Michael Ahern (Cork East, Fianna Fail)

The Government welcomes the publication of the Competition Authority's preliminary report and consultation document on competition issues in the non-life insurance market. In the wider context, An Agreed Programme for Government includes tackling the high cost of insurance. It is the Government's firm intention to implement the measures in the agreed programme which relate to insurance.

The insurance reform programme, which was launched on 25 October 2002, contained a co-ordinated set of actions across a range of Departments and considerable progress has been made in implementing the programme. This includes the implementation of road safety measures such as penalty points by the Department of Transport; enactment of PIAB legislation, where it is expected that the board will be up and running in the near future; the preparation of legislation by the Department of Justice, Equality and Law Reform dealing with fraudulent and exaggerated personal injury claims — the Civil Liability and Courts Bill has been published and is expected to be before the Houses of the Oireachtas shortly; and the Irish Financial Services Regulatory Authority and the Irish Insurance Federation also have made progress in the areas of consumer information campaigns and codes of practice for insurers.

The insurance reform programme comprises the 67 recommendations of the Motor Insurance Advisory Board's report, which was the most comprehensive study and analysis of the Irish motor insurance industry ever undertaken and provided a sound basis for addressing the problems we are experiencing in the insurance industry. To date, 32 of the 67 recommendations have been implemented. A further three have been partially implemented and 21 are being actively progressed.

Three of the MIAB recommendations were directed to the Competition Authority. First, the MIAB recommended that the authority should review all further insurance mergers in the interests of the Irish economy with appropriate reference to IFSRA. The authority took over responsibility for mergers on 1 January 2003 and, to date, no mergers requiring review have taken place. Second, a consultation document on the authority's study of the legal profession is expected by mid-year. Third, there is the recommendation to carry out a study of motor insurance. In effect, the study also covers public liability and employers' liability insurance.

The Competition Authority undertook the insurance study jointly with the Department of Enterprise, Trade and Employment and the Department's involvement was mainly in the area of funding. The study commenced in the autumn of 2002. Following publication of draft terms of reference and an analysis of responses received, it was decided to limit the range of the study to motor, employers' liability and public liability insurance. The focus of the study, in line with standard competition analysis of a sector, is on barriers to entry and rivalry. In other words, it looks at whether firms have difficulty getting into the Irish market and whether those that have entered compete against each other.

The terms of reference of this study are as follows: to identify anti-competitive practices or other constraints on competition in the non-life insurance market in Ireland, with particular reference to motor insurance, employer's liability and public liability insurance; to highlight any anti-competitive practices or other constraints that are particular to the Irish market; to make recommendations for legislative and other changes to ensure that competition works well for consumers in the Irish market; and to make, in the case of any problems identified at EU level, recommendations for change at that level.

The authority has undertaken a considerable amount of research and analysis on the insurance sector since the start of the study. In addition, it has commissioned four substantial pieces of independent research, all of which are published on its website as a resource for anyone with an interest in this important topic. First, there is a report from Cass Business School, which is part of the City of London University, on the economics and regulation of insurance. Second, there is a paper from Vincent Hogan and Colm Harmon, of University College Dublin, on the prospects for empirical analysis in the non-life insurance market in Ireland. Third, there is a report from Europe Economics of an analysis of the state of competition in the Irish liability and motor insurance sectors. Fourth, there is an analysis from Dorothea Dowling of the 2002 statutory returns in the Irish insurance market and related matters.

The authority notes that competition is by no means the only factor leading to increases in the cost of premiums. However, based on the information that it has received through its own research and from its various consultancy projects, it identifies a number of issues that caused competition concerns. These are the basis of a public consultation period over the next two months, during which all contributions will be welcome. I am sure the authority would expect most submissions to be made towards the end of the public consultation period on 18 April, but Senators have a chance this afternoon to make an early input to the process. I assure the House that the authority will carefully examine all comments made here today in preparing its final report.

The issues that have given rise to preliminary concerns relate both to insurance brokers and insurance companies. In the case of brokers, the issues are as follows. First, there appear to be market-wide ad valorem, or percentage-based, commission fees, with little evidence of competition among brokers putting downward pressure on these despite basic premia rising sharply in recent years. For example, if a business paid €10,000 for a liability premium in 2000, this increased to €20,000 in 2002. If the commission payable to the broker in 2000 was €900, it would have risen to €1,800 in 2002. In other words, in 2002 the business in question would have had to pay its broker an extra €900 in commission for the same service it received in 2000. While the cost of assessing and placing liability risk may have risen in a tighter market, or as a result of general cost inflation, it would be a remarkable coincidence if the changes in broker costs for both motor and liability insurance were perfectly correlated with the changes in the underlying cost of insurance.

In some cases, insurance brokers enter into fee based arrangements with their larger clients. In doing so, the broker returns to the client the commission he or she would otherwise earn on that client's insurance business in exchange for a negotiated and normally lower fee. This fee is based on the extent and value of the services the broker provides for his or her client. However, the evidence of this practice the authority has received relates only to larger clients who are more able to exert countervailing power.

A second concern regarding brokers is that a conflict of interest is possible. Incentives from insurers, including overriding commissions related to the quantity of sales, and minimum thresholds can cause a conflict of interest between the obligation to provide best advice to the client and best return for the broker. Third, there is a lack of transparency in that buyers do not necessarily know what incentives and commissions the broker might receive, nor which insurers the broker has contacted on their behalf.

A number of preliminary concerns have been identified with regard to insurance companies. First, there are limitations in the sharing of data that could help to assess and price risk. To determine its premium, an insurer needs to get statistical data concerning the frequency and volume of claims made in the past. Often, insurers are not in a position to collect a sufficient volume of reliable data on the basis of their business alone. European competition law, therefore, allows such data to be shared. On the Irish market, however, there appear to be problems regarding the extent, timeliness, reliability and availability of relevant statistics. The authority wants to explore whether this can be improved.

Second, potential entrants to the motor insurance market have cited as a concern the system of handling and funding claims arising from uninsured and un-traced drivers. All companies selling motor insurance on the market are obliged to fund the payment of such claims in accordance with their market share. Companies which handle the claims are reimbursed from the funds collected from all other insurers. The concern raised is that this does not provide an incentive to minimise the cost and time of handling claims, which raises the costs of all companies in the market, irrespective of whether they handle claims. The authority is, therefore, inviting suggestions as to whether there are better ways to handle these claims, for example, by tendering out claims handling for a fixed period.

Third, with regard to the motor insurance market, some potential entrants to niche markets have indicated they would have difficulty participating in the declined cases agreement as it currently operates. The declined cases agreement is designed to enable people to obtain a quote for motor insurance, even if they cannot do so on the open market. Cases accepted by the declined cases committee are given to insurance companies on a rota basis. The procedure, whereby insurance companies then potentially assess whether a specific quote under this system is so high as to be tantamount to a refusal, raises competition concerns. A separate problem cited by potential entrants to niche markets is that they do not want to run the risk of getting a case outside their niche. The authority is consulting as to whether there are other ways to run this scheme, which would be less likely to cause competition concerns, for example, using a tendering system.

Fourth, solvency requirements are higher for new entrants than for established companies. The reason for this is that the likelihood of failure is greater in the first three years than in subsequent years. However, because this could put entrants to the market at a disadvantage, the authority is inviting submissions on whether these requirements have caused a problem in practice. It is also asking for input on whether a policyholder protection fund might be set up to deal with insurer insolvency.

Many external cost factors unrelated to competition help to explain the level of, and recent spikes in, insurance prices. The wide ranging set of insurance reforms in train has the potential to make the market generally more attractive to insurers and thus encourage entry to the market. The implementation of such reforms can be expected to reduce insurance costs, with resulting reductions in premia for consumers and business alike. Competition has a vital role to play in ensuring that these cost reductions are fully passed on to the buyers of insurance.