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Trend towards consolidation has vastly changed the composition of insurance market Back  
Over the past 15 years, the domestic insurance landscape has changed significantly with the collapse of the Independent insurance company,
Generali’s departure from the Irish market and a wave of M&A ac tivity that now sees almost 75 per cent of the Irish market controlled by the five top players, writes Ian Stuart in this review and outlook of the insurance sector.
A comparison of the Irish general insurance market in 1987 with the latest published figures for 2000 shows a business that in net premium terms (after reinsurance) grew relatively modestly from •871.3m in 1987 to •1.8bn in 2000. The most striking feature of a comparison of these two years however, is not the figures but the list of the names of major players of the 1980s who are no longer with us.
More recently these changes were added to by the collapse of the Independent and the exit of the Generali from Ireland.
The result of the merger and take-over activity of the past 15 years was the production of the current situation in which 72.9 per cent of the market is controlled by the largest 5 companies, none of which have any Irish ownership. The consolidation activity of the 1980s and ’90s followed on from the earlier spectacular collapse of both the PMPA and the ICI, which resulted in the Insurance Compensation Fund and the insurance levy. Our customers continue to suffer the financial impact of the levy to this day, as a 2 per cent sales tax on all general insurance premiums.
This reduction in the number of insurers has also been matched in the broking world. There are much fewer brokers in the market today than there were in 1987. During this period we have seen the emergence of the international mega brokers such as Aon and Marsh. This trend towards consolidation amongst brokers (which is likely to continue) has been accelerated significantly by the recent advent of the compliance regulations introduced by the Central Bank.

Market profitability
The market place in 1987 was quite crowded with excess capacity in comparison with the situation today. The underwriting losses of the 1980s were supported by higher investment returns, lower reinsurance costs and more benign weather patterns than are the norms now.
Between 1987 and 1998 the better Irish insurers outperformed most UK and Continental companies, averaging profit margins in excess of 10 per cent p.a. after investment income. The profit margins in Ireland were supported by particularly strong investment returns, which were more than sufficient to counterbalance the underwriting losses being incurred. The Irish motor account in particular has a comparatively large injury element when compared to the UK. These claims take longer to settle and produce a higher investment return than damage claims thereby permitting underwriters to sustain larger underwriting losses than their counterparts overseas.
Ireland became directly linked to the EMU with a fixed exchange rate with effect from January 1999. This change was a key factor in creating a fundamentally different investment market for Irish insurers. For some time before our joining the EMU Irish rates of return rapidly reduced to European levels, never to return again to the highs of the 1980s. This new low return investment environment coupled with rapidly increasing claims costs were the prime factors which resulted in the escalation of insurance premium rates over the last few years.
Continuing strong competition among the reduced number of insurers in Ireland (despite ill informed media views to the contrary) has forced a radical curtailment of management expenses in the industry. All of the larger Irish insurers have been spending heavily on IT and change programmes in recent years in order to reduce overheads and to gain a competitive edge. The effectiveness of this investment in productivity can easily be seen by comparing the ratio of management expenses to earned premium between 1987 and 2000. That expense ratio in 1987 was 18.2 per cent and had fallen to 13.4 per cent by 2000. When the figures for 2002 are available I am certain that this key ratio will have reduced further as it is an important efficiency measurement tool constantly being reviewed by good management teams.
Many would have speculated in the past that the advent of telesales and laterally the internet would have transformed our market, as in the UK. This was a prediction, which although true to some extent, did not have the anticipated major impact. The relatively low penetration was due to the high entry cost into this distribution channel and the low commission advantage, which it would have over brokers for motor business (in Ireland 5 per cent compared with 10 per cent in the UK).

The future
Shareholders, not unreasonably, are demanding a better return from general insurers. This is reflected in the very poor performance of many general insurance stocks in the equity markets. This high-risk business will have to produce a return of at least 6 per cent of premium or the current small number of insurance companies will be further depleted as capital is moved to other more lucrative markets. Investment rates of return experienced in the past will not be available in the future, and the overheads and costs associated with compliance are most likely to increase.
Premiums will inevitably continue to rise and worsen the international competitiveness of all areas of Irish industry, unless the underlying costs of claims are brought under control. This is such a fundamental issue that it can only be successfully addressed by firm Government action. Insurers cannot reduce claims costs in a material way. Government must alter the legal environment in which we operate significantly in order to alleviate the growing claims burden from Irish society.

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