ANALYSIS:The cost of Quinn Insurance has frustrated and shocked but it will take time to gauge the damage

TIME IS WHAT is required to know whether the €1.65 billion worst-case estimate will be the actual final cost of Quinn Insurance to Irish policyholders paying the 2 per cent levy on motor and home insurance to cover the bill.

One of the joint administrators, accountant Michael McAteer of Grant Thornton, yesterday spoke in the High Court of “unknown unknowns” facing the insurer in future, in a nod to the famous comments of former US defence secretary Donald Rumsfeld on Iraq.

High Court president, Mr Justice Nicholas Kearns, instead looked back, wondering why nobody had learnt from AIB’s ICI debacle in 1985 and the losses on UK policies written by the bank’s insurance subsidiary in London.

“It is usually a good idea to learn from history,” said the judge.

Insurance is a tricky business. Companies sell policies today but won’t know whether they make money on them until they assess claims over a span of years. This is the “long-tail” nature of insurance and why actuaries are hired to assess the risks and whether companies have to put enough aside to cover future claims.

This does nothing to ease the frustration of Minister for Finance Michael Noonan or indeed Mr Justice Kearns who described last week as “truly shocking” the cost of Quinn Insurance to the State increasing from €775 million last year to the possible €1.65 billion.

Letters from Mr Noonan and one of his senior officials to the administrators in recent weeks – presented in court – show his annoyance at the failure to put a figure on the black hole at Quinn.

Noonan’s predecessor suffered the same problem with the banks.

He was “at a loss” to understand how they could have underestimated the cost of Sean Quinn’s insurance business by such a large amount over such short periods, Noonan said in his June 6th letter. He had a dig at their pay, saying he couldn’t understand “how you as highly remunerated professional administrators with the support of highly remunerated actuaries and auditors could not have had greater insight into the total increased cost at an earlier stage”.

Mr Noonan went so far as to express concerns that “the Government has been mislead (sic) by incomplete information and under estimation” in a July 25th letter from one of his senior officials.

The administrators fired back a response to the official, Aidan Carrigan, who is in charge of insurance policy in the department’s financial services division the next day.

They said the figures were in line with earlier underlying assumptions and rejected any charge of misleading Government.

The rising cost of Quinn Insurance has raised the Minister’s ire and he has demanded action to reduce the call on the fund, either by settling claims at a cheaper cost with help from the State Claims Agency or by other means.

In June, Noonan asked the administrators to keep him appraised on whether there is “right of legal action for professional negligence” against Quinn’s former auditors PricewaterhouseCoopers and the company’s “signing actuaries”, Milliman.

“It is important that my department is kept fully updated on this matter,” the Minister wrote.

The administrators issued proceedings against PwC in February.

Mr McAteer explained to the court yesterday that PwC and Milliman painted an initial benign picture of the insurer’s financial position and based on this prognosis there was no potential for a call on the compensation fund, he said.

While the insurer had breached regulatory solvency rules, the administrators said initial figures showed it had a solvent balance sheet after their appointment in March 2010. Then later that year UK-based actuarial consultants EMB dropped “a bombshell” and said that the UK business had been under-reserved by €400 million.

While the insurer had a 12-year history in the Republic of Ireland where there was a track record of reserving for claims, the firm’s UK business was a “very new book” and the foundations for reserving to cover claims were set wrong, McAteer explained to the court.

He also pointed to the culture and philosophy within Quinn’s insurer where there was pressure to keep claims to a minimum.

The uncertainty over whether Quinn would remain as owner of the business may have led managers to suppress their estimates on potential claims on the insurer.

This was among the reasons why the cost of the insurer to the compensation fund has soared.

Based on McAteer’s evidence, the bulk of the expected losses are as a result of poor reserving and loss-making policies in the UK.

And that will take some time to work through.