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Sunday, 14th April 2024
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Non life insurance - securing a platform for the future Back  
Paul Donaldson reflects on developments within the general insurance sector during 2002 and looks forward to the year ahead.
Another year has passed and, when all the market statistics are collated, I have no doubt that the entire non-life insurance sector will reflect on what was another difficult period for the industry. But it will also mark the start of a more stable insurance environment going forward.
To paint the landscape we need to recognise some global and local influences that had direct impact on insurers and consumers.

The wider picture

Looking at some stark facts it is noticeable that, globally, non-life insurers capital was reduced by some 22 per cent in 2002, with European insurers hardest hit due to their investment emphasis in equities. Most insurers and re-insurers also had their financial strength ratings reduced in 2001 and 2002.

In the global scale of things Ireland is a very small, albeit mature, insurance market. We are not shielded from the impact of global market developments. As international issues arise, affecting insurers or re-insurers, they invariably have direct repercussions for the Irish market. Throughout the year a loss of appetite for insurance stock among investors was reflected in:
• Gerling Re, the sixth largest property and casualty re-insurer in the world, ceasing to trade due to withdrawal of shareholder support
• Share prices for Europe’s six largest general insurers continuing to be driven downwards (by an average of 65 per cent since the start of 2001)
• The negative market sentiment being added to by the need for many insurers to re-build their balance sheets

Such developments are set against a backdrop of a grim investment market performance which continued to drive insurers attention to generating acceptable returns on their underwriting portfolios. This marked an about turn from the previous decades reliance on high investment returns as a cushion for underwriting losses.

Developments in the re-insurance market continued to have a major influence. Faced with the urgent need to recover from the financial shock to their business in 2001 and mindful of the growing threat of the new wave of risks including terrorism and increasing weather catastrophes, re-insurers premiums soared during the year bringing added pressure to insurers costs and consumer premiums.

Careful risk selection and pricing based on a more conservative assessment of the potential insurance loss became the order of the day for insurers in 2002. The consequence, across the board, has unfortunately been higher premiums for customers. Indeed many businesses in markets around the globe have seen their liability and property insurance premiums double in just two years to the end of 2002. Even though trends toward higher premium rates, both for personal and commercial insurance, were evident in the major markets over the past few years, the trends were reinforced in 2002. Customers who engaged in progressive risk prevention measures may have limited the upward pressure on their premiums - but they were not spared from premium hikes.

Closer to home

Turning to our own market, the industry continued to grapple with the fundamental issues surrounding the local insurance system. If nothing else, the global and local rising tide of insurance premiums served to enhance the urgency among policymakers to address problems that the industry has been airing for many years. The renewed sense of urgency for change was also driven by:
• The withdrawal of several insurance providers from the market.
• Indications that 2002 market results may result in a 4th consecutive year of post tax losses for Irish insurers
• The motor insurance topic coming to the fore in the wake of the Motor Industry Advisory Board (MIAB) findings
• The urgent need for change in our system of delivering personal injury compensation
• The major impact of continuing weather related events
• The reality that a deep-rooted compensation culture prevails
It’s worth reflecting further on developments surrounding some of these issues.

Market withdrawals

2002 saw AXA ceasing to write commercial insurance business in Ireland, the closure of Generali Ireland and the departure of up to 10 Lloyds syndicates. Following on the heels of the collapse of the Independent Insurance Company in 2001, the number of insurance providers continued to contract. The drivers were a mix of global developments as outlined earlier combined with opinion that this market did not hold potential for consistent returns on capital.
Hundreds of insurers have obtained licenses to write non-life business in Ireland but very few have decided to avail of the opportunity. Fortunately, well-structured and experienced companies continue to operate in this market and commit themselves, for now, to working through the current industry malaise.

Driving on

Motor insurance, which accounts for over 50 per cent of the industry’s entire premium income, continued to dominate media and public interest. Understandably the public’s attention rests on the current high level of premiums. Industry and policymaker attention has zeroed in on the fundamental reasons behind such premiums including the cost of claims and the system for delivering personal injury compensation which remains adversarial and costly.

Progress on implementing the recommendations of the MIAB continued and the imminent establishment of a personal injuries assessment board must be seen in positive light. All parties to the equation must be forceful in supporting its implementation. Also on the motor topic, the introduction of the penalty points system was a welcome tonic and, even at this early stage, appears to be playing a key role in changing driver attitudes. The continuation of such developments will ultimately feed directly into positive news for insurer costs and consumer premiums.

Businesses feel the pinch

Earlier in this article I indicated that businesses across the global commercial spectrum had faced premium increases over the past two years. The scenario among the Irish commercial sector was no different. With insurers margins eroded, the emphasis fell squarely on underwriters to ensure a detailed evaluation of the risk and exposure presented to them and the setting of appropriate terms for each risk. Liability covers received the greatest attention.

It is recognised that the financial shock to some sectors of business was severe, particularly at a time when the general economic slowdown was bringing added pressures to the business environment. However, driven by the ‘soft’ market that prevailed in the previous decade, insurance had essentially become an underpriced and undervalued commodity.

In the wake of ongoing global and local insurance market turmoil, insurers must continue to take the necessary pricing and risk assessment steps to secure a stable platform for the future. Businesses can play their part by recognising that risk awareness and risk management procedures cannot be seen as a problem for someone else. The ability to implement progressive risk control policies must be a key element in all commercial insurance agreements and directly impact on premium levels.

Despite the recent rounds of premium increases, the markets insurance spend has not matched the country’s growth in gross domestic product (GDP). When expressed as a percentage 1999 and 2000 saw non-life insurance premiums reach their lowest level since our records began in 1973, at 2.7 per cent of GDP. The ratio increased marginally over the past two years but remains below the 10 and 20-year averages of 3.1 per cent and 3.4 per cent respectively and well below the peak of 4.0 per cent of GDP achieved in 1987.

Going forward

Despite the shadow that prevailed over the insurance business in the past year there are grounds for optimism. Customers will increasingly recognise the importance of being able to transfer the risk of financial loss attaching to their business or personal assets to another party - namely an insurer. Over the past decade the industry has not paid sufficient attention to adequately pricing this facility. Corrective action was therefore essential and the past year will be viewed as a watershed, with the market having taken a major step towards longer-term viability.

In 2003 consumers may see the benefit of greater stability in premiums, although there continues to be ongoing problems with the frequency and cost of claims - most notably in the area of liability and household insurance.

The pace of premium increases may slow but they will not be eradicated across the board.
The litigious society and growing compensation culture remain with us. Meanwhile the scourge of fraudulent and exaggerated claims continues to impact on costs and premiums.
Going forward the industry must focus more effort into:
• Better education about the value and benefits of insurance
• Increasing awareness of the implications resulting from spiralling claims costs
• Improving the detection and exposure of fraudulent activity

We must also maintain full attention on market wide issues that directly influence the operation of the non-life insurance sector and its offerings to customers. A priority will be to ensure that we secure a fair and equitable approach to delivering compensation. We must streamline the process involved in settling claims, particularly those related to personal injury compensation, and control one of the major costs in our business. Government led initiatives within this and related areas are vital.

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