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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Thursday, 8 Feb 2018

General Scheme of the Insurance (Amendment) Bill: Discussion

I welcome the Minister of State, Deputy D'Arcy, and his officials to this meeting. We are dealing with the pre-legislative scrutiny of the draft general scheme of the insurance (amendment) Bill. I ask the Minister of State to make an opening statement.

I welcome the opportunity to brief the committee on the draft general scheme of the insurance (amendment) Bill. Its purpose is to implement the recommendations of the review of the framework for motor insurance compensation in Ireland, which was approved by the Government in July 2016. I wish to take a few moments to remind the committee of the background to this important matter.

The trigger for the review of the motor insurance compensation regime was the failure of Setanta Insurance in 2014 and the uncertainty that followed over the compensation arrangements for third party claimants. The cause of this uncertainty is the fact that there are two insurance guarantee schemes in place, namely, the insurance compensation fund, ICF, and the Motor Insurers Bureau of Ireland, MIBI. The ICF covers the liabilities of non-life insurance policyholders in the event of a failure of an insurance undertaking; and the MIBI’s primary purpose is to compensate victims of road traffic accidents caused by uninsured and unidentified vehicles.

Both schemes have differing compensation levels. Taking account of a clearly outlined reference to the MIBI in the ICF legislation, the Law Society of Ireland brought a case to the High Court seeking that the MIBI was liable to pay the Setanta third party claimants. The initial outcome of the case was that in September 2015, the High Court ruled in the Law Society’s favour and in January 2016, the Court of Appeal upheld that the MIBI was liable for meeting such claims.

That was, therefore, the context within which the motor insurance compensation framework working group was set up in January 2016. Its primary purpose was to examine what could be done to address the uncertainties of the existing regime and the inequity between the MIBI award levels for third party claimants and the levels paid by the ICF for any future motor insurance insolvencies. At the time the report was being prepared, the courts had ruled that the higher award levels applied by MIBI were the applicable ones for Setanta. For that reason, the report focused on future motor insolvencies only.

The critical recommendations of the review of the framework for motor insurance compensation in Ireland report were twofold: first, coverage of the ICF should be extended to 100% for third party motor insurance claims in the event of a liquidation of an insurer; and, second, the increased coverage of the ICF should be funded by a direct contribution to the ICF from the motor insurance industry via the MIBI to the value of 35% of the third party motor insurance claims.

The first of these recommendations was designed to ensure that any future third party motor insurance claims against policies of an insurer in liquidation would be compensated to the same level as claims against uninsured or unidentified vehicles. The question which then arose was who should finance this extra 35%. There were broadly speaking two main options – the State or the industry. The working group concluded that the State had a sufficient exposure with the existing 65% ICF requirement and that because of this, industry should fund the additional 35% cost. It recommended that this extra amount should be financed by a direct contribution to the ICF from the motor insurance industry via the MIBI.

Subsequent to the publication of the report, the industry, while accepting the recommendation in principle, argued that any payment directly from the MIBI would create an unknown exposure for insurers, as they would not know what their liability would be from one year to the next; in other words, the extra 35% could be a very small amount or a very large amount depending on the size of any future insolvent insurer.

This uncertainty, the industry contended, could result in an increase in capital costs as companies would almost certainly respond in a conservative fashion in order to ensure they had sufficient funds for a worst-case scenario. Insurance Ireland argued that to minimise future volatility, an ex ante fund should instead be established into which insurers would contribute an amount equivalent to 2% of gross written motor insurance premiums. This fund would then be used to meet the industry's liability of 35% in the event of an insolvent insurer. In summary, their views were that the greater predictability and certainty of their proposed approach to financing this extra 35% would mean a more stable pricing regime as companies would know from year to year the maximum extent of their exposure to a potential motor insurer insolvency. This matter is considered in more detail in the regulatory impact analysis, which was sent to the committee last year. The Minister for Finance agreed with this analysis and accordingly, this position is reflected in the general scheme. He believes this approach strikes the right balance between protecting consumers - claimants and policyholders - affected by an insolvency, minimising the exposure of the Exchequer, and at the same time ensures that Ireland remains an attractive place for insurers to conduct business through the provision of as much certainty as possible.

I now turn to Setanta. I accept that Setanta third-party claimants have been very unfortunate in the way in which this insolvency has unfolded. It was the first large freedom of service motor insurer operating in the Irish market to become insolvent and lessons have been learnt from this experience, which are reflected in the insurance (amendment) Bill. Unlike Quinn Insurance, the Insurance Corporation of Ireland and PMPA, which were authorised in Ireland, there was no basis for placing Setanta in administration and running off the book of business over a period and meeting claims in full as they arose. The consequence of the Supreme Court decision of May 2017 to overturn the previous decisions that the MIBI is liable in respect of third-party motor insurance claims meant that the insurance compensation fund has responsibility for the payment of such third-party claims. In this context, questions have been asked as to why the Government did not make its decision to step in earlier to ensure that Setanta and Enterprise third-party claimants are compensated in full. I can understand why these questions have been raised. However, before the Minister for Finance could make any decision on a State intervention, he believed it was necessary first to get an actuarial report on the claims reserves of Setanta and an update on the extent of assets available to transfer to third-party claimants from the liquidator and second, to obtain advice on a legal concern that any Government intervention to compensate third-party claimants over and above the 65% limit could result in the Government having a lower status in the creditor hierarchy and thus significantly reduce the amount it could recoup from the liquidator.

The Department received the details of the actuarial report in early October 2017. Based on this report, the liquidator estimates that he would not be in a position to meet more than 22% of the claims out of the assets of the liquidation, thus leaving an estimated shortfall of 13%. On the legal issue, the Department of Finance went to tender for a Maltese legal opinion in September 2017. The opinion was received in late November 2017 with a follow-up inquiry obtained in early December 2017. Department of Finance officials met the liquidator on 9 January 2018 and received an update on the current status of the liquidation process, as well as the issues he is encountering in settling claims. Also discussed was what could be done to accelerate settlement and payment of claims. Based on the information received from the liquidator and the legal advice, the Minister announced on 30 January 2018 his agreement in principle to ensure that Setanta third-party claimants are compensated in full. Key to this decision was his satisfaction that the ICF is likely ultimately to recover from the liquidators a broadly similar amount that third-party claimants would have received had the State not stepped in. The Department is now working through the detailed arrangements to implement this decision, which is likely to require legislative change. In this regard, the next step is to give consideration as to whether there is any state aid or other legal issue associated with the approach proposed. The Department is working with the Attorney General's office on this issue and once the position is clarified we can give an indication of the likely timeline for payment, including payment of the additional 35% to those who have already received 65%. I met the Attorney General yesterday to press this matter further.

Enacting the insurance (amendment) Bill and implementing the Setanta decision are priority matters for the Government. The latter will most likely be addressed through the insertion of an additional provision to this Bill. In an ideal world, I would like to have the Bill published by the end of this quarter. However, until the state aid matter is clarified, it is not possible to give an absolute commitment on this matter. As I said, I met the Attorney General yesterday to progress this. I thank the committee for the opportunity to discuss the Bill. I am happy to take any questions about the overall approach proposed or the details of the general scheme of the Bill that the committee may have.

I have a number of questions and then I am afraid I must run. My first question concerns the industry's preferred approach of the 2% ex ante fund. Is there any danger that, were a major insurer to collapse in the first year or number of years where the fund had not been built up and there were a load of claims, the fund would not be of a sufficient amount to cover such claims?

The ICF would pay in full and then recover from the industry over a period. To put this into context, there is about €22 million in the account at present. The ICF brings in about €75 million per annum. Over the period, that will be built up to €200 million, and then the percentage increases or decreases based upon the requirement.

Can anything be done to prevent the 2% being passed on to customers? That is the likely dynamic here.

It is a matter for each company to make its determination as to whether to pass on the 2%.

That is the problem. If I were the Minister of State, I would not start with an insurance market that is based on private insurance companies competing for profit.

We will frame it in such a way that the insurance company can absorb that from within its margin. It is up to the company.

As part of this work, on 1 March we will have before the committee the stakeholders involved, such as the Central Bank, Insurance Ireland and so on, and we will continue the work we have to do on the legislation. Given there are no further questions, I will adjourn the meeting unless the Minister of State wants to add anything further.

I have pretty much covered the matter. I appreciate its urgency. The sooner we can get the Bill concluded, the sooner we can move to conclude Setanta.

We will deal with it then and take the next step after that.

I appreciate the Chairman's help with this.

The joint committee adjourned at 10.28 a.m. until 2.15 p.m. on Tuesday, 13 February 2018.
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