The Irish insurance market has had more than it's fair share of ups and downs and, despite a radical overhaul of some of its more archaic practices, problems are still emerging, as Ed Vinales reports
Traditionally, Ireland's insurance market has endured more exaggerated peaks and troughs in the cycle when compared to other territories. And following recent, well-documented efforts to reduce premiums and curb claims costs in the country, premiums have plummeted. But commentators are now suggesting that things may have gone too far, and that this has unearthed new problems.
Over the past four years, insurance premiums in Ireland - a market worth EUR5.5bn (£3.7bn) in 2005 - have dropped by around 40%, largely due to the effects of a national campaign to wipe out fraud and lower insurance premiums. It is now believed that this pressure on premiums will lead to consolidation of Ireland's broker market, which has long been the favoured method of distribution for carriers.
John Higgins, a liability loss adjuster at Higgins Claims Services, explains how the current situation came about. "In recent times, there has been a growing realisation in Ireland, across all sectors, that a thriving economy floats all boats. An increasingly sophisticated workforce has, in the last decade, become aware that their prosperity is tied to that of their employer."
He says that, due to the effects of globalisation, employees in Ireland have realised that suing their employer is not going to benefit them in the long term, as this could damage the competitiveness of the business they work for.
"However, until recently, if you had an accident you litigated because it was the only way to seek a resolution. In the 1990s surveys revealed that 43% of the cost of dealing with insurance claims was related to legal fees. I did a huge amount of settlement in the 1990s and it was appalling. It was heavily in favour of claimants and the lawyers on both sides."
Mr Higgins adds that the situation became so bad that court decisions meant schools were preventing children from running around in the playground for fear of massive compensation bills - and businesses were replacing men with machines because the latter could not claim.
"Following 11 September 2001, and its effects on insurance premiums, these community issues became linked to issues of multi-national competitiveness and the whole thing became a national issue, which led to the creation of the Personal Injury Assessment Board and the Civil Liability and Courts Act 2004," he says.
A change in attitude
Mr Higgins explains that these developments - coupled with other measures designed to transform Ireland's litigation culture, such as the establishment of an insurance fraud helpline - led to a sea change in attitudes. He says that claims against insurers dropped to such an extent that claims staff have been made redundant because insurers are not receiving the same volume of work.
However, it now appears that new problems may be emerging.
Richard Enderson, managing director of Aon Ireland, agrees that these measures - combined with an influx of European workers into Ireland's prospering economy - have contributed to premium reductions. But he adds that premiums may have been too high in the first place.
"Take motor insurance. When Jack was a lad he had to save up for his motor insurance, but he could pay for his motor tax straight up. Now tax is equal to premium rates, which have come down around 30% or 40 %."
Mr Enderson says this helps illustrate the problems intermediaries now face as their incomes drop in direct correlation to the premiums the insurers are charging.
He adds: "So the insurance companies might be making more money than they did in the past, but the distributor is not.
"People in the distribution chain are going to have to change their ways. Pricing will influence the whole manner in which distribution takes place. Aon will always be at the higher end, as an advice-based brokerage, but the brokers at the lower end will either endure or they will change into internet-based models as has happened in the UK."
For his part, Dick O'Driscoll, managing director of Hibernian General Insurance, says: "On a per unit of exposure basis, premium incomes have reduced by in excess of 10% year on year for several years. But they have been compensated for by market volume as economic activity increases - increases that have been above 5% in each one of those years.
"So, you have this shrinking in the overall premium pot - but the complexity comes from the fact there are higher rates of premium reduction than the shrinkage would suggest. This is because it is compensated for by those increases flowing through from new economic activity," he says.
Mr O'Driscoll points to the significant number of business start-ups in Ireland recently, as well as an increase in vehicle population. "Plus, there is the fact that 80,000 new housing units have joined the market every year for the last five years."
So, while economic growth is driving what looks like a relatively small reduction in the overall insurance cake, he says the reality is that, at individual risk level, the premiums are far smaller than they were five years ago.
So, what effect has this had on the broker market and could it be a major contributing factor to consolidation? If so, would the major brokers such as Aon and Coyle Hamilton Willis be interested in acquiring some of the smaller players?
Brian McNelis, director of general services at the Irish Brokers' Association, fears that the soft market is continuing to soften. "General insurance brokers are experiencing significant reductions in income as a result of reduced premium, which in many commercial cases is down 50% on 2003 levels, coupled with increased costs in administration."
He adds that this has resulted in ongoing mergers, acquisitions and new networks developing among brokers. "Pressure will undoubtedly come for a review of costs and remuneration structures should the market continue its downward cycle."
On the subject of acquisitions, Coyle Hamilton Willis' chief executive Jim O'Mahoney adds that the broker would be interested in taking specific types of business from some of the smaller brokers, but says that this presents some difficulties.
"One of the issues we have is that Willis was one of first brokers to say we would abolish the acceptance of contingent commissions. If a broker is earning contingent commissions - and he wants to sell his business based on income, which includes these commissions - then that makes it very difficult for us. This is largely because we are not prepared to pay an exorbitant price."
He continues: "Many smaller brokers over-value their businesses, or value them to a point where we believe it is not worth investing to buy them. So we are not going to buy a dozen brokers over the next few years, but if someone has a particular niche, skill or expertise, then we would look at it. But we are not actively pursuing acquisitions."
On this subject, Mr O'Driscoll adds that he has been predicting broker consolidation for 15 years - and has been wrong every year. However, he says: "There has been a quiet tide of consolidation going on in the background. The multinationals have picked up an amount of business and Aon has been more acquisitive then anyone else. If you look to the large indigenous brokers, there are a number of groups locally here that have been very active sweeping up small players."
This view is endorsed by the fact that McCarthy Insurance Group, an indigenous broker that claims to have a turnover of around EUR60m, has acquired four brokers in the last 12 months. The broker is also a member of the acquisitive Bestquote broker network.
Paul Kavanagh, managing director of MIG, says: "The five broker members of the Bestquote network has acquired 30 or so brokers in the last five years, but 10 of those have come in the last 12 months. A lot of brokers are getting out of the business because of regulation. Our five brokers are seriously into acquisitions and we will purchase anything we can do within reason."
Stressing the overall drop in premium income, he reports: "One broker in the north- west of the Republic has seen his premium income go from EUR2m to EUR1.2m over the last few years. I'm taking his books of business off his hands for free because he can't afford to run the business any more."
Mr Kavanagh adds, however, that many brokers in Ireland are too proud to completely sell their business to a larger buyer. He argues that they would rather accept a reduced price offer in exchange for a deal whereby they maintain their identity in the town or district in which they are located and operate.
Issue of loyalty
Commenting on staff defections to other brokers, Mr O'Mahoney says that, unlike the UK - where a number of broking houses have in recent months resorted to litigation following the loss of staff and clients to rivals - this does not tend to happen in Ireland.
"In London you get brokers who say they can bring a book of business to a new employer but that doesn't tend to happen here."
According to some commentators, insurers have proven that their risk appetite has grown because swathes of larger risks have begun to come back - risks that five years ago could not find a home in Ireland (see graph, p18).
Although he is unable to quantify the amount of premium that is returning from the London market, Mr O'Mahoney says that it is, "quite a significant amount of heavier property business".
"Insurers are writing bigger lines themselves and there are more of them," he says. "These are areas of cover they wouldn't have been involved in four or five years ago."
Mr Enderson contends that the return of these risks provides further evidence that premiums have dropped and suggests that this is having an effect on insurers' profits. He says: "If they are coming back and premiums are still flat, that means premiums are down in real terms. The risks are coming back, the market is contracted and these risks are bolstering the figures of the insurers."
However, Mr O'Driscoll, who represents an insurer focused on small to medium-sized enterprises that would not handle these larger risks, describes their return as a "minor event" that will have little financial impact on insurers.
He says that risks, particularly in the leisure sector, found it very difficult to find a market in early 2000. But he believes that most of that business has found a home in the Irish market again.
"If you look at the amount of total insurance premium cake that is offshore at any one time, my view is that it is seldom more than 15% of the whole market. A lot of noise gets made about those risks by brokers and Lloyd's underwriters who would both have been happy to contribute to the view that capacity was very hard to find here locally.
"But if you are not an active participant in that market, the fact that some of it goes out and some comes back may not have a huge impact on you locally at any one time. Is it having an impact on premium volumes? I would say no - it's a minor event."
According to Mr McNelis, regulatory issues continue to remain a significant, time-consuming and costly issue for brokers.
"While there is general acceptance that regulation is necessary, some recent regulations - particularly in the area of commercial renewal notices - are complicated and will be difficult to implement," he says.
Review of regulation
Mr McNelis adds: "With the introduction of the Insurance Mediation Directive, members feel strongly that the time has come to review all current legislation, to iron out some of the confusion. And alongside the IMD, introduce legislation that is practical, easier to implement and that ultimately complies with the financial regulator's goals to the benefit of the consumer."
He adds that further weight has been placed on brokers through the introduction of minimum competency requirements, which came into effect on 1 January this year.
"To ensure competency across the industry, intermediaries are now required to become fully accredited individuals," he explains. "There is a general acceptance of the significant effort required by all individuals and employees to comply with the requirements. However, it will in time add to the professional image of the broker network and its staff."
When it comes to broker survival, Mr Kavanagh claims that Bestquote is more progressive than its rival networks in terms of developing new ways to reach the customer.
"We have a web offering and our own call centres in each of our 26 branch offices. We try to give the customer as many routes to approach us as possible and are in constant talks with insurers, looking for niche products that will attract new customers and win back ones we may have lost."
Bestquote is spending EUR300,000 on a major cross-media advertising campaign that will run for the remainder of the year. "The message we want to get out there is that we are 'selling quality'," he says.
Mr Kavanagh concedes that brokers have been challenged by the rise of direct insurers, such as Quinn Direct, and says that the network is "well-disposed" to broker-only companies like Royal and Sun Alliance and St Paul Travelers.
"Other insurers, such as Hibernian, Axa, Eagle Star, and Allianz have direct arms, but they are also some of the main providers of insurance into the broker market. They are riding two horses at the same time so we are obviously going to be well-disposed to insurers that don't do that."
Asked whether the relationship between RSA and St Paul might be affected by the 'direct' insurers undercutting Bestquote's prices due to lower delivery costs, he says: "We are selling our expertise and advice and quality products."
He adds: "If a policyholder invests EUR3000 landscaping his garden and goes to a direct insurer to cover it, then good luck and thanks. I know he is not going to get decent cover from them."
On the issue of offering niche products, Mr Kavanagh reveals that a number of new insurers have come into the market, such as Gibraltar-based Thomond, which set up earlier this year offering liability products.
He lists a number of other insurance providers who have entered recently, including South African-based insurance group Santam, Xcess Insurance Brokers - which offers celebrity policies - and HSBC.
"They are feeling their way in. They are mainly talking to networks, asking how they can get a distribution outlet here. And rather than giving their product to a network of 120 brokers they may give it to one with five; it just depends on what their appetite is."
Asked about the use of technology in the Irish broker market, Mr McNelis reveals that after many years of trying, full-cycle EDI is gradually being adopted in Ireland.
"The software houses continue to work with brokers and companies alike, with internet solutions by individual insurers also coming into play. Efficiencies are being achieved, but work transfer costs remain a concern for brokers in the current market climate," he says.
Mr O'Driscoll concedes that insurers are in part to blame for the slow roll out of EDI technology in Ireland. "This market has been a laggard compared to the rest of Europe in terms of full-cycle EDI for motor," he says. "Software houses and insurers have failed to create solutions for the brokers to deliver the efficiencies that should exist. Quite a bit of progress has been made in the last 12 months but I would suggest that, even in the broker market, less than 20% of all the business written is full cycle."
He adds: "There is an inherent inefficiency in the market that shouldn't be there and the question now is whether the rush is going to be towards full-scale internet trading."
Donagh McSharry, managing director of broker McSharry Foley, which is also part of the Bestquote network, says that, in his role as a board member of Insecom, he plays a part in pacing the release of software into the market.
According to its website, Insecom is a non-profit organisation set up to enhance the performance of the technology infrastructure used by insurers and brokers, and monitors what the software houses say their products will - and will not - do.
"Our role is to keeps things on an even keel," says Mr McSharry. "We control the release of products into Ireland from software houses, such as SSP, Open GI and Relay. Although motor insurance is run off the Polaris I-market platform, we do not yet have an equivalent SME solution. The introduction of this has been started, but it is a long way off," he says.
To illustrate the state of electronic trading in the Irish market, Mr McSharry explains that, in the north-west of the Republic, many customers buy their insurance over the telephone or by visiting brokers as broadband is not fully available there.
So how will the market change and develop in the future and will outsourcing play a role in driving through efficiencies?
Mr O'Driscoll says that there are a number of things that are unique to the market and these are largely driven by its size. "Successful outsourcing models have a dependency on scale, which is difficult to identify in the Irish market. However, we have had significant labour availability problems here as well as rapidly reducing premiums. It seems that if we are to maintain an efficient trading model we will have to find new ways of doing business more efficiently in the future."
He concludes: "Outsourcing is dominated by our ability to create an efficient business model locally. It wouldn't be wise to create an interim model as it would be disruptive to customers. But if, ultimately, where we are going is an internet model for a high percentage of insurance transactions, then that doesn't actually require significant team offshoring to support it. That's the crossroads we are at."
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