Joint Committee on Enterprise & Small Business 31 May 2006 Statement by Patrick Neary, Chief Executive Introduction Thank you for the opportunity to address you this morning about your ongoing work, focusing on reform of the Irish insurance market. In this opening statement I would like to first inform you about a number of developments that have taken place since we last appeared before this Committee, in June of last year. I would also like to outline our progress on the various recommendations that you have referred to us and also on our work with the Competition Authority. Then I would like to add some comments about new entrants to the insurance market. As you know our statutory mandate is to protect consumers. We do this by: helping them to make informed financial decisions in a safe and fair market; and by fostering sound, dynamic financial institutions, which, in the case of insurance companies, provides the fundamental safeguard for policyholders and potential claimants. Recent developments The Financial Regulator very much welcomes the ongoing work of the Committee in relation to the insurance market. To date, we have been able to act on all but three of the recommendations you addressed to us and our position on these remaining recommendations is outlined in our recent letter to the Committee.
In addition to acting on the recommendations we have also been engaged in significant complementary work over the past 12 months or so. We have been finalising our consumer protection code that will apply to all financial service providers. The new code represents the single biggest development in consumer protection for consumers of financial services since the establishment of the Financial Regulator. It will ensure a consumer-focused standard of behaviour by financial institutions, including those in the insurance sector, in their dealings with consumers whether they are individual consumers or the small and medium size business sector. The same level of protection will be offered to consumers regardless of the type of financial services product, or channel, that they choose. The Financial Regulator will issue the Consumer Protection Code in July of this year. It contains a number of provisions for all firms including acting in the best interests of their clients, making full disclosure of relevant information to the customer, providing suitable recommendations to and a prohibition on making the sale of one product contingent upon the sale of another. The Code will contain a specific chapter on insurance, addressing a range of issues including requirements for quotations, proposals and policy documentation and new rules for claims handling. The Code was developed following detailed consultations over a two year period, which included two rounds of public consultation. The Committee will be aware that both the Motor Insurance Advisory Board and the Competition Authority have recommended that the Financial Regulator should continue to publish private motor insurance statistics similar to those that were published by the MIAB. These relate to claims development. The data for 2002 have already been published and we will publish the data for both 2003 and 2004 this year. On foot of a Competition Authority recommendation that the Financial Regulator should publish claims statistics in relation to Employers Liability and Public Liability Insurance we have commenced a Regulatory
Impact Analysis (RIA). The first step was the publication of a consultation paper, a copy of which was provided to the Committee. The consultation period has just closed and we are examining the submissions received. However, I can inform the Committee that the majority of the responses received fail to indicate strong support for this initiative. In the period since I last met with the Committee, the Financial Regulator has also continued to augment its range of publications aimed at informing consumers of the costs, risks and benefits of insurance and other financial products. Looking only at those publications dealing with non-life insurance, we have in this time published a further two motor insurance cost surveys, two home insurance cost surveys, a fact-sheet on payment protection insurance and a guide to employers liability and public liability insurance for small businesses. As the Committee will also be aware, since the establishment of the Financial Regulator, the Insurance Statistical Review formerly known as the blue book - has been published earlier each year. The 2004 report was published in September 2005, which represents a significant improvement on prior years. Response to Recommendations The Committee will have already received my letter of 19 May addressing in your recommendations to the Financial Regulator. Looking across the 57 recommendations addressed to us by the Committee and the Competition Authority, considerable progress has been made in implementing the recommendations. As I mentioned earlier, we have been able to act on all of the Committee s recommendations, with the exception of three. We have asked for further guidance on one of these relating to providing information on premia calculations. The other two recommendations cannot be fulfilled by us because they fall outside our remit. In relation to the Competition Authority s recommendations there is one
major theme I wish to comment on - the issue of transparency. We have a very positive relationship with the Competition Authority and dialogue continues between us on their recommendations. We continue to explore the most effective framework to give practical effect to their recommendations. As part of these discussions a key concern of the Financial Regulator is to ensure that appropriate and sufficient levels of information are provided to customers and that a balance is achieved between the level of required disclosure and the information that should be provided to the customer. The Competition Authority will publish their assessment of the implementation of these recommendations in due course. What I want to highlight in this context is that disclosure and the provision of consumer information are not necessarily the same thing. Disclosure is a quasi-legal concept, referring to the provision of certain statutory information such as terms, conditions, key features and legal requirements. There is a differentiation between this form of statutory disclosure on the one-hand, and provision of information to ensure consumers understand the costs, risks and benefits of financial products on the other. Disclosure alone is not sufficient to enable consumers make informed decisions and can create information overload. We believe that consumers should receive such information from financial firms as would provide them with relevant information about a product or service in plain language. We expect a financial firm to explain their products clearly so that their clients can make informed choices. However, there are limits to the amount of information that a typical consumer can assimilate. Where we go beyond those limits, not only does additional disclosure fail to inform consumers, but it threatens to crowd out the key messages. In these circumstances, additional disclosure can impose costs on regulated firms without yielding benefits for consumers. The Financial Regulator is acutely aware that there is a balance to be struck on this issue, and through consultation and market research we seek to achieve optimal outcomes for both consumers and the industry.
We also seek to assist consumers in understanding financial products by providing independent information about various products available on the market so that they can make informed decisions themselves. In giving practical effect to recommendations, we do not want to cause unnecessary duplication, small print or confusion and are guided by this principle in acting upon the recommendations of both the Committee and the Competition Authority. Solvency Before I conclude I would like to comment in relation to solvency and market access. In our correspondence with the Committee we have outlined the rationale for the solvency regime in Ireland and also the significance of the Solvency II project both for Ireland and internationally. Having a solvency requirement for insurance companies, is fundamentally about protecting consumers and this is the sole principle guiding the Financial Regulator s approach to solvency standards. We are alive to the competition implications that any solvency regime can have. I would point out that there is no evidence that our solvency regime impacts negatively on competition and all of the major international insurance groups and many of the next line of insurers are active in the Irish market. Nevertheless, we are aware of the call from the Competition Authority for greater transparency with regard to our solvency requirements. We are in the process of finalising our revised solvency guidelines to provide clarification and these will be published on our website in the next fortnight. Market Access This brings me to my final points. You requested me to address the issue of new entrants to the insurance market in Ireland and whether or not there are any regulations here that may inhibit the establishment of new firms. The Committee will be aware that the Competition Authority in its report did not find any evidence to cause concern about this.
The Financial Regulator requires new non-life insurance companies to have a solvency margin twice that of the EU minimum. After three years of operation companies activities are reviewed and may then have a lower requirement of one and half times the minimum EU requirement. Many of our EU colleagues require a higher solvency requirement than the EU minimum for their companies. Higher requirements for start-up companies reflect the higher operational risk posed by new firms. Clearly any new firm will have an unproven business model. A new insurance company without a proven track record poses increased potential harm to policyholders and it is therefore appropriate from a prudential and consumer perspective to require that the risk be balanced by a more robust initial capital position which is reviewed after three years of operation. From the period 2001 to 2005, 59 new companies have received authorisation here. The Financial Regulator has never been informed, and has no evidence, that the higher solvency requirement posed any difficulty to a company starting up in this jurisdiction. Of companies authorised by the Financial Regulator more than three years ago and who continue to trade actively, 85% continue to hold capital in excess of our requirements. Indeed, 42% of such companies hold in excess of five times the EU requirement. Clearly companies themselves recognise that the capital level needs to reflect the level of risk within their business model. In terms of access to the market, companies from other jurisdictions are also entitled to write business in Ireland under the EU Freedom of Services and Establishment provisions. Currently 561 EU companies have notified their intention to write business in Ireland on this basis, which further evidences the fact that there are no barriers to entry into the Irish market.
Conclusion I would like to conclude by reiterating our support for your work and we will continue to work on implementing the recommendations addressed to us by this Committee. In that context, it is also important to say that the Financial Regulator is a member of, and an active participant of the Better Regulation Group that was established by the Department of the Taoiseach to implement the recommendations of the Government s White Paper on Regulating Better. You will be aware the criteria are necessity, effectiveness, proportionality, transparency, accountability and consistency. We fully subscribe to these criteria. Related to this we are also now committed to carrying out Regulatory Impact Analysis in relation to all new major proposals as appropriate. Public consultation is a key component on this analysis. Thank you again for inviting me to attend this morning. My colleagues and myself will be very happy to take any questions that you may have. -ends-