General Insurance - An Industry in Crisis?
The Irish general insurance industry was reviewed recently for ACCA Ireland by Gary Owens, Managing Director of Hibernian General Insurance, the Irish subsidiary of Aviva. Niall Duggan reports.
Worldwide, the general insurance sector has lost billions in underwriting losses over the past decade. Weather catastrophes, terrorism, employer liability claims, asbestosis, stress, bullying and greater litigiousness have pushed up underwriting losses. Potential claims from e-bugs, pollution and mobile phone radiation are lurking in the background and may result in future losses.
The decline in investment returns in recent years has aggravated general insurers’ trading results and this is reflected in their relative share price performance. Compared with their own stockmarket growth since 1997, Aviva and AXA have underperformed by 16% each, Allianz by 23%, Royal & Sun Alliance by 67% and Zurich by 69%. General insurers in the Irish market bore underwriting losses of £1.6bn between 1997 and 2001, earning investment income of only £1.4bn. These pre-tax figures ignore any earnings due to investment of the business’s capital. Their return on equity averaged 1%, with substantial negative returns in 2000 and 2001.
Motor insurance market
The Government-appointed Motor Insurance Advisory Board’s (MIAB) recent
report was fair and balanced. The report confirmed the many causes of high motor
insurance premiums in Ireland. The MIAB proposed the establishment of a Personal
Injuries Assessment Board to deal with personal injury claims as a measure to
reduce motor premiums inflation.
The press took a simplistic view of the report, dwelling on the apparent excess profits earned by Irish motor insurers compared with UK insurers, misleading readers as to the true state of the market and its causes. The press ignored the impact of the collapse of Independent Insurance and the withdrawal of several Lloyds syndicates and a number of general insurers from the Irish market as well as the factors identified by the MIAB report.
Why are these players withdrawing from the Irish market? Clearly, it provides an inadequate return on capital given its risk profile. The Irish market lacks scale and can be ignored safely by global insurers. A compensation culture is rampant and the system of dealing with personal injury claims is archaic and inflexible, evidenced by the fact that Irish personal injury cases take four times longer to reach settlement than UK cases.
In the broader general insurance market, insurance capital is increasingly being invested in low risk sectors where claim frequency can be predicted to be average and a low payout claim is likely. High risk sectors with a low claim frequency but high average payouts are being avoided as investors face potentially significant underwriting losses over time.
Customers must actively control their insurance costs. Employing a broker who knows the market and will work to win the best renewal terms ahead of the renewal date is essential. Customers should also use a risk management programme with a structured approach to health and safety, minimising risks and recording and processing claims. Appropriate cover levels, eliminating unessential benefits and increasing the excess deductibles will also help to moderate costs. Some customers may be able to limit their cover to catastrophe cover only or even establish their own captive insurance operation.
Insurers must also better manage their business and customer relations. They should develop partnerships with their customers – delivering an acceptable level of cover for a reasonable premium. Hibernian has published Managing Insurance Costs – A Guide for Small Businesses in association with the Small Firms Association. Insurers must be more transparent about their activities and engage in an informed dialogue with customers, regulators and the media. Finally, insurers are (as they should) devoting more resources to fraud prevention and detection.
These measures will permit general insurers to win customer acceptance and ensure that returns on capital revert to more economic and satisfactory levels to attract capital on an ongoing basis.
Niall Duggan – Bank of Scotland Ireland Limited