In its most recent set of results, Insurance Ireland, whose members account for over 95% of the market, noted its non-life members made an underwriting loss of €211m in 2013. This reflected a combined operating ratio (COR) of 110%.

Investment income of €131m reduced the operating loss to €81m, representing a negative return of 3.1% on gross written premium of €2.6bn. This sets the scene for what is a very challenged general insurance market in Ireland.

The aggregate underwriting loss of €211m reflects a motor loss of €254m, liability losses of €46m, property profits of €55m and profits of €34m on other classes such as travel. Taking investment income into account, most classes made an operating profit. Motor proved the exception, with net losses of €192m.

Click here if you cannot see the infographic

Extensive regulation, such as the impending Solvency II directive, due to be implemented in early 2016, along with structural changes in the industry, is creating various challenges for companies as they try to keep pace with regulation and try to integrate new demands into their business models.

Underwriting losses in 2014 can be attributed to a combination of the effects of the severe weather earlier in the year and a deteriorating claims environment, brought about by an increased frequency of claims associated with improving economic conditions and increased large claims. Low investment returns is another key factor driving the poorer performance.

While premium incomes rose in 2014 by 5.3% compared to 2013 as both rates and volume of business increased, the highly competitive nature of the domestic market, which has been a feature of the sector in recent years, is impacting firms’ underwriting profitability.

The Central Bank highlights the highly competitive nature of the market. It suggests that underwriting losses at a number of insurance companies in 2014 have weakened solvency “slightly”.

Last month, it was reported that the Central Bank told insurers to increase their motor insurance premiums by 25% to bolster their balance sheets. Motor insurance premiums are already up 16% on this time last year.

A market-wide rise in motor rates would clearly be positive, helping the industry to restore profitability to a segment which has been loss-making in the past few years.

Challenges

The biggest class of business is motor and accounts for 43% of the market. Performance in motor had been steadily improving until 2012 due to improvements in infrastructure and road safety initiatives. Road fatalities steadily declined and by 2011 were down 53% on the 2005 peak.

However, there has been a reversal since 2012. Road fatalities were up 20% last year. The increase in economic activity meant more cars and therefore more exposures. A further effect of the recession was that domestic demand contracted post-2008 as austerity measures kicked in. This impacted through lower activity levels (reflected in insurers’ policy count) and reduced cover (ie lower insurable values as customers cut sums insured where possible to reduce premiums). Retail sales of automotive fuels, a proxy for miles driven and therefore motor insurance risk, was up almost 9% last year.

Personal injury claims as a result of motor accidents are affecting performance. Whiplash claims are substantially higher in Ireland compared to the UK, where claims average €15,000, three times more than the UK.

One reason for the high awards is a lack of an up-to-date book of quantum, the guide book which is used to assess the level of damages to be awarded in a claim for compensation. New court jurisdictions is also inflating awards. Previously, the circuit court limit was €38,000 for a personal injury. This has now increased to €60,000 and raised expectations.Furthermore, new judges unfamiliar with the insurance market have recently been appointed.

Time value of money

Lower interest rates have been a major challenge to insurance companies in two ways. Firstly, a lower interest rate reduces insurer’s revenue. High investment returns boosted performance at insurance companies in the past. But now they are more reliant on the underwriting business to generate profits. General insurance is different to life assurance in that the assets or investments must be kept quite liquid and of lower risk, which implies lower rates of return.

The second way interest rates affect insurance companies is through an implied discount rate.

A court judgment last year reduced the assumed rate of return used to arrive at an award from 3% to 1%. This is currently under appeal, but could increase costs to insurance companies as the lower the discount rate, the more money that has to be put aside for the claim.

In the past few years, the property account has been the source of most volatility, driven by severe weather events. Insurers tend to plan for a certain level of exceptional weather, but results can still vary significantly from year to year. In 2014, the storms cost the insurance sector €160m.

In what is a notoriously cyclical industry, an improvement in underwriting results tends to lead to an increase in competition. The Liberty Mutual takeover of Quinn, which had been losing market share under administration, introduced a new competitive dynamic to the Irish market as it sought to increase its relatively low share of this segment.

The Injuries Board is the Government body that makes personal injury awards (relating to motor, employer and public liability accidents), avoiding the often costly litigation route. In its annual report, it reveals that the split of awards is roughly three-quarters for road traffic accidents, 8% for workplace incidents, with 17% relating to accidents in public places. The board reckons that it delivered savings of €72m in 2013. It reported that awards totalled €244m in 2013, up 12% on 2012’s level – despite the number of accidents being unchanged. While it initially took out a lot of legal costs, last year upwards of 40% of the awards given by the injuries boards were rejected by claimants.

Summary

Insurers need to refocus on sustainable profitable growth. This won’t be easy. The new normal is characterised by low interest rates and equity market volatility, which is challenging traditional business models. Added to this are increased regulation, capital constraints and operational inefficiencies, all in the context of high levels of market competition. A key question is how do insurers redesign their business models in a way that delivers sustainable and profitable growth, both here, in the UK and internationally?

Solvency II is an EU-wide regulation aimed at strengthening the supervision of the insurance sector by increasing the regulation of insurance companies’ capital requirements. In simple terms, this means that insurance companies need to ensure that they have adequate capital to cover quantifiable risks.

In some respects, it is the insurance industry’s equivalent to the capital requirements which were introduced to credit institutions and investment firms a number of years back. Recently the EU decided that a more detailed review of capital requirements across the European insurance industry was required in order to align an insurance company’s capital requirements more closely with the risk profile of its business. This would in turn strengthen the protection of both policy holders and beneficiaries through reduction of the risk of firm failure.

It will have a considerable effect on the management of insurance and reinsurance entities. Currently, the amount of capital that insurers are required to maintain is based on premium income. When Solvency II is transposed, an insurer’s capital adequacy requirement will instead be based on a minimum capital requirement and a supervisory capital requirement.

Click here if you cannot see the infographic

The Irish insurance market has declined from a peak of €4.2bn in 2003 to €2.6bn last year. The fall of almost 40% has been a direct result of a reduction in the size of the economy with less activity, fewer cars, business closures and reduced house builds.

FBD is one of seven key players in the Irish insurance market with a share of over 13%. FBD has been gradually improving market share in the past few years, helped by its No Nonsense and online offerings. Aviva is currently the largest company in the market with 22%. US giant Liberty Mutual bought Quinn Insurance for €1 in 2011. Quinn had grown strongly in the 2002-2007 period; however, since breaches of regulatory requirements (including the failure to notify the financial regulator prior to providing loans to related companies) emerged during 2008, it has lost share and currently has 6.8%. Allianz has about 12% of the market.

Meanwhile this week, Zurich Insurance, which has 10% of the Irish market, has confirmed it is evaluating making an offer to buy the London-based insurer RSA (14% of market). Industry sources claim the Swiss insurance giant is preparing a bid of 550p per share, valuing RSA at more than €6.2bn.

Click here if you cannot see the infographic

RSA has many strengths that would complement Zurich. Any deal would make Zurich the third-largest insurer in Scandinavia, the second-largest in Canada, and help it gain a foothold in South America. The UK and Ireland parts of the business are seen as the weak parts of RSA, because Zurich is already strong there. However, with low investment returns and soft insurance prices in many markets, it is expected more deals like this will come.