Shock waves

Last month, Irish consumers received a sharp reminder that they were not immune to the economic aftershocks of the terror attacks on the US, with news they would be paying between 20% and 25% more for their motor and household insurance next year. These adjustments might even be considered conservative, given that reinsurance will jump more than 40% as a result of the terrorist activity.

Ireland's economic future, with its dependence on the presence of US multi-national companies, does not look too good. Worse news is that Ireland is likely to be among the countries worst affected by human casualties.

Human toll
Around 20 Irish citizens are thought dead, including a four-year-old girl who was travelling on one of the planes that crashed into the World Trade Centre. However, the number may increase, given the number of illegal Irish emigrants earning a living in Manhattan's black economy and who, even in death, may be veiled from officialdom. Add to that the significant number of first-generation Irish Americans working for the emergency services with relatives back here and it is understandable why the government called a national day of mourning, closing all non-essential businesses, on the Friday after the attack.

A trail of economic devastation soon followed, with announcements of significant job losses in a number of sectors, but most acutely at the national airline, Aer Lingus, which is to shed 1,600 temporary and full-time staff and cut a sizable portion of its routes.

In September, the company was reporting unprecedented numbers of no-shows for its transatlantic routes.

Like Aer Lingus, insurers have allied the terror attacks with future premium hikes.

For insurers, the attacks exacerbate existing pressures, which the Irish Insurance Federation (IIF) predicts could see some insurers withdrawing from the marketplace.

Hard times
Despite the fact that 2000 saw premium income hit the £2bn mark for the first time, there are seemingly intractable difficulties in doing business profitably in Ireland, which have only become more acute in recent years. Last year, for example, the non-life sector made losses of £343m.

"Companies will inevitably share part of the cost arising from the events on September 11," said IIF chief executive Mike Kemp at the federation's announcement of aggregate results for the non-life and life insurance sectors recently. "Insurers will have to deal with the reaction from the reinsurance community on top of the hostile conditions that we face in the indigenous market."

Kemp, who received saturation media coverage for his remarks, also took the opportunity to explain that Ireland is deeply unpopular with reinsurers, due to the country's haphazard nature to policing road safety, appalling traffic accident record, expensive legal system and generous personal injury awards. As a result, it will be on the motor side where effects will be felt most severely.

"Motor insurance is the worst-performing sector in the entire insurance market. The net underwriting loss in motor insurance increased by a staggering 92.4%, from £144m in 1999 to £228m in 2000," he said. "Companies cannot - and will not - continue to absorb such un-sustainable losses, particularly in the current environment of falling investment returns.

This continuing negative trend in the motor account may force companies to withdraw from the motor market altogether.

"All sectors of the industry will be affected in some way, but especially property, business interruption, health, life and reinsurance.

"One estimate of the insurance loss is placed at between $30bn (£25.7bn) and $58bn (£49.6bn). This puts it as the largest single event loss - by multiples - in insurance history."

Premium increases will fall especially heavily on car owners, who are already incurring, on average, 20% increases imposed earlier this year. A further increase will mean the cost of motor insurance, which accounts for 52% of Ireland's non-life market, has almost doubled in two years. For many young drivers, the burden is likely to put motor insurance beyond them financially.

Commentators expect the announcement will pitch the industry and the government into a very public row about insurance costs. Already, relations are strained between the two, with the government threatening to cap the amount insurers can charge following the price increases of earlier this year. However, that initiative has been put on ice pending a report, due later this year, from the Motor Insurance Advisory Board, examining the profitability of the motor insurance sector.

While motor has always been Ireland's insurance bogeyman, property has also been a growing cause for concern in recent times. Rising rebuilding costs caused by tight availability of construction labour and spectacular floods in November 2000 cost insurers £40m.

Rumoured rises
Elsewhere, stories are emerging from the broking community of insurers telling brokers of exorbitant increases to come.

"I'm hearing of increases of between 30% and 70% on commercial non-life," says a spokesman from one Dublin-based intermediary, who declined to be named. As the insurance sector is anxious to correct its underwriting situation, he says not all of the increases can be attributed to the terrorists, as there were moves afoot to push through sizeable increases before the attacks occurred.

On the life side, the impact has been muted. The life sector generated more than £5.9m in premium income in 2000, an increase of 25.5% on the previous year. Indeed, average growth in the sector has reached 31.4% over the past five years.

Altogether, life assurers held assets worth more than £17.5bn at the end of 2000, representing almost 57% of total policyholder funds. However, in the first week after the attack, the Irish Stock Exchange fell by 10%, in line with other bourses. The major indigenous assurance players are the Bank of Ireland, AIB Group and Irish Life and Permanent, all of which are significant bankassurers and, along with Hibernian, account for two-thirds of the entire market.

"We'll see fee income hit to the extent that asset values have fallen, but that could be a temporary phenomenon," says one Dublin analyst.

He adds that if current circumstances prevail, the Bank of Ireland will be £10m out of pocket per annum in fee income next year. But he also says there is little expectation of people losing confidence in investment products - people still need pensions.

Sales hopes for the New Year
However, one financial insider says now is not a good time to try to sell. "We're communicating with our clients at the moment, rather than actively selling. We'd be hoping, though, that we can translate that into sales and get the New Year off to a good start."

Ray Gordon, a spokesman for Ireland's biggest assurance company, Irish Life and Permanent, says the company has not been exposed to claims from the atrocities, as it is almost totally focused on Ireland.

"We have negligible exposure to the actual terrorist attack itself. Any upset will arise indirectly from the overall state of the economy and the performance of equity markets," he says.

While there has been an obvious fall in asset values, there are no plans to cancel product launches as a result of the negative sentiment towards the markets.

The direct impact of the terrorist attacks on Ireland's economic boom, driven in large part by the decision of a large number of US computer and biotechnology firms to base their European operations here, remains to be seen.

However, the portents of doom are receiving plenty of coverage in the national media. A substantial retrenchment to the US as a result of global recession, on top of what is already a pronounced economic slow-down would send the Celtic Tiger into a Celtic tail-spin and bring to an abrupt end the life industry's enviable performance of recent years.