set a cracking growth pace over the past decade thanks to the high
propensity to save and growing affluence of the population. Mooted
private supplementary pension schemes could add another key element
to the Irish success story.
The Republic of Ireland’s life insurance industry continued to
power ahead in 2006, lifting total gross premium income 27.8
percent compared with 2005 to €30.4 billion ($41.5 billion),
according to the Irish Financial Services Regulatory Authority
(IFSRA). Total gross new business written in 2006 increased by 33.7
percent to €25.2 billion, of which €9.9 billion was related to
Irish risk business (up 45.8 percent) and €15.3 billion to foreign
risk business (up 28.9 percent).
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The industry’s sterling performance in 2006 brought the CAGR in
gross premium income since 2000 to 14.9 percent, a pace
significantly higher than the 6.4 percent world average CAGR over
the six years, based on data from reinsurer Swiss Re Sigma. In the
process, Ireland’s life insurance industry moved from being the
world’s 16th largest in 2000 to 11th largest in 2006.
The strong growth trend has not abated in 2007. Indicatively, Irish
Life and Permanent, the country’s largest life insurer, reported
new business of €350 million in the six months to 30 June, an
increase of 41 percent compared with the first half of 2006. “The
market for life and pensions products has never been better,”
commented Denis Casey, Irish Life’s group chief executive.
Demand was particularly strong in the retail life sector, where
Irish Life increased sales by 54 percent to €208 million from €135
million in 2006.
In its 2007 interim report, Irish Life noted that market conditions
for its corporate life business were “very favourable” in the first
half of 2007 and were driven by continued growth in salaries and
employment in the Irish economy. New business corporate sales,
which were up 24 percent to €122 million from €98 million in first
half of 2006, were “strongly ahead” in all product lines; sales of
new defined contribution schemes and annuities were particularly
buoyant. Annuity sales also benefited from an increase in the use
of annuity products to buy out defined benefit pension scheme
liabilities, reported Irish Life.
Similarly impressive performance was reported by UK insurer Aviva,
which owns Ireland’s largest composite insurer, Hibernian Insurance
Ireland. In the first half of 2007, Aviva reported that its Irish
life insurance operations had achieved new business sales of £889
million ($1.86 billion), an increase of 59.3 percent compared with
the £558 million achieved in the first half of 2006. This
performance reflected growth in both the bancassurance and broker
channels, supported by new products and favourable market
conditions, said Aviva.
Strong economy
The strength of the Irish economy was highlighted by the Wealth of
the Nation report, published by Bank of Ireland Private Banking
(BIPB) in July. Among key indicators, BIPB reported that the
average wealth per head in Ireland stood at €196,000 at the end of
2006, up 16.7 percent from €168,000 at the end of 2005. This
enabled Ireland to retain its position as the world’s
second-wealthiest nation, behind Japan and ahead of the UK, US,
Italy, France, Germany and Canada.
BIPB estimated that there are 33,000 millionaires in Ireland, based
on total assets excluding property. Of the millionaires, BIPB
estimated that there are about 330 individuals with a net worth in
excess of €30 million, 3,000 with a net worth of between €5 million
and €30 million, and the remainder with a net worth of between €1
million and €5 million. BIPB also noted that personal disposal
income in Ireland doubled between 1996 and 2010, and forecast that
it would double again over the next ten years.
BIPB’s report also examined Ireland’s wealth in terms of total
private assets and liabilities, and found the country’s household
balance sheet to be especially robust. According to BIPB, total
household assets at the end of 2006 stood at €964 billion, almost
six times total liabilities of €161 billion, leaving total private
net assets at €804 billion. BIPB forecasts that total private net
assets will rise to €928 billion in 2010 and €1.2 trillion in
2015.
Residential property was again the key driver of wealth creation in
2006, noted BIPB’s report. However, while BIPB believes that
property will continue to be the dominant asset on the private
balance sheet, it may lose its position as the pre-eminent asset of
choice as other assets, particularly equity, come to the fore. In
2006 Irish private asset allocation was cash at 10 percent, bonds
at 3 percent, equities at 16 percent and property at 71 percent. By
2015, BIPB predicts, asset allocation will change to cash at 12
percent, bonds at 5 percent, equities at 22 percent and property at
61 percent.
Compared with many other countries, the Irish are a nation of
savers. According to BIPB, the annual level of personal savings
stood at €10 billion at the end of 2006 and represented 14 percent
of total disposable income, compared with 1 percent in the US and 5
percent in the UK. It exceeded even the comparatively high level of
almost 10 percent in Germany.
The savings ethic is anticipated to persist and the bank forecast
that annual personal savings will increase to €13.5 billion by 2010
and to €24 billion by 2015. The latter figure equates to an
unchanged 14 percent of disposable income.
This savings trend points to continued buoyant conditions for Irish
life insurers. From a product perspective, BIPB’s view that there
is a potential shift ahead from property to alternative asset
classes is also of significance. Notably, the IFSRA reported that
of the €25.2 billion gross new domestic business written by Irish
life insurers in 2006, linked business was by far the most
significant, totalling €23.3 billion.
Problems of ageing
Despite impressive prosperity, Ireland is one of many countries
faced with the problem of an ageing population and a pressing need
to overhaul its pensions system. According to a report published by
Hibernian Life, the number of people in Ireland aged over 65 will
rise from 500,000 at present to more than 1.25 million by 2050,
while the current ratio of six working people to one pensioner will
deteriorate to two workers per pensioner by 2050.
Life expectancy is rising and, according to The Society of
Actuaries in Ireland, stood at 75.1 years for men and 80.3 years
for women in 2004. Indicative of the problem this could create,
rating agency Standards & Poor’s has estimated that without
substantial pension reform Ireland’s total age-related public
expenditures would rise to 20.9 percent of GDP in 2050, up from
11.2 percent in 2005.
The need for pension reform has taken the fore stage in Ireland and
at a recent seminar the Irish Insurance Federation (IIF) called on
the government to adopt a bold stance towards reform in its
forthcoming Pensions Green Paper.
“Our latest research shows that the national pensions gap – the
shortfall in annual savings against the amount needed to provide a
reasonable retirement income – has now reached €7.4 billion per
year; this equates to nearly €3,800 annually for every person in
the work force,” said the IIF’s chief executive, Michael Kemp,
speaking at the seminar.
In addition to rising life expectancy, the IIF said, factors that
are creating the pensions savings shortfall are an increase in the
labour force from 1.78 million in 2005 to 1.97 million in 2006,
earnings rising faster than assumed and a reduction in the portion
of the labour force in defined benefit pension schemes.
“Clearly, it is becoming ever more vital for reforms to help
workers and employers bridge the gap before demographic changes
make decent pensions unaffordable and our current structure
unsustainable,” said Kemp. He added that any solution had to deal
with both state and private pensions.
Proposed reforms
The IIF has a put forward a number of proposals for reform of the
pensions system, including a full-rate state pension for all based
on age and residency alone. This, said the IIF, would be a major
advance in coverage as only 12 percent of female and 42 percent of
male workers are currently entitled to the full-rate contributory
state pension.
Coupled to the IIF’s proposed reforms is a gradual increase in the
minimum retirement age at the rate of one year per decade from 2016
to 2056. This would lift the minimum retirement age from 65 to 66
in 2016 and up to 70 by 2046.
An area of reform proposed by the IIF in which life insurers would
play a pivotal role is the automatic enrolment in private
supplementary pension schemes (with the right to opt out)
incorporating a number of flexible features such as early access to
the individual’s retirement fund and joint funding by workers,
employers and the state.
The private supplementary pension schemes would require a minimum
contribution rate of 15 percent of gross pay annually (subject to a
minimum income threshold of €16,000 and a maximum income of
€250,000) with 5 percent to be paid by the worker, 5 percent by the
employer and a 5 percent tax credit from the state. The IIF
proposed that workers could also opt to increase their contribution
to a maximum of 10 percent, with any additional contributions
attracting matching tax credits.
“Experience in other countries suggests that automatic enrolment in
supplementary pensions schemes – even with the right to opt out –
significantly increases pensions coverage to over 90 percent of
eligible workers in many cases,” said Kemp. “IIF believe that a
soft mandatory private pensions system coupled with the other
reforms we have suggested will significantly increase pensions
coverage and improve retirement benefits.”
Even in the absence of supplementary pensions schemes, Ireland’s
pension industry appears set for robust growth. Irish Life, whose
own new pensions business grew from €547 million in 2002 to €959
million in 2006, forecasts that growth in new business from defined
benefit and defined contribution (DC) pension schemes will display
a CAGR of 20 percent between 2006 and 2015.
Growth is being driven primarily by the expansion of DC schemes,
membership of which Irish Life noted is growing at 10 percent
annually.
Overall, perhaps the most telling comments on the future of
Ireland’s life insurance industry came from Irish Life chairman
Gillian Bowler, speaking in August at the presentation of interim
results. “We are hugely optimistic about the outlook for the retail
business,” said Bowler. Regarding corporate business, she added
that the environment “could hardly be better”.
