Motor insurance profits masked by reinsurance deals

As FBD, the State's only remaining indigenous insurer, was forced in 2015 to sell property assets and accept a €70 million rescue investment from Canada's Fairfax Financial, many of its larger overseas-owned rivals took another route to deal with spiralling losses at the time on Irish motor books.

In order to avoid the ignominy of potential group bailouts, they entered into large reinsurance contracts with their parent companies in the UK, US and continental Europe to share some of the risks on their Irish books as the industry scrambled to hike premiums to catch up with losses caused by rising personal injury awards.

As it happens, EU insurance rules were coming down the tracks at just the right time. The so-called Solvency II directive allowed for, and even encouraged, risk-sharing across the various entities under the umbrella of large insurance groups. The aim was to avoid having capital unnecessarily trapped in various jurisdictions.

The Central Bank of Ireland's third annual Private Motor Insurance Report, which draws on figures from the National Claims Information Database (NCID), shows that motor insurers here had been ceding about 7 per cent of their premiums to reinsurers during the first half of the last decade.

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By 2015, it had jumped to about 33 per cent. Last year it was more than 40 per cent. Almost all of the deals were with other entities within their group structure, and not third parties, according to figures in the report.

The reinsurance deals cushioned the losses of Irish motor insurers between 2015 and 2016, providing a bit of stability in the market. Otherwise, who’s to know what mainstream insurers might have decided to join some of the flightier capacity providers that quit the market during the crisis.

However, the strong rebound by the industry in recent years – driven by premium hikes – has essentially, by virtue of these intragroup reinsurance deals, resulted in much of the profits being recorded not locally, but overseas.

The official operating profits recorded by motor insurers operating in the Irish market amounted to €163 million last year, or 12 per cent of total income. However, that ignores the fact that the report also notes that €144 million of profits were ceded to reinsurers last year – mostly related parties.

When that’s added in, the total tops €300 million, or a more eye-watering 22 per cent of total income.