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2003 will bring some reduction in rate of insurance premium increases Back  
Upon examining the 2001 edition of the Insurance ‘Blue Book’, which was released by the Department of Enterprise, Trade and Employment (DETE) last month, Des Hennelly writes that exceptionally poor results in 2000 led to escalating claims and reinsurance costs in 2001, which in turn led to insurers implementing large premium increases in 2002 in order to restore profitability. While 2003 should see a moderation in insurance premium increases, Henelly says that strong upward price pressure will be maintained for some classes of business such as household and liability insurance.
The Department of Enterprise, Trade and Employment has responsibility for supervision and regulation of Irish based non-life insurance companies to ensure that obligations to policyholders and claimants can be met. The DETE currently regulates 90 insurance companies. A further 20 international insurance companies operate through branches in Ireland and 400 insurance companies are authorised to insure Irish market business on a cross-border ‘freedom of services’ basis.

Insurance regulators use a number of measures to ensure policyholder protection;
• Measures to ensure insurance companies have reputable owners
• Measures to ensure that insurance companies employ competent directors and management
• Measures to ensure that insurance companies are financially sound

As part of the supervisory regime, each insurance company based in Ireland must furnish the DETE with an annual report and financial returns that covers all financial aspects of the insurance operations. In addition, insurance companies operating a branch in Ireland must provide statistical returns of the performance of business written in the Irish market.

Based on these returns, the DETE issues an Insurance Annual Report, commonly referred to as the Blue Book. The Blue Book provides detailed information on the revenue result, profit and loss account and balance sheet performance of Irish market insurers.

Strong premium growth

2001 was a year of strong growth in non-life insurance premiums with an increase of 23.5 per cent over 2000. This growth arose from two factors:

• Underlying growth in the economy increased demand for personal and commercial insurance products
• Significant increases in average premium levels
- to reduce underwriting losses,
- to keep pace with claims inflation,
- to offset the reduction in investment income,
- to cover the increased cost of reinsurance.
Businesses paid the largest premium increases. For example, liability insurance income grew by 39.9 per cent.

Insurance remains relatively inexpensive

1999 and 2000 saw the national spend on non-life insurance premiums reach 2.7 per cent of gross domestic product, the lowest level since our records began in 1973.
The premium growth in 2001 marked a significant turnaround from the prolonged period of reductions in the relative cost of insurance. The premium to GDP ratio increased to 2.98 per cent in 2001, but still remains below the 10 and 20-year averages of 3.1 per cent and 3.4 per cent respectively, and well below the ratios in the 1986 to 1994 period that peaked at 4.0 per cent of GDP in 1987.
In addition, a report from Swiss Re World Insurance in 2001, indicates that Ireland’s national spend on non-life insurance is low by international standards.

Non-Life Premiums

in per cent GDP - 2001

Ireland 2.84 p.c.
UK 3.45 p.c.
Germany 3.60 p.c.
Italy 2.46 p.c.
Spain 2.93 p.c.
Western Europe 3.06 p.c.
USA 4.57 p.c.

We project that the premium to GDP ratio in Ireland will recover to the 20-year average of around 3.4 per cent by end 2002.

Poor underwriting performance continues

To generate a reasonable level of return for their shareholders, insurers need to write business at or close to breakeven (i.e. premiums covering the cost of claims, commission to intermediaries and administration expenses). Target investment income and gains on capital and reserves, if achieved, then produce the desired bottom line profit.

2001 produced an underwriting loss of ?389.8 million compared to the record ?453.3 million losses in 2000.
In 2001, for every ?100 collected in insurance premium, insurers incurred total costs (claims + expenses + commissions to intermediaries) of ?115. Total costs in 2000 were E120 for every E100 in premium.
Most of the improvement in underwriting performance was recorded on the Motor account, but it still produced a large underwriting loss. The other classes showed little or no improvement.

Investment performance

The investment income contribution to insurers’ total income continued its decline. For example, in 1997, for every
E100 in Motor insurance premium, investment income generated on premium and claims reserves produced E21.30. In 2001, the contribution from investment income on reserves had almost halved to contribute E11.80 for every E100 in premium income.

Bottom line financial performance

After adding insurers’ investment returns, the main Irish based insurers recorded a nil post-tax net result in 2001. Two extraordinary gain items nudged the post-tax result into positive territory to produce a 4.3 per cent return on capital for 2001. This follows two years of negative returns on capital.

Balance sheets

If an insurers’ costs and claims absorb all its premium and investment income/gains in a financial year, it must then draw on its capital to meet remaining costs and claims. Due to the combination of major underwriting losses and losses on equity investments during 2000 and 2001, several major insurers were provided with capital injections to strengthen their balance sheets during 2001.

The ratio of capital to premium represents an indicator of an insurer’s financial security as it is a measure of the funds available to pay claims after insurers’ income has been absorbed. Because of the large losses in recent years, the ratio of capital to premium for Irish market insurers reduced from 48.5 per cent at the end of 1998 to 37.8 per cent at the end of 2000. The capital injections during 2001 meant that the ratio remained stable in 2001 at 37.9 per cent.

2001 was a year when some weak signs of recovery in the fortunes of non-life insurers were evident as premiums grew significantly.

However, the tentative recovery was over-shadowed by the scale of improvement required from the exceptionally poor results in 2000, escalating claims and reinsurance costs, and by major equity investment losses in 2001.

Because of the range and scale of the challenges facing insurers seeking to restore profitability, large premium
increases continued through 2002.

We believe that 2003 will bring some moderation in the rate of insurance premium increases for some classes of business, but with strong upward price pressure being maintained or increasing on household and liability insurance in particular.

The government’s plans for legal reforms, particularly the planned introduction of the Personal Injuries Assessment Board, may begin to reduce claims inflation. In addition, the early indications of reduced deaths in motor accidents since the introduction of the penalty points system gives additional grounds for optimism that claims cost increases in the key motor insurance market will start to slow and ultimately reduce. In the context of what is a competitive market, this would result in stable or reducing premiums for insurance consumers.

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