A dynamic economy; soaring premium rates after years of a soft market; and reducing choice of insurers: this is the background to Irish insurance in 2001, writes Richard Endersen.

The Irish Economy has performed exceptionally well over the past decade. Ireland now has one of the fastest growing economies worldwide, with a staggering 67% growth in GDP between 1995 and 1999. In that period, irish GDP grow from IR£41.409 billion to IR£69.052 billion. In 1999 alone, Irish GDP grew by 14%. to IR£69.052 billion.

During this period of explosive growth, the production base has shifted from agricultural to industrial, and unemployment levels from an unprecedented high to a situation where we now have virtually a full employment economy.

The insurance market, like any other, is subject to the economic fundamentals of supply and demand. The economy's performance is more than adequate to fuel demand - but what about supply?

The Irish Insurance Federation (IIF), whose members account for more than 90% of the premiums written in Ireland, publish annually a Factfile that is enlightening to anyone wishing to study the Irish market.

The IIF publication shows that the total premiums spent in Ireland in 1999 amounted to IR£6.6 billion. Approximately IR£1.9 billion was spent in the general (Non-Life) insurance market. Premiums in the period 1995 to 1998 grew by 7.7% annually against annual growth rates for Irish GDP of 13.6%.

In the absence of alternate argument these statistics support what we all know to be the fact - namely that insurance rates during this era of unprecedented growth were reducing year on year.

The effects of poor underwriting results, the need to reward capital invested and worldwide globalisation have all changed the situation fundamentally.

Turning now to the supply and pricing of general insurance products, it may be helpful to break this market down into its various constituent parts.

Taking total premium of IR£1.9 billion, approximately 50% of this, i.e. IR£950 million, relates to Personal Lines insurance where the product is distributed fairly equally between the broker channel and the direct market.

The remaining IR£950 million relates to commercial risks, where distribution of products is almost solely carried out by independent insurance brokers.

The Irish insurance market is well developed with total Life and Non-Life insurance premiums accounting for 9.4% of our GDP (Life 6.8% and Non-Life 2.6%). This figure is well ahead of Europe as a whole: the European average spend on insurance products only accounts for 6.9% of GDP as stated in 1998.

The opportunities, therefore, to grow the market meaningfully are limited. Future growth and profitability will have to come from the existing economic base by way of increased rates or further national economic activity.

In 2001, most commentators agree that experience of first quarter renewals shows that increased rates and activity are producing average premium increases in the region of 20% in the Personal Lines market and somewhere around 30% in the remainder of the market as it applies to the Property Casualty and Commercial Motor Account.

The increases applied in the Personal Lines market, whilst unpalatable from the consumerís point of view, are at least fairly uniformly applied and spread amongst a large population.

The increases applied to the Commercial sector are extremely diverse by virtue of the fact that they are individually rated and range from 10% to infinity depending on underwriting criteria.

It is in this sector, the Commercial insurance sector, that the supply of product and its cost are causing the greatest concern to all. Insurers are carefully allocating their capacity to areas of greatest return and in consequence some business sectors are not being adequately supplied, resulting in extreme cases where insurance cover is not available.

Many insurers have taken the view that capacity is best allocated in underwriting the requirements of our small to medium enterprise sector. They prefer to avoid the larger and more complicated risks which to date they have found less profitable.

As a result the local market for our large corporate risks is very restricted, and inevitably some of these risks will be placed elsewhere in other markets and, ironically, on occasions with the parent of a local Irish insurer!

Clearly the Irish market is undergoing a period of unprecedented change :

  • the Top 5 insurers now represent what were 19 separate companies before all the consolidations in the market. Demand is buoyant and premiums are now increasing by a multiple of GDP
  • whilst insurers are endeavouring to stay loyal to their customer base the hardening market is creating its own casualties
  • although the the market remains competitive, the level of competition differs substantially from sector to sector
  • the success of the Irish economy continues to bring its own difficulties in relation to claims inflation, accident frequency and so on.

    Hopefully the insurance market will now settle and corrections will prove more than adequate. The insurance market requires a stable environment in order to continue providing competititive products to all sectors of the economy and go forward to addressing age-old issues relating to customer perception, product development and the elimination of costly duplications in the delivery process.

    If this can be done before another cycle in the insurance market comes around so much the better - let's wait and see.

    Richard Endersen is Managing Director of Aon MacDonagh Boland Group
    10/12 Lansdowne Road Dublin 4.

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