What if the State took over car insurance?

Using a more radical proposal to reduce the cost of car insurance such as New Zealand’s ‘no-fault’ system could work in Ireland

Late afternoon traffic in Auckland, New Zealand, where a no-fault insurance model for cars has been operation since 1928

Late afternoon traffic in Auckland, New Zealand, where a no-fault insurance model for cars has been operation since 1928

 

When even the protesters are being reasonable, you know things have become serious. Whenever someone lets fly with the splenetic outburst of rage, especially online, you can bet that they haven’t though the problem through properly. When they’re being calm, reasonable, erudite and they’re still telling you that there’s an apparently insurmountable problem with which to be dealt, then things really have gotten bad. 

Thus it is with car insurance and thus it is with Kian Griffin. Griffin has been one of the prime drivers and organisers behind the Ireland Underground organisation, and has not just been writing online posts about the cost of car insurance, but actually getting people out on the streets to protest and stirring politicians into action. And he’s being reasonable. So this is serious.

“I do accept much of what they are saying, the insurance companies. I do agree that the higher payouts are a problem, as are fraudulent claims. Having said that, that doesn’t mean the insurance companies couldn’t be doing more. In many cases they seem to settle too easily and there looks to have been quite a bit of poor business decisions which have led to them needing to increase premiums to turn a profit. I’d like to see much more transparency in the pricing of premiums, given that we are required by law to purchase insurance, I think it’s only fair that we know exactly how our premiums are calculated,” he says.

“I accept that young male drivers statistically are the highest risk group. There’s no denying it, the stats speak for themselves. But on an individual level I don’t think it’s fair to presume all young male drivers are risky. I have never had a claim myself, for example, nor have many of my friends and colleagues who are in the same age group. That is part of the reason why I set up Ireland Underground, to tell individual stories of young people who modify cars, to try to show that they are decent people and careful drivers.” 

Indeed, it is still occasionally baffling to those arriving here from other jurisdictions that in Ireland we still do not have a system of categorising cars by insurance group, but instead depend on premiums to be set arbitrarily and individually. That, however, is only a small part of the problem. 

The bigger part of the problem is that the insurance companies got the market wrong. The dived for the bottom, slashing the cost of cover in an orgy of competition, all the while assuming that their investments would keep their balance sheets stable. And when that model failed, and insurers began to fold, there was only one route they could take the bring back profitability – raise premiums. 

According to Kevin Thompson, chief executive of Insurance Ireland, the umbrella group that represents the industry, “how insurers invest the premiums they receive is tightly regulated by the Central Bank of Ireland, the sector’s independent regulator, with limited discretion as to the asset types they can invest in to ensure they are liquid to pay claims when needed. The majority of investments are in assets such as fixed income or sovereign bonds.

Investment return

Consistent is one way of putting it; disastrous is another – turbulent stock markets and tumbling blue-chip investments, such as government bonds, have holed the insurance business model below the waterline. So, what’s being done? The Minister of State at the Department of Finance, Eoghan Murphy, has taken responsibility for overseeing an Oireachtas working group looking into the rising costs of premiums (38 per cent up this year and still rising) but thus far, the ideas seem to be the same old merry-go-round of beefing up the Personal Injuries Board and waiting to see what happens.

“An important element of this review is an assessment of the factors contributing to the increasing cost of insurance. This work will be progressed through a working group on the cost of insurance, of which I will be chairman. The working group consists of representatives from all relevant Departments and agencies and will consult with relevant stakeholders,” Murphy told the Seanad. “Options such as a national claims register and motor insurance policy database will be evaluated. The purpose of the review is to identify credible and sustainable solutions that take account of the nature of the problem as it affects consumers in the form of higher costs. However, it is also important to develop a solution that facilitates an increase in the capacity of the market.” 

Or, in other words, the same thing we have now, but different. Perhaps it is time for something a little more dramatic, and something that has already been suggested by the former governor of the Central Bank, Patrick Honohan. Honohan gained much admiration for his steady nerves during the depth of the recession, and before he left his office, he wrote a letter to the Minister for Finance Michael Noonan, suggesting something revolutionary – a no-fault insurance system.

In fact, Mr Honohan suggested that it might be the only way to rein in the excesses of the insurance industry, saying in the letter that “before the financial crisis, the insurance industry enjoyed premium growth and increasing employment levels. As a result, a number of non-life insurance companies took a very optimistic view of the future economic outlook, built up an unsustainable overhead and followed an imprudent pricing and underwriting approach across most business lines.” 

But how would a no-fault system work? Thankfully, we have a simple example to follow. New Zealand, which has a similar population (4.7-million) and actually has a slightly higher level of per-capita car ownership. It’s no-fault insurance model was originally introduced in 1900 for compensating those injured at work, and in 1928 it was expanded to cover third-party insurance for cars. Since 1974, New Zealand’s state-owned Accident Compensation Commission, or ACC, has been providing cover and recompense for all accidents and injuries across the two islands.

The motoring side of the operation is paid for by levies placed on the cost of fuel and New Zealand’s equivalent of motor tax, the “Motor Vehicle Licensing Fee”. While the corporation and the acts of parliament that control it have been changed and altered over the years (occasionally allowing private insurers back into the market, before dismissing them again) since the 1970s, the ACC has collected the levies and fees, and paid out the compensation. The system has its critics, and there are still court cases and arguments brought before a disputes tribunal, but by and large, the national insurance system keeps a lid on things. 

Would, could such a system work here? There would be significant hurdles, not least the fact that the Law Society and the insurers, traditionally at loggerheads over costs, are of one voice when it comes to no-fault. “It is to be doubted that the Irish taxpayer wants to take liability for all cost, regardless of whose negligence caused the injury. Standards of safety for everyone would be likely to fall if negligence had no consequences for the negligent,” Ken Murphy, Director General of the Law Society of Ireland told The Irish Times.

His comments were echoed by Kevin Thompson, who told us that “Insurance Ireland’s view is that we should not be distracted from the urgent issues which need to be addressed to reduce the cost of claims, such as increasing the powers of the Injuries Board and fixing Setanta, among others.

Economic consequences

Even the protesters are unsure of the veracity of no-fault. “The no-fault system has it’s merits, but my only worry about it is, would that then result in people not caring as much about how they drive?” questions Kian Griffin.

“One solution I have discussed with Lynne Boylan MEP is possibly opening up the insurance market to the EU, whereby I could purchase my insurance in Spain, Slovakia, Germany etc, and it would cover my driving in Ireland. That wouldn’t resolve the issue of higher claims in the Irish courts, but it would result in lower premiums for motorists all the same.”