Solvency shortfall at Quinn Insurance contrasts with earlier claims it was a profitable business

In a letter to the Department of Finance last year, businessman Seán Quinn said Quinn Insurance had been placed into administration unnecessarily "on the basis of incorrect assumptions relied on by the Regulator".

He said the administrators of the company had “effectively set about destroying one of the most profitable company’s in Irish corporate history; while blaming the previous management in the process”.

“The reality is that the company was outperforming all its competitors immediately prior to being unnecessarily placed into administration with the incalculable damage being inflicted thereafter,” Mr Quinn said.

On another occasion, in a somewhat muddled account of how and why Quinn Insurance was put into administration, he disputed the firm’s insolvency after it recorded substantial losses in 2009 and 2010.

“We were a highly profitable company, the regulator was wrong. Which was right? Which was right, was there a lack of solvency? McAteer (one of the Quinn Insurance administrators) was wrong.”

However, in the eyes of the Central Bank, it would seem the management of the company was to blame, and that the firm was in fact insolvent, having failed to comply with the minimum solvency requirement.

An investigation by the Central Bank found Quinn Insurance failed to maintain the required solvency margin.

The European Communities (Non-Life Insurance) Framework Regulations 1994 require all firms to maintain a minimum solvency margin, which in the firm’s case was €236 million. Instead, Quinn Insurance had a solvency margin of minus 250 per cent of the minimum required amount, namely a shortfall of €830 million in its assets, as evidenced by its 2009 regulatory return. Accordingly, the firm was insolvent at this date.

By virtue of the regulations, each non-life insurance undertaking is also required to maintain technical reserves in respect of all underwriting liabilities assumed by it. Technical reserves are thus held to cover the payment of future claims.

Between October 2005 and March 2010 the assets of the Quinn Insurance subsidiaries formed part of the firm’s technical reserves. However, at the time eight of these subsidiaries had provided guarantees in respect of borrowings of up to €1.2 billion.

The board of Quinn Insurance was unaware that its subsidiaries had guaranteed Quinn group debt, according to the Central Bank Investigation.

The Central Bank found Quinn Insurance failed to have in place adequate administrative procedures or internal control mechanisms in relation to the management and monitoring of the assets of the firm’s subsidiaries.

It said the assets of the Quinn Insurance subsidiaries were used by the firm to cover its technical reserves but many were managed by its unregulated parent. The Central Bank of Ireland director of enforcement Derville Rowland yesterday said the failure of Quinn Insurance to meet the required solvency margin contributed to the collapse of the company, an event which has had severe financial consequences for Ireland's insurance industry and the Irish taxpayer.

She added that the controls to manage the firm’s subsidiaries were “evidently deficient”.

Insurers must understand that their most fundamental obligation is to ensure that their business is managed not only to maximise their profits, but also so that they are always in a position to meet their liabilities to their policyholders, director of credit institutions and insurance supervision Fiona Muldoon said yesterday.

In effect, 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.