Will recently-announced proposals produce cheaper car insurance? Carol Coulter, Legal Affairs Correspondent, is not holding her breath
The Motor Insurance Advsory Board (MIAB) made it official: we pay more for motor insurance - and, indeed, other insurance - than do most other European countries. There are a number of reasons for this, some of which will not change, while others are unlikely to change radically enough to bring about a big drop in premiums.
The first difference between Ireland and most other European countries is the way in which accident victims are dealt with.
In most of EU member states a public health system looks after the medical needs, including rehabilitation, of accident victims. Insurance is not needed to cover this. Further, a social security system pays a substantial proportion of the wages of those who cannot work after accidental injury.
Insurance is there to fill in the gaps. In such systems the cost of providing compensation is then often calculated by a state body, similar to the Personal Injuries Assessment Board (PIAB) about to be set up here.
In Ireland, we cater for accident victims differently. There is virtually no state-sponsored income protection for those who can't work due to accidental injury. Hospitals charge for treating an accident victim likely to get a court award. Further, state provision of rehabilitation, such as physiotherapy, is very limited indeed.
There has never been any political drive to change our health and social security system to provide the kind of cradle-to-grave protection against all eventualities that exists in many EU countries.
Instead we have a system where private insurance is meant to protect against certain disasters, notably motor accidents and accidents at work, and where compensation covers loss of earnings and "pain and suffering" as well as medical expenses.
So, the awards made in Ireland are higher than in most other countries. Inevitably, therefore, insurance will be more expensive than it is in situations where it is filling in gaps in state provision.
But that in itself does not account for the high rates. A number of vested interests are also involved in the whole insurance business. The MIAB identified three main vested interests: the insurers, who are in the business to make a profit; those involved in litigation, whose costs add 40 per cent to every penny paid in compensation; and the Government, which benefits both from not having to carry the costs of meeting the needs of accident victims and which also gets 2 per cent in stamp duty from premiums.
At her press conference announcing the creation of the PIAB, Tánaiste Mary Harney made it clear that the Government was unlikely to drop the two per cent levy. And nobody at a political level is proposing the State should cough up the €2.9 billion it would cost to give us a European-standard social security system. So, the State's vested interest will remain untouched.
At the same press conference, representatives of the insurance industry were quick to point out that there was no guarantee that the reforms the Tánaiste was announcing would lead quickly to a fall in premiums. The phrase "subject to profitability" featured in a number of their contributions.
This excuse is likely to pop up again, given that profitability in the insurance industry has already been adversely affected by events that have nothing to do with car insurance, such as the September 11th attacks last year, the German floods this year and the general fall in the equity markets.
The industry regards 4.2 per cent profit as too low. But, even one per cent profit on €1 billion premium income is a lot more money than one per cent of €500 million.
The other problem with the insurance industry is the opacity of its figures. Even the redoubtable Dorothea Dowling, chairwoman of the MIAB, found that getting raw data from the industry was like pulling teeth. "It has not been the Board's experience that insurers have willingly provided all material information in the fulsome manner that the Minister is entitled to expect," her report commented.
One aspect of this has been persistent confusion about what insurers pay out in any given year. In a submission to the Tánaiste earlier this year it claimed that it had "spent" €500 million on legal costs in 2001. However, when questioned by The Irish Times about the divergence between this figure and those in the MIAB report, the Irish Insurance Federation revealed that this figure included money put into reserves for claims arising, but not paid, last year - that is, money not "spent" at all. There is no reason to believe that these difficulties with industry figures will not continue when the PIAB attempts to access them.
The third vested interest is the litigation industry. This includes, above all, the legal profession, but other professions do very nicely out of insurance litigation too. It also includes the State, which gets 21 per cent VAT on all fees - and another slice of the cake in court costs. This all adds up to the 40 per cent paid on top of compensation awards.
Insurance is the milch cow of the two branches of the legal profession. The money it generates for the industry is difficult to quantify, but it has been estimated at 40 per cent of the earnings of the Bar.
The MIAB report outlined the fees involved in a typical Circuit Court award worth £7,500, where there was a full fight on liability. Even with no witnesses on liability or witnesses expenses, the costs came to £2,700 for the claimant's solicitor and £2,400 for the defendant's solicitor, £514 for the claimant's barrister and £660 for the defendant's barrister, and £672 each for each doctor. Costs therefore came to £7,618, the bulk of it solicitor's fees.
Personal injury work is, therefore, the bread and butter of the legal profession. For many it provides a lot of jam as well. It is not surprising that both of its branches have been squealing about the proposed PIAB, which would remove from the courts those cases where liability is not contested, as this will reduce their earnings. While many commentators might enjoy the prospect of lawyers' income being reduced, it does not follow, unfortunately, that this will lead to insurance premiums being reduced.
The idea of the PIAB is that in straightforward cases where the insurer is not contesting liability, the claimant will be able to go to the board, have his or her injury assessed, and compensation calculated and paid. This will cut out the need for much of the legal representation and for two sets of medical experts, and should, the theory goes, cut costs.
However, this may not be as simple as it sounds. For example, will medical injury be the only criterion? A broken leg would have very different meanings for a secretary and a ballet dancer. Will a claimant suffering from psychological trauma be able to formulate his or her claim properly?
These issues raise the question of the right to legal representation before the PIAB. That issue is fudged in the proposals recently unveiled by the Tánaiste - Ms Harney said the interim board would work "on the formulation of options and reasoned recommendations" on legal representation. Whatever emerges, it will have a cost.
But the most contentious issue has been whether the PIAB will, in the end of the day, save money for the hard-pressed policy-holder.
Two reports commissioned by the legal profession warn that it could end up costing more to administer than any possible savings, with estimates varying up to €37.8 million annually. The report commissioned by the Bar Council also warned that it could add another layer to the system without achieving any appreciable savings.
Of course, they would say that, wouldn't they? But this warning was echoed in the report by the Tánaiste's own Implementation Group for the PIAB. Both of them pointed out that the constitutional right enjoyed by every citizen to go to court meant that the number of people using the PIAB was unpredictable, and would be substantial onlyif the awards given there were at least what could be got in court, if not slightly more.
The uncertainty about costing was reflected in the Tánaiste's announcement, when she said there would be a cost-benefit analysis of the PIAB.
Mary Harney's proposals also fudge the question of who will pay for it when it is up and running. If legal costs are reduced, then the beneficiaries will be the insurance companies. It seems obvious that they should pay for the PIAB. But this has not been agreed, and we know only that the interim board will "revisit" the question of a "funding mechanism for the operation of the PIAB involving the insurance industry".
If the insurance industry does not make a significant contribution to costs, then the taxpayer will have to pick up the tab. If the insurance industry does pay, we can expect to see this reflected in our premiums.
Meanwhile, there are going to be reforms in the court system, also aimed at cutting costs. These have been pledged in the Programme for Government, and the two branches of the legal profession have become very late converts to finding ways to cut costs here, mainly by penalising those who cause delays. But, if they are thorough and implemented rigorously, they may yield more savings than the PIAB in the long run.
Will there then be premium reductions? We'll see.