Ireland goes from boom to gloom

Ireland, Europe’s
one-time growth-star, has been plunged into economic crisis with
its property values collapsing, unemployment soaring and European
Union partners rushing to its financial rescue. Whether the Celtic
Tiger will recover from its setback is a matter of speculative
hope.

Ireland is hitting
the world’s news headlines, regrettably all for the wrong reasons,
as the recipient of an €85bn ($110bn) bailout by the European Union
(EU). For the country’s life insurance industry it is bad news that
appears unlikely to be short-lived.

The situation in Ireland
represents a dramatic about-turn from just a few years ago when the
country was hailed as a European economic miracle, having
transformed itself from an economic backwater into the fastest
growing economy in the EU.

Accompanying the Celtic
Tiger’s economic success was a rapid increase in prosperity which
saw at a CAGR of 6% between 1995 and 2007and disposable incomes
double between 1996 and 2006.

Improving at an even brisker
pace, domestic risk insurance business sustained a CAGR of 11.8%
between 2000 and 2007.

Together with growing foreign
risk business this had lifted Ireland’s life insurance industry
from 16th-largest in 2000 to 11th-largest in 2006 and 8th-largest
in 2007, based on data from Swiss Re.

Prosperity in Ireland was
underpinned by a residential property boom which enabled Ireland’s
to become one of the wealthiest nations in the world.

According to Bank of
Ireland’s private banking subsidiary the average wealth per head in
Ireland ended 2006 at €196,000, placing it second only to
Japan.

That has all come to an
abrupt end with residential property prices collapsing by almost
50% since the peak of the property boom in September
2007.

Unemployment has also
escalated out of all proportion, rising from 4.3% of the workforce
in 2007 to 11.8% at the end of 2009 and almost 14% at the end of
the third quarter of 2010. The country’s GDP contracted by 3% in
2008 and 7% in 2009.

And the worst may not be
over. Residential property prices are still falling with property
services provider CB Richard Ellis reporting a further of 5%
quarter-on-quarter fall in the asking price for houses in the third
quarter of 2010.

Things in the property market
could get even tougher in 2011 when the European Central Bank takes
direct control of Irish banks, many of which have a need to rebuild
their capital bases.

Heavy toll on
insurers

Not surprisingly,
the domestic Irish life insurance market has been hit
hard.

“The last year has been
another very difficult one for our members,” said the Irish
Insurance Federation (IIF) president Brian Forrester, summing up of
the domestic market in 2009.

“In the domestic market, new
life and pensions business fell by 28% for the second successive
year, with annual premium equivalent new business at only €1,082m
in 2009,” Forrester added.

Also illustrating the
deterioration in Ireland’s life insurance market, according to
consultancy Milliman, domestic sales of life insurance excluding
all investment-only products fell from €2.074bn in 2007 to €1.496bn
in 2008 and €1.075bn in 2009. According to Swiss Re, Ireland’s
position in the global life insurance market fell to13th in
2009.

In its annual insurance
industry report the Central Bank of Ireland (CBI) reported that
gross domestic life premium income in 2009 fell by 14.4% compared
with 2008 to €10.67bn.

Benefits and claims paid in
2009 were €8.58bn which although down 1.3% compared with 2008 were
still up 75% compared with 2004.

From mid-2007, Irish life
insurers were also impacted by deterioration in persistency, noted
Milliman principal and consulting actuary in Ireland, Dermot Corry
at a seminar held in November 2010.

Corry said the industry has
taken steps to address the problem. These include the appointment
of dedicated business retention teams and the introduction of
future persistency commissions on risk business. Deterioration in
persistency peaked in 2009, but since then has been improving,
noted Corry.

He continued that the life
industry has also achieved success in its drive to reduce costs.
For example, the industry’s overhead costs increased by over 20%
between 2005 and 2007 and subsequently fell by about 4% in 2008 and
about a further 2.5% in 2009.

According to the CBI, the
number of full-time employees in Ireland’s life industry declined
by 349 (7.2%) to 4,479 in 2009.

There were some positive
features in the life market in 2009, one being an increase in the
total value of life assurance protection in force at the end of the
year. The IIF estimated this at €400.1bn, up 4.5% from €382.7bn at
the end of 2008. The IIF also noted that the aggregate value of
policyholders’ funds managed by IIF members increased by 10% in
2009 to €70.015bn, following a decrease of 22% in 2008.

IIF data also reflect the
significance of the equity market in the Irish life industry’s
fortunes. From €27.7bn at the end of 2008, the value of equity
investments increased by 27% in 2009 to end the year at €35.224bn.
This represented 50.3% of total policyholders’ funds, up from 43.4%
at the end of 2008.

Zurich beats the
odds

Not surprisingly,
most life insurers suffered a setback in 2008 and 2009. But there
were exceptions, the most notable among the major players being
Swiss insurer Zurich Financial Services’ Zurich Life Ireland
(ZLI).

In 2009, ZLI, formerly Eagle
Star Life, proved that it is possible to beat the odds, lifting new
business gross premium income from €1.32bn in 2008 to €1.65bn. This
represented an increase of 25.1%, the highest of any of the 16 life
insurers competing in the market in 2009. In the process, ZLI’s
market share increased from 13.1% in 2008 to 17.6%, ousting Aviva
from third position in the market in the process.

ZLI continued its robust
performance into 2010, reporting new business annual equivalent
(APE) premium income, excluding investment only business, of
€129.4m in the nine months to September 2010, an increase of 6%
compared with the first nine months of 2009.

In the first nine months of
2010 ZLI’s pension new business APE increased by 3% to €100.5m
while the overall market experienced a fall of 11%. ZLI’s life new
business APE increased by 17% to €29m compared with a market
average rise of 10%.

Foreign risk
business

Another major factor in
Ireland’s overall life insurance industry is cross border risk
business written in the country. Most cross border risk business –
about 90% – is written by Ireland-based subsidiaries of foreign
insurers attracted to Ireland by government initiatives such as the
International Financial Services Centre in Dublin and a low 10% tax
rate.

Indeed, cross border premium
income is significantly higher than domestic business, totalling
€17.56bn in 2009, according to the CBI. This figure represented a
9.5% increase compared to €16.04bn in 2008, although it was still
off the peak of some €20bn seen in 2007.

Commenting on the greater
resilience of cross-border business written in Ireland, Corry said
there were a number of factors at play.

These included the better
performance of the European life market in general; new entrants
into Ireland; new distribution arrangements; and a broadening of
product offerings beyond unit-linked products.

Insurers focused on Italy
play a particularly significant role in Ireland’s cross-border risk
business. According to Milliman consulting actuary Aisling Lovett,
10 insurers have an Italian-focus and in 2008 accounted for just
over 40% of cross-border premium income.

In turn, three companies, Axa
MPS (formerly Montepaschi Life), Eurizon Life and Mediolanum
International Life accounted for about three quarters of total
Italian-focused business.

Turmoil in health
insurance

So far, Ireland’s economic
slump has claimed one victim, Quinn Group, a general insurer which
entered Ireland’s health insurance market in 2007 following its
acquisition of UK health insurer Bupa Irish unit.

On 30 March Ireland’s
Financial Regulator placed Quinn Group under administration but its
health insurance unit, Quinn Healthcare, was permitted to trade as
normal.

However, consultancy Towers
Watson stressed in October 2010 in an assessment of Ireland’s
health insurance market: “Its [Quinn Healthcare] future ownership
is uncertain due to the financial problems of its parent
organisation, Quinn Group, where banks [principally the recently
nationalised Anglo-Irish Bank] are queuing up to seek repayment of
large debts, potentially funded by the sale of Quinn’s insurance
business.”

Quinn Healthcare is a
“profitable company with an attractive customer base”, noted Towers
Watson. Quinn Healthcare has more than half am policyholders, a
significant number given that Ireland’s total population is only
4.45m.

Also facing major problems is
state-controlled VHI Healthcare which in 2009 lost some 120,000
customers and incurred an €80m underwriting loss.

Source of VHI’s problems can
be traced back several decades during which it was the only private
medical insurance provider which left it with a larger portion of
elderly customers than its competitors.

VHI was shielded against this
problem by the country’s risk equalisation scheme under which
health insurers with a younger age profile were required to make
annual payments to competitors with a larger proportion of lives in
the older age segments.

VHI’s secure position ended
in July 2008 when Ireland’s Supreme Court ruled against the risk
equalisation scheme.

Realising that the court’s
ruling demanded radical change, the Irish government announced in
May that it would recapitalise and sell VHI. Currently, noted
Towers Watson, VHI operates under a special derogation from
solvency rules other insurers face.

Towers Watson believes Quinn
Healthcare and VHI would be highly attractive to any company
seeking to establish a significant presence in the Irish health
insurance market. Both Quinn Healthcare and VHI are, the
consultancy believes, likely to have new owners sooner than
proposed reforms of the Irish health insurance market come into
effect.

Reforms planned by the Irish
government will, said Towers Watson, “hopefully, provide stable
market conditions and greater operational certainty for insurers,
thereby making it a more attractive market.”

The consultancy continued
that reforms are intended to cover a new risk equalisation scheme,
due to come into effect in 2013, and the potential rebalancing of
the market so that the distribution of older customers is spread
more evenly among insurers.

No quick
fix

Ultimately, Ireland as an
attractive market for insurers, whether they be in the general,
life of medical insurance market, will depend on the country’s
ability to overcome major economic hurdles. At present things look
rather grim.

The Irish government’s plan
to correct severe economic imbalances appear likely to place
further pressure on consumers.

According to a strategy plan
released by the Irish government it plans to cut its spending by
€6bn in the upcoming national budget and to target total cuts of
€15bn over four years. Among cost-cutting measures, thousands of
state employees are expected to be made redundant.

The government also intends
to increase tax revenue by €5bn, with the main focus of tax
increases on income tax. If all goes to plan, the government debt
to GDP ratio will peak at 108% in 2013 and then begin
declining.

In 2010, Ireland’s Economic
and Social Research Institute anticipates GDP will contract by a
further 1.5%. Looking into the future, in a recent survey of 1,000
CEOs in Ireland by CB Richard Ellis, 65% said they expect the Irish
economy to show GDP growth of less than 1% in 2011.

For life insurers hopes of at
least stabilisation also appear to be fading. According to
Milliman, the domestic life market recorded a 5% decline in new
business APE in the first nine months of 2009.

However, there was a significant 14% year-on-year decline
in the third quarter of 2010 which represented a significant
deterioration compared with a decline of only about 1% in the first
half of 2010.

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