?

Dr. Cyril Roux:

I would rephrase the Senator's question. It is not a question of reserves but of whether the capital they hold would enable them to take more risk.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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As far as I am concerned, share capital and reserves are all capital. They cannot increase their share capital. The only way they can increase their capital is to increase their reserves. The only way they can increase their reserves is by increasing their profits. The only way they can increase their profits is by charging higher premiums.

Dr. Cyril Roux:

No. Given the sides of the balance sheet, if reserves increase, capital decreases.

If one has €100 million on one's balance sheet and the reserve moves from €75 million to €80 million, one's capital decreases from €25 million to €20 million. As one increases one's reserves, one reduces one's ability to take investment risks. One can only take so much risk on the basis of the size of one's balance sheet. If one is taking a lot of reserving risk, rather than having an increased risk margin, one has less room for taking investment risk. While I understand the Deputy's line of inquiry, I do not think this is what is playing out today at all.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Dr. Roux think the increase in premiums has nothing to do with Solvency II?

Dr. Cyril Roux:

That is a different line.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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They are two sides of the same coin.

Dr. Cyril Roux:

Okay. I can give the Deputy a short answer or a long answer.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I would prefer a short answer.

Dr. Cyril Roux:

The answer is "No".

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Fine. I would also like to ask about the losses in the companies. In total, how many companies are operating in the motor insurance market in Ireland at the moment?

Dr. Cyril Roux:

Twenty-two.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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How many of them are regulated by the Central Bank?

Dr. Cyril Roux:

Eight.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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That basically means 14 companies are not regulated.

Dr. Cyril Roux:

They are regulated by foreign regulators.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Fine. What percentage of the market is taken up by the eight companies that are regulated by the Central Bank?

Dr. Cyril Roux:

We think they take up 60% of the market today. This is moving.

Mr. Bernard Sheridan:

It was much higher in the past, but it has come down slightly.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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What percentage of the market is accounted for by these eight companies?

Dr. Cyril Roux:

Does that include the branches? The branches have to be taken out.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I am interested in what is regulated by the Central Bank.

Ms Sylvia Cronin:

We regulate eight companies, which represent approximately 60% of the market.

Dr. Cyril Roux:

It was 70% last year, so it has dropped. We think it is less now.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Basically, an increasing share of the market is being taken up by companies that are not regulated by the Central Bank.

Dr. Cyril Roux:

Not prudentially regulated here.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Okay. Dr. Roux mentioned that losses of €213 million, €198 million and €273 million were earned in 2013, 2014 and 2015, respectively. When did the Irish regulator first realise that the motor insurance providers were making a loss?

Dr. Cyril Roux:

There was a very low underwriting loss of €34 million in 2012. That was negligible, given that over 1 million premiums were collected. The first time we saw a significant material loss was in the 2013 accounts. That came to our attention in 2014. By then, we were already calling on firms to change. We wanted them to act by putting more money into the firms and to look at their business plans. I think it was contemporaneous with the losses. We did not lose any time.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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At that point, did the Central Bank make it known publicly, for example in a report, that it had clear reservations about the pricing models under which Central Bank-regulated companies in the Irish motor insurance sector were operating?

Dr. Cyril Roux:

This is not the way we operate. We operate on a firm-by-firm basis. We try to solve the issues with the firms by instructing them to make corrections.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Did the Central Bank believe in 2013 that the motor insurance premiums which were being charged in Ireland were too low?

Dr. Cyril Roux:

I think it was emerging.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I want to get the point because I have a limited amount of time available to me. From what we have seen, insurance companies were driving for market share and premiums were coming down. The companies were continuing to make losses. This was bubbling away. As far as ordinary drivers from all age groups who were looking to get motor insurance, including young drivers, were concerned, this did not come to light in real terms until this year. Did the Central Bank as the regulator not have a obligation to make the public aware that on a prudential basis, it believed the motor insurance companies it regulated were making heavy losses on their motor insurance products?

Dr. Cyril Roux:

The first point I want to make is that the facts were available for everyone to see in the published accounts of the companies. Accounts that were publicly available showed a loss for 2013.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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They would be European accounts. I am talking specifically about the Irish market. Am I right when I say the losses quoted by the Central Bank today are losses in the Irish market?

Dr. Cyril Roux:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Okay. I am asking specifically about the Irish market.

Dr. Cyril Roux:

In the specific case of the Irish market, AXA Insurance Ireland publishes its accounts in line with company law. Those accounts are available. The Central Bank reports on the aggregate profit and loss of firms each year as part of the macrofinancial review in its own economics publication. If the Senator were to go back and look at the macrofinancial review that was published by the Central Bank at the time in question, he would see that it was made clear that the insurance cycle had turned, or was turning, and that these firms were making losses. That was clear. We fulfilled our mandate to the Irish policyholders because these companies remained solvent at all times even though they were starting to make losses.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I have two final points to put to Ms Cronin. I had a quick look at some of the rulings made by the Court of Appeal since November 2015, when it appears to have got going. In some areas, the Court of Appeal appears to have significantly reduced the awards made in the High Court. As Ms Cronin is probably aware, the reductions vary from 30% to 50%. I assume that is factored in. As we have heard, 14 companies - a majority of the 22 companies in the market - account for 40% of the market. This figure has increased from 30%. Can their customers be assured that the companies selling motor insurance to them are solvent? How does Ms Cronin see the future for ordinary motor insurance customers over the next five years? What would all the witnesses recommend in terms of policies from a regulatory end, from the perspective of the insurance companies and from a legislative end, in terms of the Government and the Legislature?

Ms Sylvia Cronin:

As Solvency II applies to all European countries, it applies to each of the countries from which insurance is sold into Ireland. The home regulators in those countries would be undertaking the same review of the solvency positions of the companies that operate in Ireland. The Senator asked me about certainty in relation to premiums as we go forward. I raised with his colleague the number of changes that were made in 2014.

Ms Sylvia Cronin:

The Civil Liability (Amendment) Bill 2015 proposed the introduction of periodic payment orders, but that legislation has yet to be enacted. The insurance companies need to assess and determine the impact of periodic payment orders in their reserves as we go forward. We would look at whether companies have reviewed any changes that have occurred.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Maybe that would bring down the discount rate.

Ms Sylvia Cronin:

Yes. It is in everyone's interests to ensure there is stability in the claims environment as we go forward. We would certainly welcome any initiatives that might take place, just as we welcome the working party that is looking at all stakeholders and all inputs made by stakeholders in order to reduce premiums.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Dr. Roux anticipate that motor insurance premiums will increase or decrease over the next five years?

Dr. Cyril Roux:

There are several moving parts.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I would like a short answer.

Dr. Cyril Roux:

In terms of the claims environment, we have not yet seen factors that will bring down claims. This is my main concern. That is why this committee and the working group chaired by Minister of State, Deputy Eoghan Murphy, are so important. They need to come forward with policy actions that will bring down claims. Prices do not slavishly follow claims. For years they can be below the claims and for years they can be above them. A factor that has driven prices down below a break-even level was the willingness of some actors - either here or elsewhere - to get into predatory pricing. If one or two actors engage in predatory pricing, that forces prices down. It is not a sound way of getting premiums down, but it is a way and it has operated in the past.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Basically, it is the market share.

Dr. Cyril Roux:

Actors have to follow suit, at least to some extent. The sound way to bring premiums down is to bring claims down. We cannot see that inordinate profits are being made in insurance. We welcome the review that has been started by Competition and Consumer Protection Commission, CCPC. The Chairman asked earlier if insurers are working as a cartel. That is a matter for the commission to inquire into, which it is doing. We are ready to assist it in its inquiry.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I will have to leave shortly as a vote has been called in the Dáil.

Dr. Cyril Roux:

Sure.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We asked Dr. Roux earlier about comments made by Mr. Sibley. Would he give his view on those? He will appreciate that I now have to leave to go to the Dáil.

Senator Gerry Horkan took the Chair at 1.07 p.m.

Dr. Cyril Roux:

Shall I try to answer that question?

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The Chairman would like to get Dr. Roux's view on the record.

Dr. Cyril Roux:

Very good. Mr. Sibley's speech last week focused on the difficulties with regard to the non-performing loans and the problems they cause for borrowers, banks and the wider economy. He noted that the number of non-performing loans had significantly reduced and is expected to continue to reduce. However, these loans remain elevated at the level of €45 billion across five domestic lenders. We think that efforts need to be redoubled to continue to bring them down to more normalised levels, in particular for mortgage loans. Mr. Sibley noted, and this is what attracted the attention of this committee, that the memories of some people, both inside and outside the banks, appear to be short. We have already seen some evidence of a return of more aggressive lending practices and cultures. However, that is not to say that the banks are out of control, they are not, or that they are returning to pre-crash practices, they are not. We need to remain vigilant in respect of the risk that the lessons from the failures of the period up to 2000 are not heeded.

In our recent supervisory work and on-site inspections, we have identified weaknesses in new lending practices and in controls in some of the domestic lenders. They include, for example, a need for better oversight and challenge from the boards of banks in terms of banks' risk appetites, which are used to govern and quantify lending decisions. We have seen strategies that are focused on deriving increased volumes of lending without sufficient consideration of risk factors involved. We have seen their return to the use of league tables to incentivise staff to drive lending volume without sufficient consideration of quality and we have seen issues with pricing models that take insufficient account of the underlying risks. It is disappointing to see these issues emerging but they are only emerging trends and we notice them as they emerge.

The banks and the supervisory regime are entirely different from what they were in 2008. Again, we identified these issues as they began to emerge and we require them to be remediated now. We challenge the business models and strategies and have ensured greater bank capitalisation and a better funding position. As we do in insurance, we constantly challenge the banks to ensure that they do proper underwriting. In this context, it would translate into effective credit risk management arrangements. We require the weaknesses that we saw in our on-site inspections and other work to be remediated and we also use macro-prudential instruments. We use counter cyclical buffers and other buffers. We use mortgage measures, the loan-to-value, LTV, and loan-to-income, LTI, measures, that constrain the risk that banks and borrowers take. It is in that context that I assure the committee that we are vigilant in ensuring the mistakes of the past are not repeated, especially in the context of the high level of indebtedness in Ireland and the challenges of the banking sector.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Are we entitled to find out the particular banks about which Dr. Roux has concerns?

Dr. Cyril Roux:

The Acting Chairman can ask but I cannot answer.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I thought Dr. Roux might say that. As a committee, we would be quite interested in talking to those banks. If we do not know which ones are involved, however, we will not be in a position to talk to them.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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It would be remiss of me not to ask about the deposit required to purchase a home. Many first-time buyers regard the level of that deposit as draconian. Dr. Roux might advise on the thinking behind that and his view on the level of deposit that will be required in the future, the type of models that can provide assistance at Government and legislative level to facilitate that process and where he envisages the housing market going over the next two or three years. I will not overdo it and ask about the next five years.

Dr. Cyril Roux:

Does the Senator have an extra three hours?

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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It will have to be a short answer.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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It is a huge issue.

Dr. Cyril Roux:

It is. Those in government have given the Central Bank the authority to decide on these matters and this is a very serious matter of us to decide on because it affects people's lives. I assure the Senator that the commission of the bank, which makes those decisions, and the whole bank - the supervisory part of it, the banking supervisory divisions and directorate, the economics part and the financial stability part - are working very hard to take into account all viewpoints, experiences and evidence that is given to us in order to assess the impact it has on borrowers, banks and the wider economy. As we did previously, we will publish a number of elements of our research and economic studies to answer the question that the Senator asked. The latter will inform the decision the commission will take in the November. I am one member of the commission, the membership of which is nine or ten now. The debate has not taken place. As commission members, we are given information, research, studies and elements to consider what would be the best course of action. At this stage, we have opened the consultation process, although it had never been closed. We are considering the evidence.

We will act on this evidence to see how best to protect people. When these measures were introduced and this calibration was chosen after serious deliberation, we saw which cohorts of borrowers got into trouble, which were over-indebted and got into protracted financial difficulties. We do not believe that it is fair to disregard that evidence. That helped our decision. We would not want large cohorts in risky lending practices or being exposed to the risk of being over-indebted in the future. We have to balance that with the need of families, particularly young families, to establish a home, and we do.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Would it be fair to say the level of deposit required, especially in Dublin where prices are high but also in other areas such as where I am based in Limerick, has had the unintended consequence of being an adverse supply side measure? It is effectively getting to the point where because there is no demand and people are not able to meet the deposit levels, it prevents supply coming to market.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I am conscious that the committee did not ask Dr. Roux about these points. Is Dr. Roux concerned that because it is a percentage of a total amount and if that is relaxed to 10% the house price will go up in an inverse relationship to the extent that, instead of a person having to find 20% of €400,000, he or she has to find 10% of €800,000 or €80,000 either way? There has been a slower rate of increase or even slight dips in Dublin. The people who might have been looking in Dublin have moved to the Kildare, Meath, Wicklow commuter belt because that is the only place they can get their 20% deposit for a house. Is that a concern?

Dr. Cyril Roux:

The interesting thing about this matter is that all viewpoints have an element of truth so I would agree in part with what the Acting Chairman has said and what others have said. The trick for us is to find a balanced course between all those arguments that are all valid up to a point, and there are countervailing arguments as well. I will not say today where we will land. We are all ears, and have been to all the effects that the Acting Chairman mentioned, and we will take everything into account when we decide whether we will affirm the current rules or vary them.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Dr. Roux expect that to happen in the next few weeks?

Dr. Cyril Roux:

We will publish in November.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I thank the witnesses for participating in the meeting and all our committee members who participated in it as well, and for the material the witnesses supplied in advance of the meeting.

That concludes public hearings on the rising cost of motor insurance. The secretariat will produce a report with recommendations for committee consideration.

The committee is adjourned until 10 a.m. on Thursday, 13 October when we will meet a delegation from the Central Statistics Office.

The joint committee adjourned at 1.15 p.m. until 10 a.m. on Thursday, 13 October 2016.