Quinn Insurance and the levy
THE PRESIDENT of the High Court was rightly exasperated when presented last week with a revised estimate of the cost of funding Quinn Insurance, which is now in administration following its collapse. The money needed will be paid out of the Insurance Compensation Fund (ICF), and is being raised by a Government levy on motor and home insurance policyholders. The levy is required to meet expected claims on the fund and to cover the losses of Quinn Insurance. However, great uncertainty surrounds both the likely cost of these claims, and the length of time the levy may be in place. Mr Justice Kearns said the court was told initially the company would not need to rely on the ICF. Last October, the court learned that €738 million may be required from the fund. By last week that estimate had soared to €1.65 billion.
The Government has introduced a 2 per cent levy to raise €65 million annually to finance the ICF over a 12-year period. But as the judge pointed out, the levy – if the latest estimate is accurate - will last “in perpetuity”. It would take 25 years to pay off that amount. Mr Justice Kearns has asked the company administrators and Central Bank representatives to attend the High Court this week, to explain why so much has changed, and so quickly. Indeed the Oireachtas, which passed the legislation last September, should be just as concerned, as the estimated cost has more than doubled since that date.
The failure of Quinn Insurance mirrors the collapse of PMPA insurance and the Insurance Corporation of Ireland in the mid-1980s. All the companies failed to set aside sufficient reserves to meet the cost of claims. Then a similar levy was applied that continued for a decade. The recent imposition now means the insurance industry is subject to two levies; a 3 per cent charge on non-life insurance policies already applies.
For governments reluctant to raise general taxation, levies are often seen as a means of raising revenue by stealth. The levy is raised for a specific purpose and paid for by a specific group. However, the relative ease with which large sums can be raised can also produce perverse outcomes. The pension levy is a case in point. It will operate for four years and raise almost €1 billion annually to finance the Government’s job creation programme. However, its operation has made another Government policy goal – adequate pension provision – harder to achieve. The levy has both cut the income of pensioners in retirement and reduced the assets of private sector defined benefit schemes – some 80 per cent of which are in deficit. More pension funds will almost certainly be wound up as a result of the pension levy.
Certainly it is difficult to devise a perfect levy: one that raises revenue, changes public behaviour, and proves acceptable to those who had to pay it.
One such was the 15 cent levy on plastic shopping bags. That was introduced a decade ago, and resulted in a 93 per cent reduction overnight in their usage by consumers. For governments rushing to bridge fiscal deficits with levies, its success should provide some sober pause for thought.