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March 21, 2013updated 05 Apr 2017 8:44am

Ireland – Hard times or green shoots?

Ireland’s life insurance market has been hit hard by the economic downturn in the country since 2008; however, rationalisation in the market and recovering consumer confidence may spur a rebound in the years ahead, according to a report Life Insurance in Ireland, Key Trends and Opportunities to 2017, which is available at the Insurance Intelligence Center.

By Verdict Staff

There is a relatively developed market for insurance in Ireland, reflecting high levels of coverage in major lines of business (motor, property, liability, pensions and mortgage protection) compared to other countries. Ireland’s total gross written premiums, as a share of the global market, is broadly in line with its population. Penetration as a percentage of GDP in the life insurance segment stood at 6.4% in 2012, while it was 3.4% in the non-life segment and 1.0% in the personal accident and health insurance segment. The Irish insurance industry is regulated by the Central Bank of Ireland. Insurance policies, such as third-party motor insurance and employers’ liability, are compulsory in the country.

Ireland has a successful domestic and international insurance industry, comprising life, non-life, reinsurance, captive and intermediary activities. The country acts as a major jurisdiction for domiciling head office insurance companies focusing on the European Economic Area (EEA) markets. Since 2008, many foreign insurance and reinsurance groups relocated to Ireland, including Willis Group Holdings Limited, Beazley Group plc, Zurich and XL Capital Limited. These insurance companies were encouraged by factors such as Ireland’s strong regulatory framework and the relatively low corporate tax rate of 12.5%.

More rigorous regulations were introduced in 2011 as part of the implementation of Directive 2009/138/EC on taking up insurance and reinsurance business (Solvency II Framework Directive). A number of these regulations include the new Fitness and Probity Regime, a publication by the Central Bank of Ireland of the Corporate Governance Code for Credit Institutions and Insurance Undertakings and the Minimum Competency Code. Several insurers and reinsurers have undertaken corporate restructurings, with an increased number of portfolio transfers, arrangement schemes and cross-border mergers.

The written premium of the Irish insurance industry declined from EUR18.3 billion (US$27.0 billion) in 2008 to EUR17.2 billion (US$23.9 billion) in 2012, recording a compound annual growth rate (CAGR) of -1.6% over the report’s review period (2008-2012). The decline was largely due to the financial crisis, European debt crisis and falls in equity and bond prices, which resulted in losses in the insurance industry. However, the economy began to recover in 2011 and is projected to record decent growth over the forecast period (2012-2017), which, in turn, is expected to encourage growth in the insurance industry. Written premiums are expected to increase from EUR17.2 billion (US$23.9 billion) in 2012 to EUR21.0 billion (US$29.3 billion) in 2017, a projected CAGR of 4.1% over this period.

The life insurance segment accounted for the largest proportion of written premiums of the overall insurance industry in 2012 with a share of 58.9%. Factors such as the country’s aging population, reforms in pension law, and insurers’ efforts to minimize cost and enhance efficiency are expected to drive growth in the Irish life insurance segment over the forecast period.

Further consolidation in the Irish insurance industry is anticipated as a result of the ongoing European debt crisis and the forthcoming implementation of the EU’s Solvency II directive. Solvency II regulations are expected to force many smaller companies to merge with larger ones in order to achieve the required level of solvency. ?Segment Outlook

The Irish life insurance segment was the 14th largest in Europe and accounted for 1.4% of the total European life gross written premiums, according to statistics by Insurance Europe in December 2011. Life insurance penetration as a percentage of GDP stood at 6.3% in 2011, higher than the European average of 5.0%. The segment accounted for a 58.9% share of the total gross written premiums in 2012, a decline from 60.6% in 2008, and faced a number of challenges in the backdrop of ongoing economic turmoil in domestic and international markets. New regulatory provisions, such as new corporate governance and fitness and probity requirements, revised consumer protection and minimum competency codes for insurers and intermediaries affected the Irish life insurance segment. The segment’s gross written premium declined at a CAGR of -2.3% between 2008 and 2012.

The global financial and eurozone debt crisis had an adverse impact on the life insurance segment as Ireland became the second eurozone country after Greece to accept a bailout from the EU and IMF. The government’s austerity measures, in the form of increased taxes and lower spending in exchange for a EU/IMF support program of EUR67.5 billion (US$90.9 billion) in November 2010, had a severe effect on domestic demand. Furthermore, the introduction of a 1% levy on life assurance premiums placed pressure on the sale of new life insurance policies and led to the deterioration in persistency levels (i.e. an increase in the rate at which policyholders surrender or lapse their policies in force). The written premium of the individual life insurance category valued EUR2.7 billion (US$3.8 billion) in 2012, after recording a CAGR of -6.4% during the review period. Meanwhile, uncertainty over the private pension regulation and tax treatment of retirement savings products during 2008-2010, and the introduction of a 0.6% levy on pension funds in 2011, affected the demand for pension products. The written premium of the individual pension category valued EUR7.3 billion (US$10.2 billion) in 2012, after recording a CAGR of -0.4% during the review period.

The recent problems facing the Irish life insurance segment have put significant pressure on profitability margins. The combined ratio of the life insurance segment increased from 90.2% in 2008 to 110.9% in 2012 – combined ratios greater than 100% signify a loss-making position for the core life business. This is a result of increased overhead expenditure, coupled with slow growth in new business. Life insurance companies are also facing significant challenges following the implementation of Solvency II norms in 2014 which will result in increased capital requirements. In view of this, several companies are rethinking their business strategies. Danica Life in April 2012 announced its departure from the Irish industry as the company failed to generate the scale necessary to sustain its business in the current economic environment.

As such, the challenging environment in the life insurance segment is expected to encourage insurers to focus on minimizing costs and enhancing the efficiency of writing new business, in order to maximize cash-flow generation. Although taxes and pension legislation changes will have short-term effects, an aging population should provide sustained demand for pensions and retirement products in the long term. The government’s decision in Budget 2013 to continue to provide tax relief for pension contributions, at the marginal rate of income tax of 41%, will provide an incentive for the middle-income group to save for retirement. Business strategies to deliver products in line with consumer demand, and an increase in consumer confidence as economic conditions improve in the coming years, are also expected to drive the life insurance segment at a CAGR of 4.2% over the forecast period. ?Distribution channels

Irish insurance companies sell their life insurance products either directly to customers or through a variety of distribution channels. The leading distribution channels for Irish life insurance are insurance brokers, direct marketing and agencies. Together, these channels accounted for 96% of the segment’s written premiums generated during the review period. The distribution of insurance products evolved significantly during the review period, due to technological developments such as increased use of the internet and mobile phones in the country. This provided new distribution channels for insurers to capitalize on and insurance companies are increasingly developing multi-channel distribution strategies that incorporate e-commerce and telemarketing.

Insurance brokers were the leading distribution channel in the Irish life segment during the review period due to their first-hand knowledge of customer requirements. This channel accounted for 45% of new business gross written premiums in 2012. Direct marketing (employees and distance selling) was the second-largest distribution channel, with a 40.2% share in the new business market commission in 2012.

An increase in direct marketing for life insurance products in Ireland could be attributed to the growing popularity of online services, and spending by insurers to distribute products via the telephone and the internet. The agencies channel was the third-largest distribution channel in the Irish life insurance segment with a 10.8% share of total new gross commission in 2012. Although e-commerce represents a small share of 3.7% in 2011, it registered a CAGR of 2.7% during the review period. This can be attributed to an increase in internet penetration rates.

Aggregators and social media are gaining ground, as consumers are increasingly relying on other people’s experiences to sell products. Insurance companies are looking for ways to tap into this new distribution channel, which enables customers to compare products and services easily and independently.

Brokers and direct marketing will remain the major distribution channels for the sale of life insurance products in Ireland over the forecast period. The gross written premiums for new business through these channels are expected to register CAGRs of 3.5% and 3.6% respectively, with the combined share in total commission earned expected to reach 84.6% by 2017. New strategies by major companies will include cost-control measures, achieving economies of scale, and increasing transparency to restore consumer confidence. The distribution channel landscape is likely to change significantly over the forecast period.?For more information on Life Insurance in Ireland, Key Trends and Opportunities to 2016, contact the Insurance Intelligence Center on +44 (0)20 7406 6596, or email info@insurance-ic.com

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