As you will all know by now, over the last number of months I’ve been meeting with various stakeholders in the Motor Insurance market to try to get a grasp on what is causing the extraordinary increases we are currently experiencing. I’ll do my best in this post to try to explain what I have learned.
Firstly, I’m not going to go into detail about every single thing that contributes to the cost of insurance. There is so much there, and it is such a complicated market, that I’d be writing for days to cover it all. I’m just going to focus on the one area that, in my own humble opinion, has contributed most to the cost.
To start with, we have to acknowledge that insurance companies are private businesses which are in existence to make a profit. Many of you will believe that motor insurance should run by the state, or that there should be a no-fault system in place, but for the purpose of this post that is irrelevant. The situation as it stands is that the private companies run the motor insurance industry. As private companies do, when things get tough, their first interest is self-preservation. This is important to note because the volatility in the market at the moment is forcing them to act this way.
There is an EU directive known as “solvency ii” which has a lot of clever sounding phrases and words that are quite difficult to explain. To put it simply, this instructs insurance entities on how they should reserve for the risk they take on. (Setanta, for example, massively under reserved and collapsed as a result). Basically, the insurance companies have to set aside enough cash to cover compensation pay-outs for each premium they insure.
The issue here is that, when they are taking on a premium, there is no immediate way to tell how much that premium will cost the company in terms of potential claims pay-outs. This, coupled with the solvency ii directive, forces the companies to reserve enough capital to cover the worst case scenario. So when someone gets an award of, let’s say 50k for a broken leg for example, the companies have to treat every new premium as potentially costing them 50k in a pay-out. Even if 9/10 cases paid out only 5,000 and only 1 cost the 50,00, they still have to assume the worst case scenario for each premium. Obviously, this is a very simplistic explanation of it.
When we look into it, this does make sense and match up with much of the data that is available and what the various stakeholders are saying. The Personal Injuries Assessment Board (PIAB) are adamant that the level of claims hasn’t increased in recent years, despite the insurance companies saying that it’s claims causing the increase. The thing is, they’re both correct. The level of claims hasn’t increased dramatically, but how they’re covered by premiums has changed.
What this has done, is force insurance companies to limit the risk they take on, therefore they narrow their field of interest and charge more for what they consider to be high risk categories to cover both the reserves they must set aside, their running expenses and their profit margin (roughly 5%). Unsurprisingly, young drivers fall into that category as do drivers of older cars (crashes involving older cars are more likely to be catastrophic in nature so the profiling is justified…as much as it bugs me). Double whammy for younger people who are the most likely to be driving older cars, so the whole thing hits us twice.
The recently updated “Book of Quantum” will go some way to providing clarity on court awards, but unless the Judges begin adhering to it, and clamping down on frivolous, claims it will simply act as “a menu for chancers” as Charlie Weston put it in the independent. As it stands, the legislation states that Judges must “have regard for” the book, which essentially means they can have a glance at it and then award whatever they feel appropriate.
With the pressure mounting on the government (pause for applause…awkward silence…moving on…) Minister for State Eoghan Murphy has said that he wants to have some form of solution in place by the end of the year. The Finance and Public Expenditure committee is set to report to the minister shortly with their recommendations. The likelihood is that this year will see premiums increase once more, before the market stabilizes and prices begin to come down again the following year.
I don’t envisage prices ever returning to the previous low as that was simply unsustainable, so if you used to pay only €200 for your premium, I’m sorry but that’s not going to happen again. But for the younger generation, there is some hope around the corner…in terms of car insurance at least. Let’s not mention the cost of rent, housing market, dole rate discrimination, student loans schemes, cost of 3rd level education, rural isolation or lack of career prospects. Yeah…aside from that, great time to be a young person in Ireland…
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