Competition and the Insurance Sector
John Fingleton, Chairman of the Competition Authority Insurance Institute of Ireland Annual National Conference 17 September 2004

I am very happy to have the opportunity to address the annual conference of the Insurance Institute of Ireland today. As you all know, the insurance sector has undergone an unprecedented examination of its performance, resulting in wideranging reforms involving new laws, regulations and institutions. The Competition Authority has participated in this examination, and will issue its final recommendations regarding competition in the sector before the end of the year. While I am not in a position today to outline our final views, I would like to discuss the competition issues that have arisen and the relevance of competition to the wider insurance reform agenda.

The Insurance Price Hike
Serious problems began to emerge in the insurance sector in Ireland between 2000 and 2002 when premiums began to rise rapidly or when we began to notice the sharp upward annual trend. Let me give some examples: • Motor insurance premiums rose on average by 53.8% in nominal terms (or 36.1% in real terms) between 1998 and 2002 (see Figure 1). Some groups, such as young drivers, experienced

5 2 1.6%) between 2001 and 2002 (see Figure 2). 1999-2002 4 3.5 0 EL PL Combined Percentage 1999 2000 Year 2001 2002 Source: IBEC .5 3 2. Figure 2: Average Employer and Public Liability Insurance Premium as a Percentage of Payroll.8% in 1999 to 3. with the biggest hike (from 2.much greater increases.6% in 2002.5 1 0.3% to 3. Figure 1: % Increases in Motor Insurance and Consumer Price Index 1998-2002 60 CPI 50 40 30 20 10 0 1998 Source: CSO MPI REAL 1999 2000 2001 2002 TOTAL • The combined cost of employers’ and public liability insurance doubled as a percentage of payroll from 1. as well as widely documented difficulties in obtaining insurance at any price.

Evidence from Australia and the UK suggests that much of the hike was probably “pass-through” from international markets. Community and voluntary groups were affected by having difficulties in providing services and events that enhance community life. including both indigenous companies and inward investors. as well as hotels. The AIR survey of 173 companies employing 16. is supported by an Alliance for Insurance Reform (AIR) survey in 2003. employ more people and innovate. leisure and community & voluntary groups. and • Some sectors have provided evidence that their costs rose much more than the average. Examples include many of the construction trades. For example. What caused the hike? We don’t have a fully broken down explanation for this price hike.• This sharpness of increase in the cost of liability insurance.000 people found that almost 18% of companies had premium increases of over 100% in 2002. International (or even inter-temporal) price comparisons are . as demonstrated in the IBEC research. Businesses were affected. for its members. such as. and 14% were forced to reduce their staff in order to make ends meet. recreational activities for children. the mean increase in insurance premiums in the hotel and guesthouse sector over the period 2000 to 2003 was 351%. so that the effect of such a price hike on the economy and its competitiveness was tangible. for example. the Irish Hotels Federation has indicated that. Insurance makes up several percentage points of GDP. That survey also indicated that 38% of companies borrowed to pay their premiums. compared to 9% of firms the previous year. to price competitively. in relation to their ability. for example.

Instead the question is whether competition has been strong in the sector all along. of course. among EU insurers. albeit only for motor insurance. so we cannot know how much of the Irish hike was international. put simply. for example. It is an ill-wind that blows no good. competition in the sector should ensure that the benefits flow through to buyers. I have not seen any compelling explanation of any gap between the Irish hike and the international hike. which found that. The timing of the Motor Insurance Advisory Board (MIAB) report was fortuitous because it provided a detailed statistical analysis that. and the real importance of the price hike is that it drew attention to serious underlying structural problems in the market. the Datamontitor survey (quoted in Competition Authority preliminary insurance study). Ireland was considered to be the least attractive market because of the legal environment. . I have tried in the table that follows (Figure 3) to summarise some effects of the 1 See. The structural issue. The Structural Problem The fact that we cannot fully explain the hike is not the issue. was relevant for the sector as a whole.virtually impossible to do. is that when input prices fall. I have not heard or seen any arguments that the insurance industry went from being highly competitive to being less competitive over the period of the price hike. is that insurance rates in Ireland. And. and helped build much-needed public support for politically difficult reforms. The corollary. were too high. increases in the costs of essential inputs would naturally be expected to lead to price rises. In a highly competitive sector. I don’t think changes in the level of competition can explain the price hike either. even without the price hike after 2000. A domestic sector that is not competitive will absorb more of any increase in an input price than will a competitive sector. other than resorting to an unhappy coincidence of Irish market conditions such as rising wage rates and the legal environment1.

Accident frequency combined with the pursuit of claims for compensation. or lack of availability of reliable national statistics.. and the provisions contained in the Safety. or because insurers fail to use information that is available optimally Levels of compensation being.000 or more. either because relevant information (e. particularly for minor injuries.g. which account for the majority of claims (the MIAB analysis of raw data demonstrated that only 0. in many cases. the proposed increase in the use of speed cameras. D The Book of Quantum published by the PIAB. A B C Fraudulent and exaggerated claims Inefficient pricing of risks. and directly. whereas 80% were under €6.1% of claims were valued at €127. the elements of the structural problem and.300). Reform Measure Changes to the systems of dealing with and settling claims including the Personal Injuries Assessment Board (PIAB) and the Civil Liability and Courts Act 2004. higher than in other countries or than society as a whole desires. penalty points) is not available to insurers. in the left-hand column. Figure 3: Reform Programme – Some Issues and Measures Issue The litigation costs associated with finalising claims. in the right-hand column. Firstly.reform programme by identifying. Offences in the Civil Liability and Courts Act 2004. which the MIAB estimated to be 42% on top of compensation and substantially higher than in other countries. Regulations requiring insurers to give policyholders 15 working days notice for renewal of private motor insurance policies and also requiring “No Claims Bonus” information to be provided with renewal notices F Weak competition arising from barriers to entry or obstacles faced by consumers to shopping around The Relevance of Competition Competition fits into the reform programme in two ways. Health and Welfare at Work Bill 2004. important questions have been raised about . the reform measures ready in place. E The penalty points. Making penalty points available to insurance companies.

with a small number of players. The Competition Authority embarked on its Study with several concerns arising not only from the MIAB and the price hike but also from representations made by consumer and business groups and complaints from the general public. and indirectly. our main concerns were around the following issues: • Whether the highly regulated nature of the sector. In addition to the responses we received to the Consultation Paper. an analysis of the statutory returns 2000-2002 showed that commission paid had increased by as much as. we have. • Complaints and concerns about barriers to buyers’ switching suppliers. • Complaints/observations that the sector was very concentrated. and • Market institutions that bring suppliers together in a way that raised concerns about collusion. which was published in February 2004. Secondly. At that time. competition is relevant because the full benefits of the domestic reforms and better international conditions will only be fully passed on to consumers and businesses in Ireland if the sector is competitive: see points A-E above. in recent months. or market behaviour. and we were at a loss to understand this. insurance was the sector in which the Authority received the most complaints. and especially so in some niche markets where buyers complained about lack of choice. creates barriers for new companies to enter the Irish market. In 2002. met with a large number of sector . the underlying insurance rates.competition in the sector: see point F above. if not more than. In preparing our Consultation Paper. This focused attention on the performance of the broker market.

Indeed. For this reason. Let me turn now to discuss some of the detailed issues we have been working on. Insurance is a special case where data sharing can promote competition. Normally competition authorities do not like data sharing among competitors lest it dampen or eliminate competition to the detriment of buyers. because they are grouped with other somewhat similar but in fact higher risks. Better . it can be many years later. the more precisely it can calculate its costs and hence the more keenly it can price.participants and other interested parties with a view to deepening our understanding of how competition works in the market. The wider publication of such data can also reduce the costs of new entry. This leads to lower-risk clients paying higher premiums than their real risk profile would have required. Data Sharing Our focus on data sharing and publication may seem surprising at first glance. The more information that a seller has about claims in the market. it is usually in three years but. This will seem unfair to what might be termed ‘lower-risk’ clients. with some liability insurance. where even a specialist may not have many observations in a year. When there is inadequate information about a specific risk. different types of risk may be lumped together into a common grouping. data sharing may be more important in a small economy like Ireland. many industry participants have cited the scale of the Irish market as a disincentive to entry. This is especially important for thin markets. an additional stimulus to competition. For motor. An unusual feature of insurance is that sellers only discover their costs after they set prices.

publication. which analysed raw data from insurers. at a useful level of detail. including monitoring data quality. Nor should any insurer be obliged to make use of the data. nor any insured parties. The fact that data sharing can have a positive effect on competition in insurance is recognised in EC law. we have seen some buyer-led initiatives to improve data quality. No individual insurance undertakings. either in aggregate or by economic sector. the collective creation of reliable statistical data on the intensity and frequency of claims in respect of a risk in the past is allowed. but an improvement could surely be made on the current situation by separating out public and employers’ liability. would be identified. The MIAB recommended3 that the central gathering of statistics on motor insurance premium and claims costs by driver profile be formalised by IFSRA. e. The development of market-wide statistics for liability might be less useful. helps in tackling this problem. whose members faced large increases 2 3 IFSRA is carrying on the work done by MIAB in this regard and is in consultation with the industry on Commission Regulation 358/2003 MIAB Report 2002. how to further develop it. to ensure that reliable information is available to inform public policy in future years and to improve market intelligence.information about risk.g. Some representative organisations. The work done by the MIAB. The results should be made available on reasonable and nondiscriminatory terms.. Partly because of the crisis in the insurance sector. was a good example of how the creation of reliable statistical data at a market-wide level can comply with competition law. 5 . In particular. subject to strict conditions. Recommendation No. where there is a ‘block exemption’ regulation2 providing for certain specified forms of cooperation.

regardless of where initially levied. Such costs. not in such crosssubsidisation. In some cases. will be borne by buyers. • Second. And. this has led to new underwriters being interested in the risk. Let me clarify that the type of data in question is basic aggregate claims data. better data might lead to a clearer identification of ‘problem’ segments. with cases in such segments being charged higher premiums or even having difficulty in securing quotes. indeed the increased competition might stimulate it as a source of competitive advantage. there is the issue of cost to insurers of presenting data and the additional costs of collating them. The important question is to ensure that the public benefit of greater competition outweighs any such cost. there may be a fear that the public availability of detailed statistics would reduce the incentive for insurers to collect such data or to develop innovative approaches to data collection because this “intellectual property” would then be shared. have worked with brokers to collect relevant data about their specific areas of premiums in the last two to three years. The solution should lie. or possibly other Government intervention if market failure arose. and offering quotes significantly lower than had been available up to that point. This would obviously present an immediate problem for the buyers in question. Providing a common platform would do nothing to inhibit enhanced data work. but rather towards better risk management and greater safety. to the extent that such risks are . From an insurer’s perspective. there may be a number of concerns about central collection of statistics: • First. • Third. This type of evidence strengthens the argument for greater data sharing. thereby giving members of those organisations choices that they did not previously have.

mean that it would be dangerous for an insurer to rely on past trends. it would be up to existing and new insurers to determine the reliability of historical data. Some believe that historical data are of little use to insurers in a changing environment and that international developments. This is not unique to insurance: it applies to many service sectors of the economy that have grown in importance in recent decades and where data collection is more costly. such as manufacturing and agriculture. it is rather surprising how little public data are collected on the insurance market. Several parties have suggested that solvency levels should be relaxed in order to attract new entrants. the official statistics collected are only a tiny percentage of those collected in other sectors. there is a strong public policy argument for better data for the sector. no specific cases . such as the decline of equity returns and the rise of reinsurance premiums and the changes being brought about in the insurance reform programme. it would reduce that element of cross-subsidisation. a central ingredient of any enhancement of data sharing should be the speed with which data are produced: virtually all participants in the industry agree that the Insurance Annual Report (“Blue Book”) is published too late. More generally. Solvency constraints bite when the market is in a hard phase because capital is relatively scarce.being subsidised by other policyholders. In addition. Nevertheless. Although it accounts for 8% or so of GDP. While it is advisable to treat past trends with caution. Solvency The EU lays down minimum solvency requirements. However. with regulators in each Member State free to set limits above that level.

on the other hand. Claims caused by uninsured drivers.4 A separate concern was raised over higher solvency requirements for new entrants. companies are also free to operate in Ireland subject to the solvency requirements of another Member State. the “long tail”.were put forward to illustrate how viable potential entrants had been dissuaded from entry by solvency requirements. This would provide some comfort to policyholders that might be worried about the solvency of their insurer. where the vehicle being used is also uninsured. are handled by the leading six insurers (by market share) on behalf of the MIBI. 90% of a claim in the event of an insurer becoming insolvent. or untraced. A separate question is what Ireland’s position should be vis-à-vis any EU-wide policy in this regard. with the costs being shared among insurers in accordance with their market share. Motor Insurance Bureau of Ireland (MIBI) Our Consultation Paper asked whether the MIBI might represent a barrier to entry to the Irish market to motor insurers.. which would pay out.) Some suggestions have been made for a policyholder protection fund. and this is to be welcomed. 4 At the Joint Oireachtas Committee on 7 April 2004 IFSRA pointed out that 400 companies are entitled to sell business into Ireland under EU rules. issues arise regarding the collection of levies for a fund and whether it would create any negative (i. Furthermore. . costly) incentives for insurers. say. even if it raises the EU minimum levels in the case of liability insurance due to the length of time it can take to settle claims (i. There are moves at EU level to make solvency requirements more risk-based. However. The justification offered is that this is a riskbased approach. reflecting the higher risk associated.e.e.

MIBI paid out €30 million in 1993 in respect of uninsured claims. which require uninsured driving cases to be dealt with in the same way as the companies' own cases. it seems fair to say that the situation regarding uninsured and untraced driving has improved in the recent past in that the . Overall. It appears that the high level of uninsured driving.There was a perception that these cases were not being afforded a high enough priority to settle them quickly and minimise costs. In 2003. from over €90 million in 2001. which was a significant drop. However. the figure was up to €70 million. Figure 5:Cost of Uninsured Claims (MIBI only) 100 80 € million 60 40 20 0 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 Costs of Claims Year In relation to the handling of such claims. and the high costs associated with settling uninsured and untraced claims. were among the factors that discouraged potential entrants to the motor insurance market. but still considerably less than the peak in 2001. the cost fell to just under €50 million in 2002. By 2001. the MIBI has recently introduced new service level agreements with handling offices. the amount paid out had more than trebled to over €90 million. The MIBI now audits the handling offices to ensure that the required procedures are being followed.

I think. The attention may have been disproportionate relative to that afforded the competition issues in 5 The only circumstances in which the Declined Cases Agreement will not operate are where to provide insurance would be contrary to the public interest. Although competitors meet there. the insurance market will provide insurance to an individual seeking insurance if he or she has approached at least three insurers and has not been able to obtain cover from them5. reliable market-level data on the motor insurance market. based on the evidence we have seen. However. would. This would seem to create difficulties in some cases in assessing and pricing a risk. A difficulty with this scheme that potential entrants to the motor insurance market have raised is that an insurer with expertise and information in particular niches might have to quote in respect of other niches where it has no experience. In general. the insurer first approached will be required to provide the individual with a quote. and the systems for handling claims appear to be better than they were. Brokers/Intermediaries Our Consultation Paper resulted in enormous attention on the broker/intermediary market. and attendance by MIBI staff at all meetings. timely. they do so in the context of strict MIBI-related agendas. However. Whether we will want to make any recommendations to MIBI is still under consideration. help insurers to assess and price specific risks. minuted meetings. . Declined Cases Agreement Under the Declined Cases Agreement. that MIBI is not a forum for collusive practices. I would like to say at this stage that we are satisfied.amounts now being paid out are significantly lower than their peak in 2001.

. and to highlight some apparent questions about its operation. not just in ‘matching’ insurers to buyers. but also insurers and. but also in many cases. risk management and deductibles Insurer Distribution of product Administrative tasks Example Approaching insurers Identification of hazards Explaining options Finding customers Completion of forms & EDI Collection of premiums Both buyer and insurer Development of schemes Liaison between insurer and buyer Accurate risk presentation Policy alterations Helping identify groups of buyers and attracting insurer This typology of services does not attempt to capture every activity by brokers. it aims to recognise that brokers can help.the underwriting market itself. indeed. Figure 4: Some Broker Services to Buyers and Insurers For Buyer Nature of Service Searching for most suitable product Advice on insurance procedures. especially in the liability market. Rather. Brokers provide valuable services to buyers and sellers of insurance. but it is probably explained by the fact that the Competition Authority was the first to draw out the full importance of this market. not only buyers directly. in some cases. The Consultation Paper raised the question of whether the way brokers are paid by insurers (particularly the use of percentage fees) could create a conflict of interest for brokers between their obligation to act in the best interest of their clients on the one hand. Figure 4 below illustrates the range of services provided to both buyers and seller of insurance. in providing expert technical advice and services. both buyers and insurers simultaneously.

and perhaps by some brokers. It is too early to say whether these market-led initiatives by buyers. for fear it might lose business.and to behave in a commercially sensible way and distribute insurers’ products on the other. Whether buyers themselves should simply ask for the information if they want it. For this business. Such information helps buyers to shop around for the combination of price and service that they want. will result in a substantial proportion of brokerage business being carried out on the basis of buyer-paid fees. or . Many buyers would no doubt prefer to continue to use a commission-based system for remunerating brokers. This is not to suggest in any way that the broker is not entitled to a competitively set fee. On top of this was the somewhat surprising evidence that brokerage fees had increased as much. if not more. This. than underlying insurance premiums over the period. Concern was also expressed about the lack of transparency to buyers. An alternative is for the buyer to go direct to the insurer. That model has grown considerably in recent years in the case of motor insurance. but rather that sellers are entitled to see what a broker is charging (ultimately it is the buyer who pays). would ensure that the broker was acting only in the buyer’s interest. Some buyer groups have suggested that brokers should only be paid by the buyers. especially for large clients. For liability insurance. This system may also limit the incentives for any individual insurer to cut broker commissions. it is less common. While some business in the market is transacted in this way. There has been some increased pressure for brokers to provide fee-based services. it is far from the norm. they argue. there remains a concern about transparency of the brokerage fee. and some buyer groups or trade associations have been actively encouraging members to seek such arrangements.

The price of premiums and the availability of cover became the focal points for much public debate and scrutiny. and industry promotion (whistle blowers’ ad campaign) has all contributed to some premiums falling back to levels not seen since 2000. or regulation. penalty points. the fear of change and the use of short-sighted.g. punishing fraud). or that might even benefit them. A related question is whether the current system of regulating brokers is excessive. we find not just that competition is weak or absent. A combination of cross-departmental Government action (e. Alliance for Insurance Reform and many other groups). have in common that a diverse array of vested interests is totally opposed to any change in the status quo.g. or for the economy as a whole.whether this might be covered by a code of conduct. Sometimes. that it may inhibit market transparency and raise brokerage costs. narrow analysis is sufficient to make vested interests oppose reforms that would not harm them. for business buyer. Conclusion Over the last number of years the insurance industry has been under the microscope to an unprecedented degree. The insurance sector is a rare positive example of the promotion of the broader interests of consumers and the national economy ahead of the narrow self-interest of powerful lobby groups. competition included. All of these issues. tackling legal costs. . but that there are numerous other structural or regulatory problems that push up costs or inhibit the development of the market. When we scratch the surface of these poorly performing markets. organised buyer pressure (e. Many sectors of the Irish economy do not perform well for consumer. is a matter for further consideration.

and I hope that you can continue to co-operate with us as we finalise our work. such as recent CSO figures that show that motor insurance has reduced by 12. While there have been positive developments. We still have some work to do in finalising our Study. . Even though the full impact of the reforms is still to come. bringing benefits for participants and the economy as a whole. particularly with regard to crafting particular remedies to competition problems in the sector. However.The reform process should lead to substantially lower insurance costs. Competition is hugely important both to ensure that the benefits of the whole range of reforms are fully passed on to buyers. and providing a roadmap for the modernisation of many under performing sectors of the economy. in a decade from now when we look back. we have seen substantial improvements in industry profit. Thank you for the co-operation that we have received throughout the process. I have made it clear that competition is only one of a range of issues facing the industry. it will be critically important as the other reforms begin to take effect. From the outset of the Authority’s Study. and beyond. I hope that. and to stimulate suppliers to find ever more innovative and efficient ways of reducing costs to give further price reductions. we will see this episode in the Irish insurance market as hugely important: an example of how the performance of a market can be improved.5% in the 12 months to August 2004 and anecdotal reports of reductions in liability insurance. the jury is still out on whether competition is sufficiently intense to deliver rapid and full pass-through to buyers.

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