Quinn Insurance liability may surpass €1.65 billion

The Central Bank has not ruled out the possibility the €1.65 billion worst-case call on the State’s Insurance Compensation Fund to cover losses at Quinn Insurance could rise further.

Domhnall Cullinan, head of general insurance supervision at the Central Bank, told the President of the High Court, Mr Justice Nicholas Kearns, the Central Bank hoped the €1.65 billion figure was “as bad as it gets” but added, “further peels of the onion”, through additional reviews of the business, means the call on the fund “could get worse”.

He was satisfied the joint administrators appointed to the insurer in March 2010 had “gone through a very robust process” to determine the potential call on the fund, he told the court.

Mr Cullinan, who made the Central Bank’s case to the court for the appointment of the joint administrators two years ago, said the call on the fund was due to the losses arising from the company’s failure to provide properly for future claims arising mostly on UK insurance policies sold before the administrators went into the company.

Mr Justice Kearns was hearing evidence from Mr Cullinan and one of the joint administrators, Michael McAteer of accountancy firm Grant Thornton, about why the claim on the compensation fund, which is being funded by a 2 per cent levy on all non-life insurance policies, has risen from no call at all in 2010 to €738 million last year and possibly up to €1.65 billion under a worst-case scenario this year.

Mr McAteer said the administrators expected the likely call on the compensation fund to be in the range of €1.1 billion to €1.3 billion and the €1.65 billion was based on considerable contingencies.

This included a €215 million charge if the euro crisis deepened further and the euro weakened against sterling, on which the insurer’s policies in the UK were priced.

The court was told by the joint administrator that the true financial position of the losses at the company was revealed through reviews by actuaries through 2010 and 2011.

The judge referred to a letter sent by Minister for Finance Michael Noonan to the joint administrators on June 6th complaining about spiralling cost of the insurer to the compensation fund particularly when considering the context of “the very difficult financial environment the country is currently grappling with”.

“What is remarkable is that this figure continues to climb by substantial amounts in what are relatively short periods of time and following examination by teams of actuaries and accountants and your own oversight of the process,” the Minister wrote.

“It is over two years now since your appointment as joint administrators to QIL [Quinn Insurance Limited] and notwithstanding the information contained in your letter and email referred to above, I am at a loss to see how such a large under estimation, and the corresponding scale of what is required from the ICF, could not have been foreseen to a greater extent before now.”

The Department of Finance sent a follow-up letter to the administrators on July 25th last, in which a senior department official said that the Minister “cannot 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, and is concerned by the manner in which the Government has been mislead (sic) by incomplete information and under estimation.”

Mr McAteer expressed his own frustration at the growing cost of the insurance company to the fund but said the administrators have to give an accurate figure as actuaries reviewed the potential cost of future claims based on what they found in the business and whether the level of reserves are adequate in light of a deteriorating economic environment.

He told the court he was comfortable that the level of reserves at the company were now “appropriately set” and that he was “more comfortable” the numbers are correct now.

On a potential further cost of €215 million due to a further decline in the value of the euro, Mr McAteer said the administrators had tried to hedge the company’s foreign exchange rate exposure last autumn in discussions with the Department of Finance, which in turn consulted the National Treasury Management Agency, but there was no capital available to the company to pay for hedging.

Mr Justice Kearns questioned whether the administrators should have looked at what was discovered at the Insurance Corporation of Ireland, the subsidiary of AIB taken over by the Government in 1985 to save the bank from heavy losses on insurance policies written by the company’s UK operations.

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