Why anyone worried about insurance prices in Ireland should care about the 'blue book'
Clear data is essential when it comes to holding powerful vested interests to account.
SOME READERS MAY be wondering about the reason for our fuss and noise about the discontinued ‘blue book’ data from the Central Bank about insurance companies’ revenues.
While this stuff is of minority interest, it is essential in holding vested interests to account as insurance premiums climb.
By way of analogy, one of the major criticisms of our economic performance data has been the ‘leprechaun economics’ barb thrown at us by the economist Paul Krugman.
Never mind that the CSO was fairly and accurately reporting the data in line with Eurostat requirements, the fact was that Ireland recorded 26.3% in its national accounts for 2015.
Everyone knew that the Irish economy hadn’t grown by a quarter in one year. What really happened was a massive inward transfer of intellectual property by foreign multinationals in order to reduce corporation tax liability elsewhere.
Without the rigour of the data analysis, we would be none the wiser.
The role of the Central Bank
The mission statement of the Central Bank is: Safeguarding stability, protecting consumers. This of course represents two missions, not one, and we believe that there is an inherent and unresolvable conflict between these two mission objectives.
The macro-prudential requirements for the insurance market – and indeed for any other financial service regulated by the Central Bank – are in conflict to some degree with consumer protection.
Put simply, when an insurance company succeeds in charging me €1,000 to insure my car after previously charging me €500, the Central Bank is nominally twice as happy with them from a macro-prudential perspective.
The value-for-money or consumer-protection mandate does not intrude upon this transaction.
We have met with the Central Bank on the issue. Unsurprisingly, they do not share our perspective and believe that the macro-prudential and consumer protection mandates are complementary, not contradictory. On that, we will disagree.
However, what is uncontested, even by the Central Bank, is the inferior quality of the financial data being published by them now under the latest, Solvency II EU regime in comparison to what was available in the blue book under the previous, Solvency I, set of rules.
Compare the clarity and granularity of the profit-and-loss data from the 2015 statistics provided by the Central Bank with the aggregate data now on offer. There is simply no comparison.
More importantly, there is an almost total absence of the profit-and-loss data necessary to see what the insurance companies are claiming they’re spending their money on.
Understanding costs
When we dig a little deeper into important topics such as ‘management costs’ the opacity of the current reporting regime worsens.
As noted in a recent Times Ireland edition article by former Motor Insurance Advisory Board chair Dorothea Dowling, motor insurers’ management costs rose from 12% to 21% relative to their net income from premiums between 2004 and 2013. Really?
Our own research into the cost of legal fees within the personal injuries system suggests that more than €350 million of the costs incurred by insurers was paid to lawyers.
That represents a cost of €140 per year for every single one of the 2.5 million ‘taxpaying units’ that Revenue counts in Ireland; a very significant sum indeed, and a material contributor to the cost of insurance.
This type of research is virtually impossible under the current reporting regime, although we understand the technical reasons why the Central Bank can’t now provide the same data set.
Transparency
However, although the Central Bank may be correct in their interpretation of current rules, the fact remains that we have lost a significant degree of transparency with the demise of the blue book.
Despite Ireland having a very weak white-collar crime detection regime, convictions have been secured for collusive practices and cartel formation in Ireland.
The temptation for insurers to pad their management expenses, commission charges and other expenditures, and to engage in sectoral carve-ups will only be elevated by the departure of the blue book.
The EU Commission has already initiated an investigation into unlawful barriers to entry into the Irish insurance market. It is embarrassing that such an investigation should have been launched from outside the State.
Our banking crash represented a fundamental failure of regulatory oversight of the lenders during the boom years.
It would be more than merely embarrassing if the next financial scandal in Ireland escaped local detection because the Central Bank blamed the regulations for not knowing what was going on.
After almost a three-year gap since the last blue book was published – during which time insurance companies have returned to rude profitability – it is time to get the magnifying glass out and see what is going on amongst Ireland’s insurers.
Neil McDonnell is CEO of the Irish Small and Medium Enterprises Association (ISME).
