After years of growth, the insurance market - like the economy - is steeling itself for harder times. John Jackson investigates.

The insurance industry has entered a period of uncertainty. Underwriters are reluctant to write liability business for areas such as construction and the Independent Insurance collapse continues to reverberate throughout the country.

Claims inflation is a key concern. It has been a spin-off from the double-digit growth that Ireland has experienced in recent years. This is coupled with huge wage inflation, which means that, for anyone with a claim, the loss of earnings is substantially higher and adds even more to the claim.

Despite claims inflation, the insurance industry is doing well. The Central Statistical Office (CSO) states employment in the insurance sector increased by 1,000 last year, and average weekly earnings rose 13.1% over the same period.

But the real picture is slightly less rosy. In a global economy, no country is immune and the downturn in the US economy - accelerated by the US terrorist attacks in New York and Washington - has already had an impact because of its many hi-tech US multinationals. The shock decision of US personal computer manufacturer Gateway to close down its Irish (and UK) operations and lay off its 900 workforce has left the economy shaking.

Marsh deputy chief executive Kieran McHugh says the insurance market is in the middle of the most severe market conditions he has witnessed for 25 years.

"It is unprecedented," he says. "The market turned at the end of last year, just after the reinsurance contracts were renegotiated. The market has moved from being relatively soft in the past six or seven years to becoming a savagely hard market."

Underwriters are seeking increases across the board, with premiums doubling.

He adds: "We do not see the market changing in the sense of getting softer for at least 18 months or new competitors coming into the market."

Consistent approach
RJ Wallace Syndicates has been underwriting commercial and construction liability risks for more than 11 years. Senior underwriter Gerry Ambrose is confident pricing is now more realistic.

"We have found the rates which we have been quoting over the last five to six years are now of interest. As underwriters, we have to demonstrate a reasonable level of consistency in our approach."

He adds that the "Celtic Tiger" economy has not been good to the Irish insurance industry.

"Competitors dipped in and out of markets. Consolidation has lead to greater security, but fewer markets. Lower interest rates has been one of the factors in increased claims inflation," he says.

Legal costs
Another reason claims are so high and underwriters are reluctant to enter the market is the legal system which underpins the whole insurance market.

The total insurance market is worth about £2.9bn a year and out of that, lawyers take about £600m. For every £100 a company pays for employers' liability and public liability, a similar UK firm pays £34 and the Netherlands just £13.

Small Firms Association (SFA) director Pat Delaney says of some of the problems facing insurers who deal in the employer's liability market: "We do not have a book of quantum similar to that in the UK. We do not have a culture of rehabilitation. Because it takes three to four years for a claim to go through the courts, that encourages people to stay out of work and therefore the loss is higher than it might otherwise have been."

He adds: "You can understand why insurers are reluctant to enter the market. It is very uncertain - it is very much a form of Russian roulette - because you don't know what your exposure is when a claim is taken against you."

One serious problem is that next year the circuit courts will have extra powers to make personal injury awards more than double what they can give currently.

At present, district judges can award up to £5,000 and the circuit judges between £5,000 and £30,000. The latter is increasing to between £70,000 and £80,000. The High Court has power to make unlimited awards.

St Paul claims manager Philip Fagan says this change will have a big impact on claims. "We're not here to be cynical, but to settle claims as best we can," he says. "We will have to be good negotiators."

He says in the 1990s the maximum amount circuit judges were allowed to award went up from £15,000 to £30,000 and that boosted claims payments. The same will happen again.

Awarding the lawyers
Fagan points out that a huge part of an award goes on paying the lawyers, usually around 30%. But this can be as high as 70% in medical claims. He says: "Awards are particularly high for serious debilitating injuries such as brain damage. Such an award five years ago would have been up to £1m, but it can cost £2m to £3m today."

Yet another huge difficulty is that, unlike in the UK, there is no compulsory employers' liability (EL) insurance and no Policyholders' Protection Board (PPB). According to the Irish Insurance Federation (IIF), there are currently 13 companies underwriting EL business.

In 1996, consultants Deloitte & Touche, in a report titled "Economic Evaluation of Insurance Costs", recommended the government review the issue of compulsory EL cover.

However, the IIF is opposed to the idea. It says compulsory EL cover would lead to EL premium hikes and cause claims involving uninsured employers to be funded by existing policyholders. Also, it would need someone to enforce the measure.

The IIF says the current system allows for considerable flexibility in areas such as deductibles or partial self-insurance. Moreover, insurers can encourage policyholders to improve standards by threatening to withdraw their cover, a leverage that would be denied them with a compulsory regime.

It supports the proposed Irish government initiative, the Personal Injuries Assessment Board (PIAB), announced earlier this year to tackle the high cost of such claims, particularly the legal element.

Uncertainties clearly lie ahead, but the insurance industry is resilient and, despite a slowing down in its economic growth, the country still has a strong air of confidence about it. Lessons have also been learned from the Independent disaster and a hardening market for premiums should strengthen both insurers and brokers. Readjusting to changing circumstances is partly what risk-taking is all about.

What impact did Indie have?
Independent Insurance wrote around IR£40m of largely construction and property business in the Irish market and around 700 companies have been affected by the collapse.

The Small Firms Association (SFA) castigated the Irish government for its "lack of action" over the situation.

SFA director Pat Delaney says three key issues arose over Independent: the cost of re-placing business with other insurers, liability for existing claims and potential liability for future claims in the period when the policies were with Independent.

However, Independent's 9,000 personal lines (PL) policyholders in Ireland are protected by UK laws and will be compensated by the Policyholders' Protection Board (PPB) for the insurer's collapse.

The policyholders, mostly motorcyclists, are covered under the Carole Nash scheme and will receive 90% protection through the PPB.

Doubts still surround the company's 700 employers' liability (EL) policyholders who will probably not be covered. EL is not a mandatory class of insurance in Ireland, unlike in the UK.

Delaney is concerned that rocketing premiums averaging a rise of 40% on existing levels are on the way, particularly for EL, and has called for a government inquiry into the increases.

In Ireland, for every £100 of premium, £94 goes in claims. So Delaney says there are existing and future Indie claims of around £96m that will enter the Irish legal system, which will take about four years to process.

Delaney says one company paid £200,000 in premiums to Independent, to reinsure cost it £510,000 and it has claims outstanding of a potential £430,000. He adds: "That company finds itself in a situation within three months of thinking they had full cover for their £200,000, to finding itself with a further exposure of nearly £1m."

The SFA has begun lobbying the Irish government, particularly Trade Minister Noel Treacey, whether a government-appointed official can work directly with the UK liquidators, PricewaterhouseCoopers (PWC). It also wants the government to use the existing 2% levy paid on all insurance premiums in Ireland to pay out current claims. Money retrieved by the liquidator would then be paid back to the government.

Delaney adds: "Another fear is that outstanding claims could see petitions for companies to be wound up if awards are made in the court and there is no money there to pay them.

"The directors of those companies might be sued individually. At the end of this year, it will be very difficult for auditors to sign off accounts of companies that are Independent clients."