Eoghan Murphy (Dublin Bay South, Fine Gael) | Oireachtas source

I thank Deputy Michael McGrath for introducing this Private Members' Bill on the topic

of flood insurance. It is an issue I understand well because it affects my constituency, Dublin Bay South. The Minister of State, Deputy Seán Canney, will also speak on the work being done by the OPW to improve flood defences and the corresponding knock-on benefits for increased flood cover. Deputy Canney, the Minister, Deputy Noonan, and I are fully aware of the difficulties experienced by certain households and businesses in securing flood insurance in areas at most risk of flooding. However, we believe that this Bill, if enacted, is likely to have the opposite effect to that intended. In particular, the Government believes the Bill would undermine the well-established market system of insurance cover which ensures that flood insurance is currently widely available in Ireland. Insurers have contributed significantly to ensuring people have been adequately compensated after a flood event. Data for the period 2000-16 indicates that insurers paid out in the region of €1.5 billion for flood, storm and freeze weather events. This Bill runs the serious risk of undermining this model and puts future insurance payouts of this scale at risk. We believe that this proposal creates a major financial risk exposure for the Exchequer.

There are a number of legal concerns regarding the Bill as currently proposed which will need to be assessed. In particular, there is a concern, shared by the Central Bank, that the Bill runs contrary to the EU legislative framework for insurance, the Solvency II Directive. In broad terms, Solvency II prohibits member states from adopting rules which require insurance companies to obtain prior approval on special policy conditions and scales of premiums except as part of a general price control system. This has been acknowledged in the past by the European Court of Justice in ECJ case law, namely, case C-518/06. In addition, there may be constitutional issues with the absence of an appeal mechanism for the regulated financial service providers targeted in the legislation. Section 11 proposes that the decisions taken pursuant to sections 8 to 10, inclusive, are binding but there is no appeal mechanism. It is a provision that appears to contravene the constitutional right of access to the courts.

The Bill provides that where there is a disagreement with the policyholder, the ultimate arbiter is the Financial Services Ombudsman. In our view, this takes the pricing of risk outside of the control of insurance companies, which could lead to insurers being forced to provide a significant level of cover at an inappropriate pricing level, that is, at a loss. Insurers could see this as undermining their financial position.

In addition, the level of claims experienced by the market is likely to rise due to the higher risk properties now being brought within the insured portfolio. The overall effect would be an increase in premiums as low risk policies would be required to subsidise higher-risk ones.

The Bill specifically links the provision of property insurance to including flood cover. In other words, one cannot get one without the other. The impact of the Bill on the financial position of insurers and on pricing would raise the risk that insurance companies, most of which are subsidiaries or branches of international companies, could decide to withdraw from the household insurance sector of the Irish market altogether.

In addition, as the Bill effectively proposes intervention in what would normally be commercial decisions of insurance companies, it could have the effect of deterring potential entrants to the market and thereby reduce the choices available to policy-holders and the competition within the market.

In the course of our work on the cost of insurance working group review, the general frustration within the non-life insurance market in Ireland has emerged as a prevalent issue. One particular company commented that significant pressures had been brought to bear from head office abroad to withdraw from the motor insurance sector. It is not difficult to conceive that the introduction of legislation such as this could compound the worries of such firms and could force a major rethink about doing business in Ireland.

Alternatively, if insurers are forced by the Bill to offer flood cover, they may choose to only offer minimum cover for all policies in an effort to control the risk. In the context of managing risk and recovering costs, there could be further increasing of the excess required from the policyholder or limits on sums insured for repairs. Ultimately, the result could be a deterioration in the general quality of flood insurance available for policyholders.

It is not beyond the bounds of possibility that if this legislation were introduced, there might be a need to include a provision providing compensation to insurers in respect of losses imposed on them by reason of compulsory insurance of dwellings at higher risk of flooding. This could create an additional significant financial exposure for the State.

The Government believes, for the reasons stated above, that this Bill runs the risk of undermining the home and flood insurance sectors. It would make Ireland unattractive to new entrants at best, and at worst could lead to a withdrawal from the non-life insurance market by some of the biggest players, most of which are either branches or subsidiaries of companies based abroad.

Finally, and importantly, the Bill raises matters of legal concern regarding its consistency with Solvency II regarding the role of the Central Bank and the Financial Services Ombudsman and the Bill raises constitutional issues.

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