Opening Statement by Domhnall Cullinan, Head of General Insurance Supervision, Central Bank of Ireland, to the Joint Committee on Finance, Public Expenditure and Reform

10 October 2012 Speech

Firstly, I would like to thank the committee members for inviting me and my colleagues from the General Insurance Supervision Division of the Central Bank to discuss the Insurance Compensation Fund and Quinn Insurance Limited.

The Insurance Compensation Fund was established under the Insurance Act 1964. It is maintained and administered under the control of the President of the High Court acting through the Accountant of the High Court. Only the High Court may make payments from the Fund. The Fund is financed through contributions received from non-life insurance companies up to a maximum of 2% of their Gross Written Premium. The contribution is collected by the Revenue Commissioners and forwarded to the Fund through the Accountant of the High Court. The role of the Central Bank in relation to the Fund includes carrying out an annual assessment of the financial position of the Fund and determining an appropriate contribution to be paid to the Fund by non-life insurance companies.

The Insurance Act 1964 states that the High Court may pay out of the Fund to the administrator of an insurer such amounts as are required to enable the administrator to carry on the business of the insurer.

Quinn Insurance Limited (QIL) is required to comply with its obligations under the Insurance Acts and Regulations on an ongoing basis.

Of particular note in this regard is the obligation that each insurer shall establish and maintain technical reserves in respect of all underwriting liabilities assumed by it. The amount of technical provisions must at all times be sufficient to cover any liabilities arising out of insurance contracts as far as can reasonably be foreseen. The amount of any item in the accounts must be determined on a prudent basis. It is the obligation of insurance companies to ensure compliance with these requirements on an ongoing basis.

Throughout 2008 and 2009 the Central Bank engaged with QIL on a continuous basis in relation to its business and financial performance. The Central Bank was concerned that there were gaps between the technical reserve calculations of Milliman (QIL’s signing actuary), and PWC (QIL’s external auditors), as Milliman’s calculations were lower than those of PWC. The Central Bank advised QIL during 2009 that these gaps were unacceptable. We required QIL, Milliman and PWC to attend a number of meetings in the Central Bank to discuss this issue. The last of these meetings took place on the 24th March 2010. At this meeting the Central Bank informed QIL that the €68m gap between Milliman’s estimate and PWC’s estimate for 2009 was unacceptable.

In addition, since May 2008 monthly returns submitted by QIL showed that the company only complied from time to time with the required solvency margin. Submissions made to the Central Bank by QIL during the early part of 2010 showed that QIL’s financial position had deteriorated to such an extent that the company’s solvency margin was just 107%, considerably below the 150% level required. There was no satisfactory plan in place for QIL’s recovery, and on 19 February 2010, and again on 23 March 2010, the Central Bank informed QIL that consideration was being given to applying to the High Court for the appointment of administrators. Then, on 24 March 2010, the Central Bank was advised that previously unknown guarantees against properties of QIL valued at €448m were in place against Quinn Group debt. In addition, the Central Bank was advised that an amount of €35m that the Quinn Group had given an absolute commitment would be injected into QIL by the end of that week would not now be made as the consent of Quinn Group’s lenders was required for such a payment and had not been forthcoming.

The Central Bank’s decision, therefore, to apply to the High Court on 30 March 2010 for the appointment of the Joint Administrators was based on the emergence of the guarantees, a significant concern that QIL’s technical reserves were insufficient and that the manner in which the business of QIL was being, and had been, conducted had failed to make adequate provision for its debts. The appointment of the administrators was confirmed on 15 April 2010, after the board of QIL consented to the permanent appointment.

The Central Bank understands and shares the concern in relation to the level of the potential call on the Insurance Compensation Fund by QIL and in particular that the projected call has increased from €775m to €1.65bn. Reserve calculation by its very nature is a difficult and complex process which is heavily dependent on a number of factors, including a firm’s claim-handling process and its approach to the setting of reserves. The Joint Administrators have kept the Central Bank informed of developments in this regard during the course of the Central Bank’s on-going supervision of the firm. The Central Bank understands that, in broad terms, the source of the increase can be divided into four distinct parts:

  1. First, there has been an increase of €207m in the estimated reserves that the Joint Administrators believe are needed.
  2. Second, the Joint Administrators have made a provision for adverse deviation of €300m.
  3. Third, the Joint Administrators have added a contingency reserve of €215m to protect against exchange-rate exposure.
  4. Fourth, there has been a fall of approximately €150m in the value of QIL’s assets.

The Joint Administrators have undertaken a number of reviews in order to identify and correct any shortfall in the case reserves of the company. It would appear that the Joint Administrators have undertaken a robust review in arriving at their revised estimate of the call on the Fund and that the increase in the potential call arises essentially from business written by the firm prior to the appointment of the Joint Administrators. It is essential that the Joint Administrators make and continue to make adequate provision for QIL’s debts to ensure that the rights and interests of QIL policyholders are protected and the Central Bank will ensure that the Joint Administrators continue to do so.

In conclusion, I would like to assure the Committee that the Central Bank will continue to monitor QIL’s compliance with its statutory obligations to make provision for its liabilities and adopt a prudent approach in doing so.

Thank you for your attention. We are now happy to take your questions.