Short-term insurance gain has yielded long-term pain

The collapse of FBD's share price on Monday represented the Perfect Storm for the Irish insurer but without George Clooney as eye candy.

Disastrous interim results, which resulted in a €96 million loss being booked, coupled with the Black Monday stock market meltdown globally over fears about China’s economy, resulted in FBD’s shares falling in value by 21 per cent.

There was a familiar narrative from the company of increased frequency of claims now that the economy is getting back on its feet, higher awards by the courts following structural changes (which the industry did not object to at the time), and customers taking longer to settle their cases, pushing up legal expenses.

Investment returns are unable to balance the books due to historically low interest rates, tight bond yields and stock market volatility.

Future claims

FBD has set aside €88 million to meet the costs of future claims and decided to simplify its business model, forsaking the broad consumer market for a return to its roots of agri and small business.

FBD is the latest casualty in the Irish insurance sector. Malta-regulated Setanta collapsed in April 2014, leaving 75,000 policyholders here high and dry.

UK-based RSA was forced to pump hundreds of millions of euro into its Irish subsidiary after reserving and other issues emerged in 2013.

Quinn Insurance Ltd (QIL) was placed into administration by the Central Bank of Ireland in 2010, while Aviva Ireland put itself in the spotlight in 2011 with a cack-handed announcement about redundancies following a decision to scale back here.

Insurance is all about pricing risk yet the companies have failed spectacularly to set non-life premiums at sustainable levels. They have consistently shot themselves in the foot by engaging in fierce price competition to grab market share. This short-term gain has yielded only long-term pain for the insurers and their shareholders.

Motor accounts for roughly 45 per cent of non-life insurance and is responsible for many big ticket claims. According to statistics from Insurance Ireland, its members racked up net underwriting losses of €478 million in the five years to 2013. It’s a shocking statistic.

When Boston-based Liberty Insurance acquired QIL in November 2011, its then chief executive in Ireland, Patrick O'Brien, told me there was no actuarial function within the company. "We're in the process of recruiting an actuarial team," he said.

Actuaries should be core to any insurance business and it was an extraordinary revelation.

The administrators of QIL tapped the Insurance Compensation Fund for more than €1 billion – which is being paid for by a 2 per cent levy on all non-life insurance policies.

In June, Liberty announced plans to cut 270 jobs in Ireland as it still struggles to put the business on to a sustainable footing. The Central Bank of Ireland regulates the insurance industry, ensuring that the companies can meet their obligations to consumers. The EU’s Solvency II directive, which is due to take effect next January, will require insurers to define their own risk profile and show that they have sufficient capital to meet this level.

Stress tests

Following stress tests of insurers, the Central Bank has been “actively” working with a number of companies to ensure they comply with Solvency II, according to

Sylvia Cronin

, its director of insurance supervision.

Cronin said that the industry has a “lot to do” to put itself back on a sustainable footing, adding that underwriting losses would probably be the order of the day, in the short term at least, unless there’s a dramatic change in market conditions.

This likely means more premium increases. Consolidation will also be a feature with Zurich already making eyes at RSA globally. FBD this week accepted that its strategy to win market share had failed and it is taking action to put it back on the road to profit. It has come at a cost to both shareholders and staff but it was the right thing to do.

It’s time for some of its rivals to also wake up and smell the coffee.