Martin Mansergh (Tipperary South, Fianna Fail)

): The Government believes competition in the insurance market is essential if consumers and businesses are to obtain good value for money. Up to about 18 months ago insurance prices had fallen significantly for a prolonged period, reflecting Government initiatives such as the establishment of the Personal Injuries Assessment Board and legislation to improve road safety, which has reduced accidents significantly, and also competition within the market, with a resulting impact on insurance prices. In more recent times, however, prices have begun to increase owing to the recessionary pressures in the economy, which is also affecting financial service providers, including the insurance industry, and other factors such as an increase in claims following the recent severe weather events during the winter as well as a fall in investment returns and the continuing stress in the financial markets.

In this context, the Government, in its revised programme for Government, made a commitment to review insurance costs to ensure the consumer is benefiting to the maximum extent possible from competition in the sector. At present, the Department of Finance is preparing this and hopes to commence the review shortly. The review will examine a number of issues dealing with the existing levels of competition within the sector, in particular the non-life insurance area and the following factors that impact on this.

One factor is size and scale of operation. The nature of the insurance industry is such that, except in specialist niche areas, scale of operation is very important. There are two main reasons for this, the first is known as the pooling effect, that is, the bigger the pool of customers or policyholders, the greater the company's ability to absorb losses when they arise as only a small number of people in the pool make claims at any one time. The second is the diversification effect - the broader the range of insurance products a company offers as well as the greater the amount of markets it operates within, the easier it is to offset losses against sectors that are growing and profitable. Another factor is the level of capital resources required.To enter a marketplace, considerable capital resources are required at the outset to satisfy the Financial Regulator's regulatory requirements. New entrant companies are required to hold even higher capital requirements than existing companies because of the higher risk associated with breaking into the new market. A further factor is the size of the market. Ireland is a relatively small market and, therefore, many companies find it difficult to establish a foothold in the marketplace, especially when there are a few very large, well-established companies here already. A further factor is the level of economic activity taking place in a marketplace. In the current economic climate there is little incentive to enter the market and aim to develop new business as existing companies are struggling to maintain their level of business. Another factor is the trend in the number of claims being made. Before entering a market it is usual for companies to get a sense of the extent of claims within the market, and whatever judgement they make will inform their views on whether and when to enter the market. The increase in the number of claims in recent years is a factor which might make a company hesitate in committing to the Irish market. A more Europe-wide phenomenon, which also could be a factor here, is the apparent reluctance by people to engage with cross-Border companies which do not have an establishment in Ireland.

Competition in the insurance sector takes place within a regulated marketplace to safeguard both the short-term and long-term interests of policyholders and third parties. Without this, there is a risk that companies entering the market would be insufficiently prepared for the challenges in the sector, involving significant risk to policyholders and others exposed to losses. To avoid this scenario, insurance companies are required to meet a series of prudential requirements which are derived from EU legislation known as Solvency 1. In the first place, insurance companies are required to hold sufficient assets to cover their insurance liabilities, that is, their expected losses. On top of this, companies are required to maintain a solvency margin that is an additional amount to cover unexpected losses or fluctuations in asset values, for example, the recent November flooding where the losses for insurance companies have been greater than they forecast at the start of the last year. Therefore, the role of the Financial Regulator is also important in ensuring the regulatory requirements in which competition takes place are complied with. The actions of the Financial Regulator in recent days provide an example of this.

Following an application by the Financial Regulator, Mr. Justice John Cooke in the High Court appointed Mr. Michael McAteer and Mr. Paul McCann from Grant Thornton to act as the two joint provisional administrators to Quinn Insurance Limited under the Insurance (No. 2) Act 1983. They have already begun their work, they have an on-site presence in the company and will oversee its actions and work with the management. The appointment was made after the court was informed that the Financial Regulator had a number of concerns, including that the insurance company had significantly breached its solvency ratios and its subsidiaries had entered a series of guarantee agreements which had reduced its assets and had failed to deliver a financial recovery plan that met the Financial Regulator's requirements aimed at restoring financial health. In other words, the Financial Regulator had concerns about the way the company was conducting its affairs and that it was not meeting the regulatory requirements. In particular, the regulator expressed concern that the company may be unable to comply with the requirements of the Insurance (No. 2) Act 1983 in that it had failed to make adequate provision for its debts, including contingent and prospective liabilities.

I am informed that, following a meeting between the Financial Regulator and the company, it was revealed that the effect of the guarantees had reduced the insurer's unencumbered assets by some €448 million and thus wiped out the company's solvency cushion. The fact that these guarantees had been in place was a matter of the gravest concern to the Financial Regulator. This raised serious governance and accountability questions about the internal control mechanisms as well as the accounting and administration procedures and practices within the company.

The Financial Regulator has commenced an investigation into these matters within Quinn Insurance that have very recently come to light and we must await the outcome of this investigation. I should also stress that it is the courts which will make the final decisions on the question of an administrator. Therefore, we must be careful not to prejudice the position regarding any matter that is sub judice. The courts will make the final determination on the relevant facts. That is the reason I must be fairly circumspect in what I say.

I recognise that the Financial Regulator has taken the action to seek the appointment of the two joint provisional administrators in the best interests of the firm's policyholders and that the appointment will allow the firm to remain open for business and to continue to be run as a going concern with a view to placing it on an ongoing and sound commercial and financial footing. This will assist in the maintenance, in the public interest, of the proper and orderly regulation and conduct of the business.

I welcome the fact that Irish policyholders of Quinn Insurance Limited can continue to renew policies, carry out new business and make claims in the normal way. Quinn Life business, which is a separate entity, is not affected by these measures.

It is important to note that at this stage, there is no requirement for additional funds from the insurance compensation fund as the administration is only of a provisional nature. If the administration is confirmed on 12 April and should the administrator subsequently need additional funds to help him with the business, there is the facility of the insurance compensation fund established under the Insurance Act 1964. This fund was used in previous insurance company administrations, for example, in PMPA in 1983 and ICI in 1985.

As regards the employment implications of the decision to appoint the administrators, the aim is to stabilise the company which in turn will help to protect employment. The administrators are there to continue the company as a going concern.

The Government remains acutely conscious that while economic activity continues to remain weak, it is imperative that we do nothing to further erode private sector employment. We are particularly conscious of the contribution of the financial services sector to employment in this country and it is the Government's objective that this sector emerges from the current downturn strong, competitive and able to withstand any future downturns.