Seanad Éireann - Volume 107 - 02 April, 1985
Insurance (Miscellaneous Provisions) Bill, 1985: Second and Subsequent Stages.
Question proposed: “That the Bill be now read a Second Time.”
Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins) Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins)
Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins): The purpose of this Bill is, on the face of it, the relatively simple and straightforward one of statutorily underpinning a holding company formed on behalf of the Minister for Industry, Trade, Commerce and Tourism. However, the Bill also forms part of the basis for the action taken by the Government in the past fortnight to avoid the collapse of a large insurance company.
In my contribution, I intend to concentrate on both the general background and the specific circumstances which gave rise to the legislation now before the House. I will be commenting on the serious problems of the Insurance Corporation of Ireland which have come to light in recent weeks together with the attendant implications for the Allied Irish Banks Group, the choices open to the Government and the corrective action taken to deal with these particular difficulties, and the arrangements likely to be made to enable the insurance company to be restored to a sound financial footing.
I propose to start by referring to the position of the Insurance Corporation of Ireland. We are dealing with an established company of almost 50 years' standing trading in a market in which they had long experience. In these respects they differed from a newly authorised undertaking or a relatively recent entrant to the non-life insurance market, in which case the supervisory process applied involves particularly close monitoring of operations over the formative years of the enterprise concerned. Furthermore,  ICI were a company whose state was satisfactory over a long period of years. The company were trading normally, had a consistent track record of steady profitability and were disclosing a very comfortable surplus of assets over the required solvency margin. Prior to 1984 they had a broadly based board of directors representative of their various share-holding interests; these included American and Dutch insurance interests and other institutional investors, including Allied Irish Banks. Since September 1983 ICI were under the full control and ownership of AIB.
I should explain briefly at this stage, firstly, the responsibility and competence of insurance supervisory authorities under EC law and, secondly, the system of supervision applied by my Department.
On the first point, the position is that all insurers operating in the EC are subject to specific financial and other requirements laid down by EC directives which harmonise basic insurance supervision throughout all member states. The relevant directive deals with the situation where a company headquartered in one member state may, in accordance with the freedom of establishment under the Treaty, extend by way of simple branch operation into another member state. That directive makes the supervision of the branch activities the responsibility of the supervisory authority of the member state in which the branch is located, while the supervisory authority of the head office must oversee the solvency of the global activities of the company. In order to perform the latter function, however, the head office supervisor is dependent on the branch supervisor to vet and examine the accounts of the branch which feed into the head office accounts. That is the system laid down by the EC and, while there is provision for co-operation between member states, the formal Protocol of Collaboration clearly recognises the division of competences between supervisory authorities as provided for by the directive. In the case of the London  branch of ICI, the appropriate supervisory authority was the Department of Trade and Industry in the UK.
As regards the system of supervision employed in Ireland, my Department receive the accounts of insurers annually and undertake detailed analysis of the information supplied in relation to the different classes of insurers' business. The examination undertaken by my Department does not and cannot substitute for the role of statutory auditors. It would be unreasonable to expect that the State should provide resources to double-check on the work done by auditors. My Department's work is, rather, an independent outside test on the information supplied. This is in line with the supervisory practice for insurance internationally.
Arising from the tests applied to ICI, my Department began to be concerned about the adequacy of the technical claims reserves set up by the company in relation to their Irish business. During 1983 the Department communicated formally to ICI their concern at this particular aspect of the company's operations. The company indicated in reply that they had learned that they had not made adequate allowance for the development of some very large cases which worsened unexpectedly; they had strengthened reserves to make additional allowance for this type of potential development and they hoped that the provisions would prove adequate.
Notwithstanding the assurance of the company, the Department decided to examine the 1983 accounts of ICI on a priority basis when received. These accounts were duly submitted on 26 June 1984. Based on the 1983 accounts as submitted, ICI held free assets of £56 million, equivalent to a surplus of 124 per cent over and above the statutory solvency margin required.
Following their analysis of these accounts in July 1984, the Department were not satisfied that adequate provision was made in the company's 1983 accounts for outstanding claims on their Irish business. This aspect of the accounting returns was gone into in considerable  detail at a meeting between the Department and company representatives on 17 August 1984. The responses of the ICI representatives at that meeting were considered inadequate by the Department, and the company were requested to provide further detailed information on the outstanding claims provisions struck for Irish business. My Department had already decided to engage a firm of consulting actuaries to undertake an examination of the Irish technical claims reserves of ICI. Discussions between the Department and the firm in question tok place in September 1984. The study commenced in early October, and representatives of AIB and ICI were formally advised of this at a meeting with my Department on 14 November 1984.
The purpose of the meeting in November 1984 was to discuss the insurance company's results contained in the interim report of the Allied Irish Banks Group for the half year ended 30 September 1984, which were being released at that time. At the meeting in question, it was indicated to my Department that AIB had decided to strengthen the outstanding claims provisions of ICI by £23 million as at 30 June 1984, and that the bank would be taking immediate action to strengthen the capital base of the insurance company arising from this depletion of its free reserves. The specific question of the London branch business of ICI was raised at the meeting also, and the Department was assured that while there were problems with the London branch, corrective measures were being taken to rectify matters; furthermore, there was no under-reserving apparent in the London claims reserves.
In December 1984 the issued share capital of ICI was increased by £40 million, of which £30 million was fully paid up by AIB. Subsequently, in a report dated January 1985, the actuarial firm engaged by my Department confirmed that the reserves of ICI in relation to their Irish business, as strengthened, were adequate.
To a large extent, the above facts speak for themselves. In relation to their supervisory functions my Department acted  quickly and with diligence in recognising the claims reserving problems facing ICI on their Irish business, following which corrective action by way of identifying the shortfall and a substantial injection of fresh capital took place in December 1984. Although not directly within their area of supervisory competence, my Department also raised questions with AIB and ICI representatives in relation to the London branch operations of the insurance company, and received assurances that there was no under-reserving of London business, and furthermore that corrective measures to improve the current trading experience of the London branch were being implemented. The Department of Trade and Industry in the United Kingdom had not communicated any concerns to my Department in relation to the UK branch business of ICI. Given this fact and in the light of the reassurances received from AIB and ICI at the meeting in November 1984, my Department had no reason to question matters further at that stage.
I would like to make clear that I am not imputing any dereliction of supervisory functions on the part of the United Kingdom supervisory authority. Indeed, I understand that the UK branch accounts of ICI for 1983 disclosed a surplus of some £19 million sterling in admissible assets over branch liabilities. Furthermore, the UK branch accounts were not qualified in any respect by the statutory auditors.
It is clear in the relatively short space of time that has elapsed since November 1984, that there were serious problems with the former London branch business of ICI in particular, about which the former owners were, seemingly, unaware and which had not come to light at that stage.
New auditors were appointed to ICI in mid-December 1984. Detailed audit work got under way in January 1985 and by early February the auditors realised that there were serious deficiencies in the information systems and data base covering the London branch operations of ICI. Once AIB were advised of this, they immediately ordered an accelerated  programme by a special investigating team to establish as far as possible the true financial position of ICI's London branch.
By the first week of March 1985 the results of this investigation had led AIB to conclude that ICI had very serious problems with their London branch operation. AIB notified both the Central Bank and my Department of the position at separate meetings on Friday, 8 March. By letter dated 15 March 1985 the board of ICI notified me that they had concluded that as at 31 December 1984 the company did not comply with the requirements of the European Communities (Non-Life Insurance) Regulations in a material respect, and that this position still obtained.
Before turning to the ultimate decision reached by the Government in relation to the problems of ICI, I would like to state that I consider that the management of AIB acted promptly and responsibly in bringing the matter to the attention of my Department. I have to say more than this, however. It is almost incomprehensible and more than a little disquieting that it apparently took so long for senior management in both ICI and AIB to begin to realise that there might be fundamental problems with the London branch operations of the insurance company, which after all accounted for about 70 per cent of total business in gross terms. This is even more difficult to understand when one considers that problems had arisen within the head office operations of ICI in Ireland, and corrective measures were taken during 1984.
The facts are far from clear at this stage, and it is difficult to say how much of the London branch's problems arose while AIB were a minority shareholder and how much actually arose during 1984, at which stage ICI were under the full control and ownership of AIB. It is obvious that a serious lack of management control, particularly in relation to the flow of information between London and Dublin, contributed in no small measure to the present problem. If the  problem had been spotted and the position established at an earlier date, then the magnitude of the present difficulties would not be as great. The belated realisation that there were problems in London is, therefore, all the more disappointing.
The problem which came to light in ICI was one which called for urgent, firm and decisive action. The Government decided on 15 March 1985 to acquire ICI from Allied Irish Banks Group for a nominal sum by a company controlled by the Minister for Industry, Trade, Commerce and Tourism. The provisions applying to this holding company, Sealúchais Árachais Teoranta, form the greater part of the Bill now before this House. On a petition from me under the Insurance (No. 2) Act, 1983, an administrator was appointed provisionally by the High Court to take over the business of ICI on the evening of 15 March, and the High Court confirmed the order for administration at a sitting on Monday 25 March. The purpose of the takeover and administration of ICI was to ensure the continuation of the insurance business and the protection of all policy holders.
The Government decision offered the best solution to the problems which arose within ICI and which could have had serious implications for the insurance market generally. Other companies in the market could not readily have absorbed the market share held by ICI, particularly in the critically important employer and public liability classes. Furthermore, it was the view of the Government that it would not be feasible for the parent company, Allied Irish Banks, to undertake the additional financial commitment and other reorganisation measures required to restore ICI to an even keel; the bank could not prudently persist in the attempt to resolve the problems of ICI without the risk of adverse effects on their banking operations.
The placing of the Insurance Corporation of Ireland under administration, and the funding of that operation, are covered by existing legislation, that is, the Insurance Act, 1964, and the Insurance (No. 2) Act, 1983. These acts provide the statutory powers for the  appointment of the administrator by the High Court on the petition of the Minister for Industry, Trade, Commerce and Tourism and for the provision of moneys from the insurance compensation fund to enable the administrator to carry on the business of the company as a going concern. I would remind the House that the administrator is appointed by, and carries out his duties under the supervision of, the High Court. The insurance compensation fund is administered by the accountant of the High Court under that court's jurisdiction. The entire process of administration, therefore, is under the control of the court.
Pending the completion of the full investigation of the company now being undertaken under the direction of the administrator, it is difficult to say with certainty where the blame lies for the problems facing the company. However, I have already referred to the lack of adequate information systems and of management control, particularly in relation to the London branch of the company. It appears that the information supplied by the London branch to their supervisory authority and to their head office in Dublin did not reflect the true position of the business being transacted in the branch. The investigation now in progress is intended to establish how far the true position differs from the reported position.
The problems which have come to light in this case clearly raise the most serious questions about the role of management, of directors, shareholders and of auditors of companies. The chain of responsibility is clear. The primary responsibility for ensuring the satisfactory conduct of company affairs lies with the shareholders and is exercised through the directors and management of the company. The secondary responsibility for the correct presentation of the financial activities and standing of any company rests on the auditors. In the case of the more important financial institutions, such as insurance and banking, the State has a tertiary responsibility. The tertiary responsibility must obviously involve the State, through  its various agencies, in laying down certain minimum standards and in assessing the adequacy of the systems and the competence of the persons involved in the first and second stages of responsibility. The State's role also involves, in the case of insurance, examination of the information supplied by insurers and audited as required by statute.
The failings which have been disclosed in the present case confirm the need to proceed quickly with a redefinition of the statutory responsibilities of directors and of auditors. The Government have already approved the provisions to be included in a major reform of companies legislation and drafting has been proceeding apace. I have directed that those aspects of the full Bill which are of special relevance to the points which I have been making should now be finalised as a matter of urgency.
In addition to the changes in the area of company responsibility, I will also be giving special attention to an assessment of the supervisory role of my own Department. This will involve a full review of the frequency and quality of the information required from insurers and of the technical capacity of my Department to assess such information. I am particularly concerned that my Department should have available to it in-house actuarial expertise in the examination of accounts and other information supplied by insurers. I might add that the non-life insurance industry in general could also benefit from much greater use of expertise of this type which has tended to date to be concentrated in life assurance companies.
It is not possible at this stage to speak in definitive terms about the precise financial position of ICI. The company audit is in progress and the administrator estimates that it will take at least six weeks to clarify matters. Based on the company's own draft unaudited accounts, it appears that losses in 1984 will amount to at least £65 million resulting in a minimum deficit of £25 million in the shareholders' funds in the company balance sheet.
At this point, I should like to make it clear that one should be extremely wary  of various amounts which have been bandied about. Such figures are speculative and some of the orders of magnitude are so astronomical as to be totally unrealistic. Such speculation as there has been about possible losses in the company has not been based on the information derived by those who have examined the company's affairs. That information, from those who have been in the company, is the only sound basis on which any decisions can be made.
While I have stressed that the information available is not definitive, the Government had to act on the basis of the best information available from those who examined the company's affairs from within. This information indicates that the losses incurred in London fall within the range of £50 million to £120 million. I have to stress that I mention £120 million as an upper limit of losses and not in any circumstances as the most likely figure. These figures are, of course, based on reinsurance contracts being sustained as it must be assumed they will be.
Any financial assistance required by the administrator of ICI will be channelled through the insurance compensation fund. Until such time as the exact financial position of the company is clarified, it is pointless to speak other than in general terms about the likely funding requirements. However, for the purposes of the administration of ICI, the compensation fund will be financed by funds provided by the Central Bank in conjunction with the banking system generally. The Central Bank have indicated their willingness to provide this funding within the dimensions of the problem which I have indicated and subject to reassessment by the Government of the position at the end of 1985. Sufficient funding will be provided to deal with the problem as it arises so as to obviate the need for recourse to the Exchequer. As the Minister for Finance made clear during the Dáil debate last week, the Central Bank will be discussing with Allied Irish Banks and the other licensed banks the appropriate form and apportionment of this funding.
 As a result of the helpful decision of the Central Bank last week to involve themselves in the funding arrangements, the prospect of direct Exchequer funding is, to all intents and purposes, removed. This welcome development is entirely in line with the Government's objective to ensure that, if at all possible, the ordinary taxpayer would not have to pay towards the rescue of ICI.
An important focus on this whole debate is the extent of the contribution by Allied Irish Banks to the rescue of ICI. As the owner of ICI they should, in the normal course, meet the entire cost. In fact they are contributing as follows. First, AIB will make a loan of £50 million, for a period of three years at a rate four percentage points below the three-year gilt rate, to the Central Bank. This is equivalent to an interest subsidy of £2 million per year. AIB have further agreed that, should the emerging position and the reassessment at the end of this year warrant it, they are prepared to extend the term of this loan facility for a further period not exceeding two years.
Second, AIB have agreed to place a non-interest bearing deposit of £20 million with the Central Bank to cover the contingent liability being assumed by the State in respect of the AIB's guarantee to the Institute of London Underwriters. This is worth £3 million a year at current interest rates.
Third, AIB have agreed to share with the Government, in proportions to be determined when the ultimate losses are known, the proceeds of the bank's action against the former auditors of ICI.
Fourth, AIB have paid a purchase price of £2½ million for Credit Finance Bank, which they had “sold” to the Government with ICI for £5.
Fifth, AIB sold their 20 per cent share-holding in the Insurance Corporation of Ireland Life, a healthy and profitable company, for £5 also.
Finally, AIB will be required to contribute in proportion to the additional funding package to be co-ordinated under the auspices of the Central Bank.
The total of £70 million provided by AIB to the Central Bank will be passed  on to the insurance compensation fund to finance the operations of the administrator of ICI. These funds will, of course, be entirely separate from the moneys already in the fund and the continuing 2 per cent contributions which are helping to finance the administration of the PMPA.
With regard to the arrangements which I have outlined for financing the administration of ICI, there are a number of general points to be made. I understand that the company have good liquidity at present and that the need for a substantial cash injection is not foreseen in the immediate future. The losses will not all have to be made good in any one year in that finance will be required according as claims fall due to be paid over a period. The administrator will use his commercial judgment as to how to obtain the best return for the company from the assets available to him. There has, of course, been debate as to the amount which should be paid by AIB.
The Central Bank, whose job it is to assure the soundness of our banking system, were involved in the discussions leading to the decision to rescue ICI. Their strong view, as a regulator of the banking industry, was that the contribution by the bank that I have already outlined was the limit of what AIB could prudently be expected to make at this time. The Central Bank were also most anxious that there should be certainty about AIB's liabilities, as uncertainty would be damaging to the bank and to the financial system generally. The Government and this House must give due weight to the advice of the Central Bank which has been charged by both Houses of the Oireachtas with the responsibility of ensuring the soundness of the banking system.
If the Insurance Corporation of Ireland, a wholly owned subsidiary of Allied Irish Banks, had gone into liquidation this would have had consequences for the bank itself as well. In such circumstances, the terms on which the bank itself could then borrow money would immediately be affected. If this happened all of those who borrowed from the bank would also  suffer. We have rescued not the shareholders of the AIB, but its customers, the public at large and the policyholders of the ICI.
If ICI had been left in AIB's ownership, the continuing uncertainty as to the bank's potential liabilities, and the resultant speculation, would have held many dangers for the bank. Other proposed solutions, involving meetings of financial institutions generally or an extraordinary general meeting of the bank, would have lacked the confidentiality and the speed necessary for an effective rescue. This ruled out some other solutions to the problem which might otherwise have been attractive.
AIB remain a strong financial institution, despite the heavy losses which they incurred on the ICI fiasco. The AIB board have announced that they will maintain their dividend despite the losses. While I personally regard this as a somewhat insensitive announcement, highlighting the bank's much greater concern for shareholders than for the policyholders with the ICI or for the general public, I am advised that a cut in dividend would be taken in the stock markets here and abroad as a signal — in this case false — that the underlying strength of the AIB was somewhat damaged. Confidence of this kind is very important in international financial circles. As a country which borrows substantially abroad, it is vital that our financial institutions be seen to be strong.
I believe that I need refer only briefly at this stage to the provisions in the Bill. Sections 2 to 13 are standard provisions in relation to State companies. In this case, Sealúchais Árachais Teoranta is merely a holding company which will hold the shares in ICI on behalf of the Minister. The directors of the company are two officials of my Department and the company will have no employees. Neither will it have effective authority over ICI, which will remain fully under the control of the administrator, who is answerable to the court.
Section 14 of the Bill empowers the Minister, with the consent of the Minister for Finance, to guarantee up to a limit of  £20 million ICI's liabilities in respect of marine business underwritten on or before 15 March 1985 by virtue of the insurance company's membership of the Institute of London Underwriters. The marine business involved is sound and of good quality. The State has undertaken a contingent liability in respect of a guarantee covering the institute business written by ICI up to the date of sale of the insurance company by AIB, at which time their membership of the institute terminated automatically on change of ownership. It is extremely unlikely that the guarantee will be called upon. The additional exposure arising in respect of the marine business involved is put at an extreme of £20 million. AIB have already deposited £20 million interest free with the Central Bank to cover the State's exposure in respect of the guarantee. In the event of any liability arising in excess of designated reserves, the amount involved will be deducted from the £20 million before the balance is repaid to AIB.
Section 15 is consequent on section 14, and provides that any advances under the latter section shall be from the Central Fund.
Section 16 of the Bill contains minor amendments to the Insurance Act, 1964 so as to allow for the creation of priorities on the insurance compensation fund; and also to permit the High Court, before approving payments out of the fund, to have regard to the state of solvency of the fund. These amendments are of a technical nature only. The remaining sections of the Bill are standard ones.
The steps which have been taken by the Government to deal with the ICI problem will permit the recovery of Allied Irish Banks from the setback which it has suffered. This is essential for the wellbeing of the economy as a whole. It is important to bear in mind that financial institutions depend on trust and can operate properly and effectively only in an atmosphere of confidence and calm. Those who indulge in uninformed speculation about the affairs of financial institutions, wherever they do so, should be acutely conscious of the possible damage  that they may cause by their very indulgence in this speculation. This applies to the banking and insurance industries alike, and I am sure that in debating this Bill today all Members of this House will maintain a responsible attitude in the national interest. I recommend the Bill to the House.
Mr. Fallon Mr. Fallon
Mr. Fallon: We, on this side of the House, will endeavour, as we did in Dáil Éireann, to debate this matter in a very responsible manner in the best interests of the nation. Having said that, it does not follow that I agree totally with all of what the Minister has said. There are many points in his speech I do not fully agree with and I will elaborate as I proceed.
First, I should like to make a point which will be made by many people, the man in the street, business people or whatever. If, for example, an ordinary customer of Allied Irish Banks sought to borrow £20,000 or £50,000 for a particular project, or for the purchase of a house, or a business premises, the bank would examine the client and the project in very great detail. The AIB like other banking institutions have great expertise in particular areas. They have trained personnel to fully examine accounts, balance sheets and records of companies.
It is painfully obvious that this expertise did not pertain when Allied Irish Banks purchased ICI. We all know that if anything went wrong with the type of customer I described, the bank would be very tough indeed and would bring him to court to get their money back, as indeed would any other financial institution. It seems to me that in this case Allied Irish Banks, despite all the expertise I have mentioned, bought a pig in a poke. The Government, in a panic measure, bought the same pig in a poke without having any concept of the size of that animal.
Allied Irish Banks said they made a competitive bid as if to suggest in some way that there was a private action. Obviously, we know now that was not the case at all. Mr. Scanlan from Allied Irish Banks, made the point that this competitive bid did not entitle them to  put in their people, as it were, to examine the company beforehand. He suggested that it was bought on the basis that it looked good, that it had a good growth record, that it was the sixth most profitable public company in the country.
I would have to suggest that, from a bank like the Allied Irish, or from any institution of their size and importance, that is simply not good enough. It is not good enough to say it looked good and had a good track record. They should have investigated the company to the fullest extent before purchasing it. Even after buying the company — we are told by the Minister that accounts will be available in six weeks from 15 March — if they were not happy they should have made an onslaught on the affairs of the company. They should have sent in their actuarial and other experts to find out about the company. It was quite clear two years before AIB bought the ICI that there were real problems within that company, particularly at that stage with the Lime Street, London office of the company. The kind of operation that the London office were engaged in was in speculating on whether Wrexham would get into the third division or re-insurance on Australian bush fires and high risk satellite and bloodstock insurance, of which they knew little. Many of these areas, I would have to suggest, were more appropriate and more suitable for Corals or for Ladbrookes, but certainly it seems that the mistake was made by AIB in not finding out more about the company.
The reports are fairly freely available that all was not well long before AIB bought the company and they should have taken note. We know from 1981, in the London office in particular, the kind of mad, fast growth that the company had. There were worrying signs. Brokers were given, we know, binding authority to accept risks which clearly left the ICI very vulnerable to obvious claims and to huge increases in business over which they would have very little control. We know too that the ICI in London have acted as a front for other re-insurers accepting business and then passing it on  to other insurers to reduce the risk. This is a very vulnerable area which could cost the company very dearly in the future because as we know claims will continue to come. It takes years for claims to pass on. A claim reported today may not be paid for five years. An incident may have happened a year ago and may not be even reported until now. That is the kind of situation.
Generally, the affairs of the ICI London office over the past five or six years have been in a deplorable state, reinsuring, as they were, in 15 or 16 countries of the world. This was common knowledge long before AIB bought the company. Why did they not have, as we would expect, a full investigation before getting involved? I will go further and say why I think the proposals suggested now are at least realistic, and I do not wish to upset the apple cart. My own opinion and that of many, many people is that AIB should carry the can for the mistakes they made.
It is very unsatisfactory. We do not know still the amount of the outstanding liabilities. I am very mindful of what the Minister has said, not to be speculative on this area and I do not wish to be. I just know no more than the Minister knows. The Minister, Deputy Bruton, last week and again today the Minister, Deputy Collins, have referred to the fact that it could be between £50 and £120 million. London experts perhaps can be believed and perhaps they cannot. I do not know. They are setting the figure as high as £500 million and even higher.
Whatever the figure, I find it very hard to believe that AIB would renege on a figure as low as the figure suggested by the Minister. I feel that they would have stayed with the problem. They would have endeavoured to sort out the problem of ICI, rather than lose the confidence of the financial world, as they have since 15 March.
Last November Business and Finance Magazine outlined the alarming details of the ICI problem. I do not think the Government paid any heed to these rumours. I know rumours are things you  do not heed, but these were so widespread and such common knowledge for very responsible people that I think they should have been heeded. We were hearing rumours for a long time about PMPA until finally the collapse happened. It was bound to happen in this case also. There was no action on the part of the Government. The inactivity was all too obvious and certainly they should have acted much more quickly.
We have heard of the rescue package. It has been outlined here by the Minister. I do feel that the suggestion that Deputy Haughey came up with was very intelligent and responsible and I am glad the Government have accepted his suggestion of the manner in which the whole problem can be dealt with.
Many people around the country feel as I do that AIB should have taken full responsibility. It is immoral that they should have £85 million of pre-tax profits and that they should have dividends of £16 million available for the shareholders. I know that the problems are there for shareholders and the Minister has outlined them. The manner in which the problem is now being solved is agreed and accepted and we go along with that. I hope that it works. Again, the fact that the rescue package is so different from what was first suggested highlights the total confusion of the Government in this matter. Certainly, many people — and I am included — feel that the Government acted in haste, that they panicked. It can be said that there is still a degree of panic in the area of Government in regard to this matter.
The Central Bank have been involved in this rescue package in a very practical and real way, but could I ask the Minister am I to assume that the Central Bank are involved for up to the figures that he quotes of £120 million? Is that the top of the pile, as it were, for which the Central Bank will underwrite the business or the losses, and if they do reach the astronomical figures that have been suggested — and which we all hope are only figures pulled out of the air — will they stay with the problem or will it be back to the  Government and the taxpayer or what? I do not know what will happen if claims for losses continue to pour in. This should be and must be thrashed out. I again do not wish to highlight it but even on Sunday on radio we had a gentleman from Insurance Solvency International making the point that this had been a very badly run company for years, that there had been serious problems and that on the latest report the ICI difficulties could take years to run off. Are the Central Bank going to stay with the problem for as long as it takes, or for as much as it takes? Perhaps the Minister would make a comment on that.
In addition, of course, to the direct insurance, we have in London the re-insurance. There they were operating on a re-insurance and a direct insurance. We seem to have no concept whatsoever of the losses from London. Despite what the Minister says regarding the quality of checking insurance companies — and I support his view that there should be a greater amount of attention paid to the examination of accounts — I would have to say to him, even forgetting the London office for a moment, that it is common knowledge that, in the Dublin office of the ICI as recently as last November at a meeting of staff and some management during the ICI strike, the ICI in Dublin had reduced quite dramatically their estimate for outstanding claims. A figure, I believe, was suggested of 40 per cent. If that is the case, why was that done? Was it investigated and if it is true can the Minister comment on it?
I find it unbelievable that AIB would walk away from a debt as low as £50 million to £120 million. How can the AIB say they are going to write off £80 million and then the subsequent low interest loans of £70 million, knowing that by walking away they could be doing severe damage to the reputation of the company? For a figure like that I believe that rather than walking away they should have stayed because the damage to their standing and reputation will be enormous. We know that the share prices and the value of the company generally have dropped considerably. My  contention is that they should have stayed with it, they should have endeavoured to put together a package to protect their good name, to get the ICI out of their problems. A rescue package could have been worked out by AIB in conjunction with expert people and finance groups around the country. There were many options open to them which have been repeated many times since the collapse. That is what should have happened.
The Minister referred to what the ICI regard as the jewel of the company, namely Insurance Corporation Life. The management and staff, consisting of about 100, are obviously very anxious to clarify the status of their company in the light of the appointment of the administrator. It is a well known fact in insurance circles that this company were doing extremely well, that they had profits last year of £3.2 million, that they had very good senior management and were a company which people looked up to. It is shocking that they should now come under the same umbrella as ICI. For Insurance Corporation Life the situation is that the brokers and the insuring public generally are not happy. The company will not progress as they have in the past unless something positive is done. This could have formed part of the package that I referred to because this company would certainly be worth anything from £18 million to £22 million. They could well have been involved in the overall package to save ICI by the AIB if they had the goodwill to get down and to do that particular job.
The Minister referred to the 2 per cent compensation fund. We want an assurance that there will be no increase. This was introduced in October, 1983 at the time of the collapse of the PMPA and it applies to all non-life premiums. It is a most unfair situation. Whilst it was there for a specific purpose — the collapse of a motor insurance company — it is now most unfair that all old age pensioners, and persons with modest private houses, should have to pay an extra 2 per cent on their fire premiums to bail out a company who went out of business because of their own mismanagement. There is not alone  the granny or the old age pensioner's premium but the industrialist may be paying as high as £200,000 or £300,000 for his premiums, his motor and employer's liability, public liability and fire. It is certainly eating into companies' profits. I ask the Minister to guarantee no increase in the levy. It is high enough. I hope sometime it will be eliminated and that the public generally would have cheaper insurance as a result.
The Minister is well aware of the problems of the industry. The employer's liability section and the public liability section in particular, are in a chaotic situation at present. I read that the small firms association claim that some of their members are paying as much as £1,000 and £1,500 per employee, a situation that has got out of hand in quite a short space of time. It is almost impossible to get any size of heavy risk placed for employer's liability or public liability, even the type of risk for which a few years ago, I would venture to suggest, companies would charge a nominal premium, for example, the Department of Labour team work scheme or the Department of Labour new social insurance scheme. They will experience difficulty in operating because community groups will find it extremely difficult to get the cover they require. This is something the Government will have to examine.
A chaotic situation has developed in the insurance industry. I have said before that it is my contention that this country is fast becoming uninsurable, not just in the employer's liability, public liability and the motor insurance areas, but even in regard to household policies which, up to a few years ago, was the real profit making area for insurance companies. They are losing hand over fist at present with burglary claims mounting; premiums are shooting up a pace with the number of claims being made.
This is nothing new to the Government. These problems have been highlighted many times by different people. The root cause of the problem — in so far as the motor, employer's liability and public liability insurance are concerned — is the jury system about which we  have been talking since 15 March. The Minister, in his speech in the Dáil, indicated an intended modification of the jury system. There is the uncertainty of the jury system. Juries are not alone granting inconsistent huge awards at present but are also deciding on liability. I have seen cases where there could be no liability. Yet when such cases go to court a huge award is given. I spoke to a person who was on a jury that gave a decree for £63,000. I asked how it was computed. One man said £93,000, another said £63,000, another said £48,000 and they took the middle one; there was no expertise whatever in deciding. That type of award is contributing to the size of the premiums and to the losses generally in the insurance business.
It is well known that insurance companies — and I refer to the liability aspect even if there is no liability — will endeavour to settle rather than let a case go to the High Court before a jury. That is why I welcome the Minister's statement of an intended modification of the system. What the modification will mean I do not know. We know that the Committee on Court Practice and Procedure are currently considering a recommendation that the judge should give a recommendation, a direction or some form of guideline to juries on the scale of an award to be made. This was very strongly recommended in the report of the committee set up by the then Minister, Deputy John Kelly, in 1983, the Motor Premium Advisory Committee.
I would suggest giving the Circuit Court unlimited jurisdiction. In this way we would have a much better system. There would be no jury. There would be some degree of consistency on the part of judges. There would be less than half of the legal fees and cases would move much faster to the court. Unless something is done, and done quickly, there is no doubt that there will be massive increases in motor insurance, employer's liability and public liability insurance premiums. There will be major underwriting losses. Insurance companies will go out  of business and those with branch offices here will pull away from the Irish scene.
The Minister has given much consideration to the examination of company accounts, something I welcome. At the time of the PMPA collapse I said that if the same auditors who examined Vehicle and General in England had examined the PMPA the PMPA would have been asked to stop trading. Obviously a much more detailed examination by the Department of Industry, Trade, Commerce and Tourism is urgently required. I am delighted that this is happening.
What many people are asking now is if further companies will collapse. I hope not. Four or five weeks ago, in reply to Deputy Flynn the Minister indicated that all was well. I have no doubt but that the Minister said that in good faith in the light of the information he had on his desk. That is all the more reason why the investigations into companies affairs must be done with all haste. The PMPA and the ICI are both huge loss makers. When one examines the blue book for 1983 it shows both the ICI and the PMPA as the biggest loss makers. There are two huge loss makers and two Government administrators. Will the Government endeavour to amalgamate both companies under one administrator? Is this at the back of the mind of the Government? Perhaps the Minister will comment? Since 15 March it has been a very sad story for many people. I am delighted that a solution has been found and that the Government have accepted the Fianna Fáil policies in regard to solving this problem.
It is a very sad reflection on business generally. While it is commonplace nowadays to belabour politicians for their incompetence and ineptitude, in some cases with some justification, ineptitude is not the prerogative of politicians. The ICI debacle raises all kinds of questions about the calibre of the people in the highest echelons of commercial life. The problem of the ICI will not end with the passing of this Bill, but I hope I am wrong.
It is a bit of an insult to expect the  Seanad to pass this Bill without knowing the true financial liabilities, but being a responsible Opposition we will help to protect the good name of the financial and insurance arms of our society. I hope that the doubts I have about many aspects of the ICI affair will prove to have no foundation.
Mr. O'Mahony Mr. O'Mahony
Mr. O'Mahony: All of us agree that we are faced with a debacle of the first rank in dealing with this matter. I was interested to hear Senator Fallon claim credit on behalf of Fianna Fáil for the arrangements made last Thursday whereby the Central Bank will at least in the initial period fund potential liabilities of ICI. I would remind the Senator and the Fianna Fáil Party that the internal reserves of the Central Bank, from which it would appear from briefings given by the Minister for Finance that the initial moneys will come, are public moneys. Until such time as we see whether or not the licensed banks will contribute towards the repayment of any loans put up by the Central Bank and until we see how much of any such loans from the Central Bank are paid by the licensed banks we will not know who will pay for the ICI liabilities.
It is interesting to note that, following in the wake of the PMPA disaster and taking that in conjunction with the whole series of private sector company closures in recent years, the collapse of ICI demolishes once and for all the theory that private companies are better managed than their public sector counterparts. Patently they are not, a fact which is no consolation to any of us. It is worth reiterating a point of view, which is, that the quality of management in this society is appallingly poor and something to which we must turn our minds with more intensity than we have in the past.
Beyond that comment on the failure of management, one can only be appalled at the level of hypocrisy demonstrated by the management of private sector companies which fall into difficulty. In many cases the people who privately decry the role of the State in economic affairs are the first to come cap in hand to the  Government to be bailed out when problems arise. In many respects that is what has happened in the case of ICI and its parent company AIB. AIB made an appallingly bad decision in deciding to buy ICI. In addition they allowed the problem to run on for at least 12 months after they must have become aware that they had unusually acute difficulties to face. They consistently underestimated the scale of ICI problems, certainly since the period March 1984. Yet they had the gall to put the gun to the Government's head, at one week's notice, when they decided to get out of ICI early in March of this year. In behaving in this way, in demonstrating such a combination of ineptitude and arrogance, they were behaving no differently than the management of many privately owned Irish companies. They should have behaved differently. After all, AIB is the largest financial institution in the State and one of the largest private companies. Their responsibility to act prudently and competently was overwhelming, given their role in the financial system; yet they did not do so.
I will concentrate now on two principal aspects of the matter. First, the question of why the scale of the ICI problem was not identified sooner by the ICI and AIB and, second, the response of the Government when AIB came to them early in March of this year. There can be no doubt that AIB made a major mistake in purchasing ICI. For some inexplicable reason their decision to purchase ICI in September 1983 appears to have been based on the historical performance of ICI rather than the current position of the company. The ICI showed underwriting losses of over £7 million in 1982 after a first ever underwriting loss of £422,000 in 1981. In 1982 the underwriting loss of over £7 million was very significant in historical terms. Even though it must be set against an investment income of £15 million in that year, which included some once-off gains, it should have set some serious warning bells ringing in the ears of AIB management. At the very least, the 1982 ICI results should have led AIB  to analyse thoroughly ICIs 1983 half-yearly performance prior to the acquisition of the enterprise and their entire shareholding in that company in September 1983.
One can only conclude that AIB's lust for expansion and the new competitive spirit which had emerged between the Bank of Ireland and themselves, a state of affairs which in my view is detrimental to customers of both banks, made them blind to the requirements of even minimal prudence in their takeover bid for ICI. The 1983 results for ICI, available in the early part of 1984, confirmed the downward trend in ICI's position. Underwriting losses rose to £13.6 million, which was just about compensated for by an investment income of £15.9 million. This superficial data alone which was available in March 1984 to AIB should have provoked a major and urgent investigation of the company's affairs by AIB. Yet, apparently, it did not.
When one looks beyond the superficial data, however, the degree of AIB's negligence in overseeing their wholly owned subsidiary becomes even more horrendous. It is quite clear from the 1983 ICI accounts that reserves and liabilities were underprovided relative to a very rapid and significant increase in premium income. It became clear in March 1984 that the company were going hell for leather to increase business and premium income but were underproviding radically for this business in their insurance funds and liabilities.
It appears from what the Minister said that the Department spotted this at the very earliest opportunity when the AIB accounts were made available to them in June 1984. It must be said that AIB put aside £5.6 million in their group accounts of March 1984 against underprovision in ICI but, on the basis of ICI's 1983 performance, this could not in any way be seen as adequate provision.
At this stage, I should like to raise a related matter of some significance. AIB have indicated that they intend to sue ICI's former auditors. Ernst and Whinney, in respect of their auditing of ICIs  accounts prior to the take-over in 1983. It seems to me they are right to do so.
However, another question arises at this stage. AIB's own auditors, in preparing AIB's accounts for the year ended March 1984, had a responsibility to supervise and scrutinise the 1983 accounts of the ICI wholly owned subsidiary. That scrutiny would normally include, at the very least, an arms length but thorough investigation of ICI by means of questionnaires and other means. It would also, at the very least, involve a thorough examination of Ernst and Whinney's audit.
Why then did AIB's auditors not insist that AIB make a greater sum than £5.6 million available for underprovision by ICI in the group's accounts of March 1984? This is a mystery to me, given ICI's 1983 accounts and given what must have been known of the very rapid increase in ICI business in the previous years.
Now that the Central Bank have taken on the key role in sorting this mess out, it seems to me it should call in AIB's auditors to find out how and why they allowed under-provision to continue in ICI beyond March 1984. It may well be that they were subjected to pressure by ICI in this regard, perhaps because AIB wanted their group accounts to show the best possible results, but the fact remains that an explanation is required from AIB's auditors and I hope it will be forthcoming.
Everything I have said so far concerning the management failure of AIB must be said with even greater vigour concerning the management and board of ICI.
That company engaged in a programme of rapid expansion from about 1979 onwards, but, apparently, did so without building in adequate management control systems, information systems or provision against liabilities, particularly in the latter years. It has been well known for some years that ICI have been undertaking high risks both domestically and in London in order to expand their business but the scale of these risks were either not known to the ICI management or they were prepared to tolerate them for reasons which are not explicable in purely business terms.  In particular it is beyond comprehension that ICI knew so little about their London operation as late as the end of 1984 despite the fact that London accounted for 70 per cent of their gross business in that year.
How can this have been? How can the information flow from London to the Dublin headquarters have been so inadequate that ICI, and AIB, were able to say in November 1984 to officials of the Department of Industry, Trade, Commerce and Tourism that there was no under-reserving on London business? How can the information have been that bad, that incorrect, that irrelevant to the true position especially when the dog in the street in the insurance sector in London knew differently and when even officials in the relevant Department here suspected things to be different at arms length?
It is noticeable that AIB, in their interim report for the half year ended 30 September 1984, set aside a further £17.4 million from group reserves to insurance claims provisions in ICI. But the startling thing is, if one is to judge by comments of AIB's chief executive in a recent edition of Business and Finance, this provision was made in respect of domestic ICI business only, that is in respect of 30 per cent of ICI's total business. If the domestic business representing 30 per cent of gross business income was seen to be in such bad shape in September 1984, why, in the name of commonsense, should there have been such complacency about the London business, which was not only larger in size but, as we know, in a far higher risk category?
I cannot answer that question, nor can anyone else, apparently, least of all AIB. Was the information and financial control system in ICI of such a poor quality that no one in Dublin knew what was going on in London or were people in London disguising the true nature of their business in a situation of lax control generally? It would seem from what the Minister has said — it is the first time I have heard it put in those terms — that there does seem to be a suggestion now  that the information supplied by the London branch, to quote the Minister:
...to its supervisory authority and to its head office in Dublin did not reflect the true position of the business being transacted in the branch.
That seems, if it is a new insertion into the debate to be an important one which has not been said as explicitly to date, if I interpreted the Minister's comments correctly. Either way, whether it is that someone in London was sending back false information, or whether it is that the information control systems in ICI were so appallingly poor that they were not able to know what was happening in London, a sworn public inquiry into the London business seems to be called for. The Minister should see to it that this is initiated in an appropriate way irrespective of what funding arrangements are made regarding ICI's liabilities, assuming that such arrangements can be made at all.
Finally, regarding ICI, there is one matter in regard to their accounts which puzzles me. I am neither an accountant nor a financier and I may well be missing an obvious explanation through ignorance. Nevertheless, I have a duty to ask the question in the hope of a satisfactory answer. In ICI's 1983 accounts, it is shown that executives or directors of that company were allowed to buy 158,000 “A” ordinary shares at a price of 320 pence each in September 1983 under a share scheme for executives approved at an extraordinary general meeting in March 1975. The company advanced £96,000 to directors to enable them to purchase some or all of these shares. Presumably these were sold to AIB later in September at AIB's offer price of 350p a share, representing a small though not insignificant gain of £47,000 pre-tax. In 1983 ICI accounts also indicate that, with the exercising of the option on these 158,000 shares, all share options under the 1975 share option scheme had then been exercised. What puzzles me — there may well be an obvious answer which I am missing — is what happened to the options granted to executives to purchase  294,375 shares under the 1975 scheme, which options are mentioned in the 1980 accounts but which do not surface in subsequent accounts of ICI so far as I have been able to tell. If these options were not taken up why are we told in the 1983 accounts that all options under the scheme had been exercised? If they were taken up, the questions which arise are when were they taken up, by whom and at what price? I should be grateful if the Minister would clarify this matter for me before the debate concludes. There may be a straightforward explanation which I am missing. In any event I would like to set my mind at rest in the matter. I am not sure that share option schemes should apply in the financial and insurance sectors. The Minister might consider this matter at a future date.
I turn now to the Government's response to the debacle when they were faced at very short notice with it by AIB. For the reasons I have given concerning the obvious, though gradual, build up of ICI's problems over the last two years and the degree of information which AIB must have had about the scale of these problems in London, at least for the past several months, it is difficult to avoid the conclusion that AIB set out deliberately to panic the Government into a solution benign to themselves in the early part of March of this year. The initial agreement made between the Government and AIB on 15 March was indeed benign to the banking institution concerned. It comprised AIB's handing over an unknown quantity of ICI liabilities to the State through a State company in return for a preferential interest loan of £50 million over three years, valued at £2 million a year, and an interest-free loan of £20 million over one year, valued at £3 million. The deal was that the State in effect was to take on loans worth £70 million at preferential interest rates against liabilities which were and still are unknown. The net cost to AIB of the State potentially burying itself in significant quantities of debt was to be £9 million over three years. One can add in the £2.4 million in respect of ICI Life, but it is not in the  same category because that is still a viable concern.
There was, of course, under the initial agreement to be a levy on banks and insurance companies to assist the State in meeting ICI's liabilities, whatever they might be, but the reality about such levies is that they are rapidly passed on to the consumer so that one way or another the taxpayer was going to be up-front so far as ICI's liabilities are concerned.
At this stage I should like to make an important point which has been missed so far in the general discussion of this matter. AIB and their apologists have made a great deal of the fact that they have already written off about £86 million on ICI. Given the nature of our capital gains tax laws this is not strictly speaking the truth. What they have done is generate a £36 million to £54 million capital gains tax loss which can be set against future capital gains taxes, perhaps after a decent interval has elapsed. The real loss to AIB of selling ICI and its unknown liabilities to the Minister for £5 will at best be a £32 million loss, from AIB's point of view, and at worst a £56 million loss, depending on the rate of capital gains tax which will apply. These are the real parameters of AIB's write-off loss, not the £86 million mentioned by them and their apologists but losses considerably less than this because of the nature of our capital gains tax laws. I am sure that their tax consultants are already working on a suitable scheme to achieve this purpose. I would urge the Minister to propose an amendment to the Bill to ensure that the Exchequer does not lose between £36 million and £54 million in capital gains tax in the next few years as a result of AIB's write off of their £86 million loss in ICI.
As far as the arrangements announced last Thursday by the Minister for Finance in the other House are concerned, there is no doubt that these constitute an improvement on the initial position. They lead to the further removal of the taxpayer from the long-run liabilities of ICI. I must reiterate the point I made at the beginning that if, as the Minister for Finance appears to have said in his briefing  following his announcement, the Central Bank moneys which will be put up are to come from its internal reserves, then that money will be coming from what is in effect public moneys. The effect of reducing the internal reserves of the Central Bank by whatever amount will be twofold at least. First of all, the income on the Central Bank's internal reserves will be reduced commensurately, and similarly its contribution to the Exchequer from its surplus will be reduced also. Secondly, its ability to lend to the Government from its reserves will be reduced by an amount equivalent to whatever money is put up to bail out an AIB management error. Thirdly, if there are spare internal reserves of the Central Bank around, as I have no doubt there are, then it seems to me that these reserves, or the proportion of them which we are now talking about, could be put to better use for public purposes than to the purpose of bailing out the largest financial institution in the country.
The notion that Fianna Fáil will claim credit for this package, at a time when we still do not know whether AIB will pay any more than it committed itself to pay in the beginning and at a time when we still do not know how much, if anything, the remainder of the licensed banks will pay, is foolish in the extreme on their part. We will have to await the outcome of discussions between the Central Bank and the licensed banks, which have been promised, before we can pass any judgment on the latest position announced in the other House last week. Commitments have been given that details of these discussions will be brought back to the Oireachtas in due course when we can see precisely how much AIB's liabilities are and how much of these liabilities will be met from public moneys of one sort of another.
The reality is that most people are deeply aware not only that AIB have made a massive blunder and put another millstone around the neck of the State, but that they are getting away extremely lightly indeed. The people who are getting away lightly in management terms,  if not in any other terms, are people who have never been hesitant to close businesses or to foreclose on individuals when it suits their own private interests as a financial institution. There is little sympathy with them, particularly when one sees that it appears at this point that perhaps half, perhaps more, of the amount they had claimed to have written off will be recouped in capital gains tax losses and that, in addition to this, they will pay a mere £9 million in the next several years to meet whatever their massive liabilities are. That is the way it stands until such time as we see the outcome of discussions between the Central Bank and themselves.
Finally, I should like to refer briefly to comments made in the Dáil by the Minister for Industry, Trade, Commerce and Tourism concerning his desire to bring forward elements of the proposed comprehensive company law reform legislation which is in the course of being drafted so that he might expeditiously deal with aspects of affairs which have arisen from this debacle with particular reference to the obligations of auditors. All of us sympathise with the Minister in his desire to rectify certain omissions in the law in these areas, but many of us are aware that legislation of a comprehensive nature has been available in advanced draft form for at least 18 months and many of us would be very sceptical if elements of this advanced draft legislation were to be brought forward and other elements of that same draft legislation left behind, perhaps never to surface again in the lifetime of this Government. That is something I would like to draw to the attention of the Minister of State because many of us would treat with great seriousness, particularly after a delay of 18 months in bringing this legislation forward, this comprehensive and long awaited company law reform legislation. Many of us would look with grave suspicion indeed at elements of it being brought forward now when indeed there may well be other more important elements left behind which we in this party wish to see implemented as a matter of urgency.
Mr. Ross Mr. Ross
 Mr. Ross: I welcome the Bill, if not the circumstances in which it had to be introduced into this House and to the Dáil. I congratulate Senator O'Mahony on a particularly good analysis of the financial problems which the AIB and the Government had to tackle but I regret that he should have yielded to what was obviously an ideological temptation to take this as an opportunity to hit the big banks. I do not believe at this stage that it is helpful to use words such as “lust, arrogance and ineptitude” nor to say that this is typical of privately owned companies. Such ideological beliefs have their own place but at this stage in the debate it is too late and also in many ways too early to raise these questions. Those who knock the bank and what has happened and those who knock the bank and the Government and what has happened have an obligation to give us a different scenario. What they have not told us is what they would have done in those circumstances. If is perfectly evident to me that, had the Government not acted so promptly and so decisively, we would have had a financial crisis of catastrophic proportions. It is easy now, but I think wrong, to point out all the flaws which existed and the action that was taken. What we need from those who criticise what happened is a substitute scenario.
That temptation to put the boot into Allied Irish Banks is very prevalent and is probably at the moment very popular, because banks are by nature not very popular institutions. That has been the case since biblical times. While we should certainly lay blame and not hide the fact that a disastrous commercial decision has been made, we should also take a responsible attitude to what we are to do next. We should resist the temptation, which has been yielded to by many in the Dáil and here in the Seanad as well as outside the House, to bandy around figures when we do not know what we are talking about. It is evident and obvious that the extent of the liabilities of ICI, the bank and the Government are as yet not known, but I choose, because I see no reason not to, to accept the good faith of the Minister when he says he believes the  maximum figure is £120 million. There is no other evidence apart from the sort of rumours which I have heard, and which other Members of the House have obviously heard from London and elsewhere, to suggest that the figure is higher. Until that figure is shown to be higher, it is wrong for Members of the House to bandy around figures because it affects the stability of the financial institutions if we say irresponsible things without reason.
Certainly there are serious questions to be asked as a result of this. There is an enormous amount of probing to be done by the Government and there are lessons to be learned. I support Senator O'Mahony's call for a public inquiry at a very high level on this. This is necessary because the extent of what happened is highly significant and highly dangerous. It points to something which is seriously wrong in the financial world here, and if it can happen once it can happen again and again. We do need greater safeguards in the financial world if we are to prevent it happening again.
There are questions to be asked about the system in which we live and, while I believe in free enterprise and private enterprise, it has taken a blow and a serious blow. We should ask whether huge organisations such as Allied Irish Banks should be exceptions to the normal rules which apply to private enterprise and competitive commercial life in this country. Is it right that because Allied Irish Banks are so big they should not be made to suffer for their mistakes in the way that a small commercial organisation such as a small industry, a small business or a small professional man would be made to? Is that correct or is it not? In theory it is absolutely correct that they should be made to pay the same price but in practice it is impossible for such monolithic organisations to do so. We should then ask whether we should allow such organisations to become so big that they, in fact, hold such entrenched and privileged positions.
The action which the Government took on this issue was guided, it seems, by one principle and one alone. That was  confidence — confidence in the banking system, in the Government and in the country, because in banking terms, as we all know, confidence is paramount. It is not the amount of money you have, it is the actual amount of money people will trust you to hold for them. The Government had to take prompt and decisive action if the confidence of the whole international banking system was not to be shaken. Why the Government had to move in and Allied Irish Banks could not be left on their own was because the losses — and this is the reason why the Government still has to hold the reins — of ICI for which AIB were responsible were unquantifiable and they remain unquantifiable and that uncertainty required a bigger organisation even than AIB to step in.
On that Friday, had the Government or AIB been able to say the losses are X amount and that is all, then it would have been all right to leave the bank in charge provided the bank could stand the losses. But it must be remembered that had the Government not stepped in the scenario would have been catastrophic. AIB do 40 per cent of their business internationally and abroad and had they seen on that day that AIB were shaken from a loss which was unquantifiable, the consequences are unimaginable. Whether all deposits with AIB would have been withdrawn, whether exchange dealings with AIB would have been stopped, I do not know but the consequences of a loss of confidence in the international community are unthinkable.
The Government had to step in to stop that run. Had that lack of confidence spread to the country as a whole the same consequences would have occurred. It is premature and wrong to say that there would necessarily have been a run on deposits of that and other banks. It is probably wrong to say that necessarily there would have been withdrawals from building societies but there would have been a situation in which the people of the country as a whole would have been uncertain about their banking institutions and this undoubtedly would have been conveyed within minutes to those from  whom the Government are borrowing abroad. We, regrettably, depend enormously on foreign borrowing and had our capacity to borrow abroad been questioned or limited in any way, a new scenario with the IMF and so on would have arisen. It was essential for the Government to take prompt action to stand behind Allied Irish Banks, whether we like it or not, if these consequences were to be prevented and this is what the Government did, and this was responsible action on their part.
The decision of Allied Irish Banks to maintain their dividend for the current year has received an enormous amount of criticism both in the press and in these Houses. This is directly related to the issue of confidence and I understand why the Minister says he does not see why that dividend should be maintained. I, as a stockbroker, feel that ethically and morally it was wrong to maintain that dividend because I see no reason why the shareholders should receive a similar payout while other people are paying, but once again the Minister put his finger right on it because, like it or not, had the dividend been cut the ripples of horror would have gone through the international banking community and the consequences would have been the same. While the shareholders may, in the short term, be the beneficiaries of that decision, the country will also benefit simply because the dividend is a yardstick by which the international banks will have judged AIB. In absolute terms it was outrageous that the dividend should have been paid but in realistic terms, as a short term measure, because it is that yardstick, it was necessary.
I am very pleased with the decision of the Government to change their mind and I do not regard it as a decision to follow Fianna Fáil's policy or anybody else's but to adjust what they were doing so that the taxpayer would not foot the bill. It would be quite wrong for the taxpayer, under any circumstances, to pay the price of a bad commercial decision by a private company, however large. Undoubtedly, there will be serious inequities in who pays for what, but it would  be wrong for the taxpayer to foot this bill. It is probably wrong that other banks should have to move in because they are competing with Allied Irish Banks themselves and I welcome the Government's decision to see that the taxpayer will not have to foot this bill. Possibly it was necessary to put the full weight of the taxpayer, the Government and the Department of Finance behind ICI in the initial stages until it was realised that there would not be any run on the banks or any lack of confidence.
At this stage a decision should be made as to what extent the bank should pay and be made to suffer. There should be a gradual process whereby, when we realise how much is involved, the bank should pay to the maximum of their ability without the evident danger of the bank going into liquidation. Because the losses are unquantifiable at the moment the bank's liabilities should also be unquantifiable and if the losses are a lot larger than anticipated, then the bank, if they can stand those losses, should be made to pay more than they have promised at the moment, but not to the extent of liquidation. In other words, liquidation or any threat to the Allied Irish Banks would be a threat to the financial system of the State and, therefore, to the existence of the State itself but this should be balanced by the fact that the bank are acting in a commercial world in which they should suffer like everybody else for bad commercial decisions.
We have heard a few uninformed comments about the role of the shareholders in Allied Irish Banks and in any company. The Minister said, and theoretically he is right, that the ultimate responsibility lies with the shareholders in a company. The shareholders are the owners of Allied Irish Banks. Enormous play has been made of the fact that shareholders are big fish, fat cats and that they should be made to pay for this because they can afford it. This is patently not true.
In Allied Irish Banks, there are 27,000 shareholders who cover a large and disparate group of people. They are the nominal owners of the bank; they are 99 per  cent Irish and mostly pensioners, small holders with small earnings, small savings, with two out of three of them holding less than £2,700 worth of shares. The typical shareholder of Allied Irish Banks is not a fat cat; he is someone who has put a small amount of savings into a company which he believed was rock solid and the typical shareholder in AIB was not looking for overnight gains. He was not looking for a huge return or a massive dividend. He was putting his money where he thought it was safe. While ultimately those who invest in the Stock Exchange are seeking a capital gain and while they should be prepared to take the losses which are the balance of that sort of capital gain, it should be remembered that those nominal owners are mostly small shareholders without very much money. There are, of course, the large holders, the pension funds, the other banks and the other insurance companies, but on the whole they are holding money for people who will depend on income from it and who are not fat cats. Very few rich people own shares in AIB.
To say that ultimately responsibility lies with AIB is technically true but probably unrealistic. It is inconceivable that the shareholders in AIB would come together and decide on something like the way AIB ran ICI. The management and board of AIB are supposed to be there because they have expertise, and management and board are entrusted with this by the shareholders. The average shareholder has nothing like the technical or financial expertise to question the decisions of management. So much in the financial world is taken on trust in all these things that it is unrealistic to say that the shareholders take the ultimate responsibility. They pay and should certainly be made to pay because they, too, have made a wrong decision. That is the way the system in which we work operates, but we should not say that without realising who these shareholders are.
One question which must be asked among others which have not been touched on this debate, and I do not wish to duplicate, is whether it is wrong for the banks to become involved in activities  which they do not fully understand. Should the banks be involved in other related activities in which they have no expertise? I do not know whether the basic problem in this was that AIB decided to get into a field which they had no competence to judge. They were not breaking the law. They were doing nothing that they should not have done, but it should be considered whether banks should be allowed to invest in and fully own insurance companies, building societies or any other financial institutions. Surely the banks should be making an investment for their shareholders but not taking control over another company. Would it not be better if a bank were to be limited in such companies to, say, 10 or 20 per cent which would not give them a controlling interest? Indeed, it would be preferable if they were limited to the extent that they did not have such a large holding that they had effective control if the rest of the shareholders were dissipated very widely. This trend in the financial world is worrying because the tendency is for too many banks to seek to diversify too far too fast and not to understand the businesses into which they are entering.
In that context it should be asked also whether the very fact that AIB had taken over ICI made the executives and the employees of ICI irresponsible. If you have a big financial institution behind you there is an enormous temptation to take risks because you know at the end of the day that the big financial institution will fork out. That brings us to the ideological argument touched on by Senator O'Mahony which is the difference in efficiency between private and public enterprise. While this is no advertisement for private enterprise, it must be said in reply to Senator O'Mahony that one of the great problems of semi-State bodies and public enterprise is that they know also that those who work and make decisions for fully owned Government organisations know that at the end of the day if their decision goes wrong the Government are behind it. That makes it possible and more likely for them to make irresponsible decisions and irresponsible  financial decisions. In some ways ICI as a fully owned subsidiary of AIB acted in the same way as a semi-State body can act in their relationship with the State.
This is indeed a blow to private enterprise and it should be regarded very seriously. All sorts of questions should be asked. What is the role of a board in a situation like this? Can the board know what is going on if information, as has been suggested here, is not being conveyed to them? What is the role of non-executive directors in private companies even as large as this? If information is not being communicated to them, are they to blame? Ultimately, yes they are, but as a result of this debacle we must learn lessons and police the insurance world and the banking world much more carefully. It does not really matter at this stage who is responsible for what happened a few weeks ago or in the last 18 months. We should not be asking whose head we should have on a plate. We should ask why this was not discovered sooner and we should ensure that it will never happen again.
Mr. Howard Mr. Howard
Mr. Howard: I support the measure before the House. I am quite happy with the content of the Minister's speech here this evening and I agree substantially with some of the points made here. I do not wish to repeat much of what was said here, but I am sure I will be pardoned if I revert to one or two matters occasionally.
It is only reasonable that we should congratulate the Government on having acted decisively and positively in a very serious situation. The decision that the Government had to reach between 8 and 15 March was very serious and had far-reaching effects. As Senator Ross indicated very ably, catastrophic consequences could have arisen if proper decisions and the proper approach were not taken by Government. An urgent response was needed, and the stability of the institutions of banking and insurance were at risk, as has been stated here this evening. An additional factor was that employer's liability and public liability cover of a substantial number of the  workforce here were equally at risk. A giant in the insurance industry was tottering and, were it to collapse, it would bring with it the giant of the Irish banking industry also. The consequences could have been widespread and serious, and it is satisfying that we can look back, two to three weeks later, and say that the real risks with which the Government and the country were confronted between 8 and 15 March have been successfully handled, that confidence in the banking institutions has been reasonably maintained, that this Bill is part of a strategy that has been successful and that the Government's involvement has been successful and has saved a situation that could have had extremely serious consequences.
I believe that this measure and the events that will flow from it will in time restore the Insurance Corporation of Ireland to a commercial footing. I sincerely hope it will assist AIB to overcome the setback they have received, and I want to say that particularly in relation to the AIB in view of some comments which I will be making later on concerning their performance. But what I welcome most from the Minister's contribution tonight is the assurance that at the end of the day it is very unlikely that the taxpayer will be asked to carry any part of the cost.
There are other aspects of this situation that one cannot avoid referring to. Indeed, it is impossible to speak on the matter, and it would be wrong to speak on it, without giving clear expression to the widespread feelings of anger and dismay shared by the general public at the events which led to this situation. As far as I am concerned, that anger and dismay created a feeling of unanimity among the general public that I have rarely seen on any issue, and it was directed solely at the institutions responsible for the creation of this mess. There were several factors that were part of that dismay, some of them have been referred to already this evening and there were others. There was, first and foremost, the performance of the Insurance Corporation of Ireland running itself to the point  where liquidation became inevitable. There was also — this has not been referred to, but it has certainly figured in the minds of many people throughout the country — the perceived connection between ICI and Irish Shipping. There was also the incredible position that this situation developed while ICI were either partially or fully under the control of the AIB.
It is stretching credibility — the Minister to some extent was saying the same thing, but perhaps in not so direct language — to believe that AIB should say that they were unaware of what was happening when through most of 1983 and into 1984 there were at least six occasions, either through formal communication or through meetings, that the Department expressed their concern about the operations with ICI. Not alone was that concern conveyed to ICI but it was also conveyed to AIB. I believe that should have been sufficient to alert AIB, if that was necessary, to the risks that were developing in ICI. Reassurances were received by the Department from both ICI and AIB that these worries or doubts were unfounded. In view of what has since happened, it is again stretching credibility to suggest that there was not deliberate concealment of a rapidly worsening situation.
As I said, the Government's decision was necessary and it has been successful. There were big and serious problems in insurance, in the employers and public liabilities sectors. There was a threat to jobs and many people could have been left without insurance cover. There was the damage to AIB itself, as has been outlined by the Minister and my colleagues, because they might have to meet in full the losses incurred by ICI, and there was a resulting damage that could occur by loss of confidence in the banking industry. These were logical, demanding and sustainable reasons why the Government should have acted as they did in the interests of the country, the people and the economy.
Having said that much, I feel, as I said earlier, that there is a duty on us to convey the feelings that are shared by the  public. When this news was broken to the public by an AIB spokesman people found it quite offensive because it appeared AIB were suggesting something along the following lines. While AIB had found themselves with a mess, it was now all right because they had succeeded in passing it on to the Government and, through the Government, to the taxpayer, that the Government and the taxpayers between them could resolve the situation, but AIB had no further responsibility, their profits would remain intact and the dividends would be paid to their shareholders. The reaction that resulted from that explanation has been the most explosive I ever had to deal with. Events like this rarely happen, but the reaction to that insensitive explanation was so explosive that I believe the ramifications of it will be felt for many years.
There are many people in business, farming, and even professional people who have been receiving quite a hard time from the banks, AIB are no exception. Many of these people found that money was showered on them when times were good and things were booming, but as soon as times got difficult the banks wanted their money back. In many cases very little mercy was shown to people who found themselves in difficulty. People who overborrowed were harassed, in many cases in a most brutal and merciless fashion, and many businesses went to the wall. Many people have found themselves in difficulty simply because they were unable to live up, 100 per cent, to the standards set for them by the banks, including AIB. It appeared for one awful moment that the banks and their directors were imposing standards and responsibilities on their customers, but when they were in the same difficulties they would avoid their responsibilities and be free of the standards, responsibilities and obligations which were placed on many business people.
I do not believe in bashing the AIB. As far as I am concerned, they were a fine company and I am sure will be again. I accept the need to maintain confidence in them. It is a matter for the Allied Irish  Banks and their shareholders to deal with those who have damaged it.
The old Munster and Leinster part of the bank, which I can speak of from experience, was an institution which supported the co-operative movement. It financed many worthwhile developments. For a long time, it was a motivating force behind many of the successful developments and industries that are based on agriculture. I would like to see AIB return to that position. There is no doubt that in recent years — Senator Ross said that 40 per cent of their turnover was transacted outside of the country — a policy decision was made to swing away from this position and seek opportunities in other countries. Their involvement with the Insurance Corporation of Ireland was an example of that. Their involvement with the First Maryland Bank in the USA is another indication of that.
It is easy to be wise after the event but if the funds that were committed to both of these ventures were made available for development within this island, a far more satisfactory situation might have developed as far as the people and the bank are concerned. It is not in the long term interest of AIB that somebody else should carry the can.
I accept there is a need to assist the bank. The arrangement which the Minister spoke of with the Central Bank is one that will assist the AIB and one which will help them overcome their difficulties. It would be unreasonable — this view may not be shared by others — to expect other financial institutions to help carry a burden they were not responsible for creating. At the end of the day, the cost of the salvage must be borne by AIB no matter how long it takes and in the meantime they must be assisted to ensure that no lasting damage is done to them as a banking institution.
It is imperative that the taxpayers — we got this assurance from the Minister this evening — should not have to pick up the tab. It is equally important to ensure that bank customers, irrespective of what bank they deal with, either  through extra charges or levies will not have to pick up the tab. Those who purchase insurance must not be asked to pay by way of charges or levies. At the end of the day the pool to provide the money has to be AIB, their shareholders, their funds and investments.
I have already referred to the First Maryland Bank, USA. I am told that is a prime asset. It has a value in excess of £150 million. If customers of the AIB or any other bank are compelled daily to dispose of assets to make their repayments, I do not think there is any reason why now when the AIB are in the same position as some of their customers have been that they, too, should not realise this valuable asset if that is required.
It is abundantly clear that a calculated attempt was made to dump this problem and the objective was to walk away unscathed from the mess that was created. That cannot and must not happen. It is for that reason I welcome the Minister's assurance that there will be a continuous review of the position.
I also welcome the assurance from the Minister that there will be tighter controls by his Department in situations such as this and that the Government are to bring forward changes in company law aimed at strengthening the responsibilities of directors, companies and auditors. I welcome the fact that the capacity of his own Department to monitor developments in the various bodies will be improved.
It was stated by a Minister in the Dáil that modifications were being planned in relation to the jury system as far as the assessment of damages was concerned. It is now accepted by the vast majority of people that the assessment of damages by juries is, in many cases, excessive and has a spin-off effect which results in increased premiums and increased cost of insurance cover.
I should like the Minister to clarify the precise involvement of the Central Bank and the funds available to them in this rescue operation. Is the role of the Central Bank simply that of a co-ordinator? Many people are asking this question and I hope I express it correctly in relation to the resources which the Central Bank  would possibly be making use of in this rescue operation. In view of the fact that the resources which are available to the Central Bank are revenues which, if not otherwise called upon, are available to the Exchequer, to whatever extent they will be utilised in this rescue operation that amount, as it were, will not be available to the Exchequer. Consequently, this represents in some way a cost to the Exchequer and to the taxpayer. That is a question I am not clear about and I would like to have an answer to it.
The measure before us is necessary and valuable. I am satisfied that the Government acted correctly and properly. I am pleased with the Minister's speech this evening which clarified the means of resolving this situation. I hope they will be successful.
Mr. Lynch Mr. Lynch
Mr. Lynch: Mainly because meaningful changes have taken place since the legislation was first introduced in the Dáil I will try to facilitate the Government in the passage of the Bill as it now stands. Like many other Senators I wish to make it quite clear that I have serious reservations and I am fully entitled to feel sceptical about the entire affair and, in particular, about the Government's handling of the problem. The 1964 Bill which the Minister referred to allows the Minister for Finance to advance money to the insurance fund from which the administrator can draw funds to pay the ever-increasing claims. The assumption that this is a plan to nationalise the industry is borne out by the fact that the two companies presently under the administrator's control have 60 per cent of the motor insurance market and 25 per cent of the liability market. If this trend of acquisition continues, many of the private companies will be forced to withdraw from Ireland, thus further increasing the Government's share of the market.
In considering the 1982-83 blue books, one can see the companies now under administration were in dire financial difficulty and this view should have been easily seen by the Department's insurance section, if they had this expertise to  understand the figures they were dealing with at that time. Obviously, this statutory body is ineffective to deal with the job on hand and the blame for this must be put fairly and squarely at the door of the Minister. Surely after the problems of the PMPA, the Minister must have had a detailed report on the state of other companies and, if not, the Minister has been extremely negligent in his duty as overseer of the insurance industry.
The sad part of the whole situation is that the Government are using stop gap measures only to deal with the huge problem facing the whole insurance industry. Mounting losses over the past number of years are putting a number of companies in difficult trading positions and these losses and their causes are not being dealt with by the Government. At present the insurance industry accepts that up to 20 per cent of the cost of all liability claims are paid in legal costs.
Can the Minister state categorically that the banks and the Central Bank will underwrite all losses and, if not, at what level will they stop underwriting these losses? If there is a limit, will the Exchequer, and therefore the taxpayer, be held liable if the legislation is passed? If the limit of the banking institutions is £120 million as suggested in the Minister's speech, then there is a strong possibility that this limit may be reached if the fringe re-insurance market reneges on fulfilling its treaty obligation. I should like to ask the Minister has the London office ceased trading? One would have thought that it should have, as most of the losses are being associated with this office in London. If one notes the report in The Post Magazine dated 28 March 1985, one will see that the Irish Government have confirmed that they are continuing to underwrite the unprofitable holiday insurance cover for the Association of British Travel Agents. I will quote from The Post Magazine:
The Association of British Travel Agents, which last year switched underwriters of the Extrasure holiday cover from Accident & General to ICI, said it had received assurances from  the Irish government that this was ongoing.
“We have telexes from the Irish government confirming that every policy sold will be honoured according to our agreement with ICI,” said Ray Bernstone, chairman of ABTA's insurance committee.
Legislation was introduced by the then Minister, Deputy Cluskey, on the collapse of the PMPA, or the pending collapse of the company at that time according to the Government, and we should have learned from that episode, but apparently no lessons were learned. The Government have not taken the necessary steps to monitor the insurance business in this country and outside it. Had the Government taken heed of the advice given at that time, and had they taken seriously the questions raised in this House during discussions on the passage of that measure, and taken the appropriate action as was suggested at the time, we could possibly have avoided this debacle.
I want an assurance that the consequential effect of what has happened to ICI will not be as disastrous as what happened with the PMPA when thousands of investors, decent, hardworking Irish men and women, lost their entire life savings which they had invested with the PMPA. Furthermore, consequent to that legislation there is the burden by levy on insurance premiums which insured people have to bear as a result of that episode and will have to bear for many years. I asked many questions on that issue which the then Minister failed to answer. I want a full assurance that the Minister here today is fully armed with the information and that he will give clear, positive and definite answers to the many queries raised in this House during the debate this evening.
It is clear to me and very obvious to everybody that when the Minister, Deputy Bruton, decided to take the initiative in this instance he had not got his facts right. What started out initially as a matter to be dealt with by his Department, eventually finished up in the other  House being dealt with or salvaged by the Minister for Finance. Now it is back where it started. Figures were mentioned during the Dáil debate ranging from £65 million to £120 million, the figure quoted here today. Figures have been mentioned in newspaper reports which I agree are startling and astronomical. Surely the House is entitled to know which figure is at least the nearest one to presenting a true picture of the actual amount of money involved.
I am not sure whether anybody has quoted an article in yesterday's Irish Press. I will quote from it. It was headed: “State may have to close down ICI, says expert.” It went on:
The Government may eventually have to wind up the Insurance Corporation of Ireland, according to the managing director of a leading London company which provides a confidential solvency guide to the insurance industry.
Speaking on RTE's This Week programme yesterday, Mr. John Gardiner, of Insurance Solvency International, said he could not really see the company surviving. And he warned that ICI could face a final shortfall of £500 million.
There is also talk of reinsurers withdrawing their cover. I noticed in the Minister's speech that the company will be dependent on reinsurers. If this happens on a large scale, then the full risk falls due to be paid by the insurer — in this case, the ICI. Therefore, the ICI will be fully responsible for any risks that fall due. I have a certain sympathy for the Minister taking this Bill here this evening. In the Dáil during Question Time on 30 January when a specific question was raised with regard to the ICI, the Minister stated that there was no cause for alarm. There is certainly cause for alarm today. A very serious situation has arisen which I hope will not deteriorate any further.
Mr. Conway Mr. Conway
Mr. Conway: First, let me say that Senator Ross said that a member of the Labour Party, Senator Flor O'Mahony, has taken advantage of AIBs problems.  The situation is that the Minister has analysed very well — an analysis which instances many circumstances in which the London office of the ICI were guilty of gross negligence which nearly in themselves brought the AIB banking organisation down. This is a very serious situation with which we are faced in the Seanad and the Dáil. We were presented with a fait accompli. The situation was that if we did not pass this Bill there would be lack of confidence in Allied Irish Banks, there would be a run on the bank themselves and the whole financial institution of the State would grind to a halt. We were told that we, the State, were now to take over the ICI. We have already taken over the PMPA. The situation is that we, the State, are left with the leavings of a private enterprise to do with it as we wish.
There is a connection between Irish Shipping Ltd. and the ICI. We met the late William O'Neill on the semi-State bodies committee, who was a director of ICI. It was put to him at that stage and to the directors of Irish Shipping whether they wished to be a private or a State company. Their answer at that time was that, naturally, they would wish to be in private enterprise. The point I put to the late Mr. O'Neill was that in circumstances where the company are in a disastrous position they would like the benefit and the umbrella of the State, but in situations where there was money to be made in a highly lucrative business, they wanted private enterprise. You cannot have it both ways.
The board of AIB have announced that they will be maintaining their dividends despite these severe losses. We are told that that is for confidence in the banking institution. I wonder is it confidence. As we look at the accounts of Allied Irish Banks, we see that the directors' fees and emoluments for 1984 were £760,000, for 1983, £635,000, an increase of 24 per cent with inflation running at 9 per cent. Possibly we will be told that the directors' fees should continue to be paid at an increased level for next year because if it does not happen there would be a lack of confidence in the banks. I would query that.  Perhaps we have been given information that is correct, that there would be a lack of confidence if the dividend was not paid. I find it very hard to understand why the directors of these banks would pay themselves such an increase. A question the Minister should be asking the banking organisation is, why, in effect, they paid themselves and their directors a 24 per cent increase in 1984.
We are told that had ICI gone into liquidation under the auspices of Allied Irish Banks, it possibly would have brought the bank down. The information we are presented with is the information given to the Minister by Allied Irish Banks. They say that if they were in complete control of ICI and if that company were to go into liquidation they themselves would be faced with a run on the bank. I do not accept that.
This company have been a highly successful company up to now. They have many interests abroad, possibly too many abroad. Nearly 40 per cent of their business is abroad. We see all of the investments that they have abroad. We see from their annual report how many companies they are involved in — 33 wholly owned subsidiaries. They have companies in the Channel Islands, in Jersey and in Scotland. In the United States, they have associated companies. They have a controlling interest in Allied Energy Resources Limited. They have interests in Allied Combined Trust Limited. They have Channel Islands Insurance Consultants Limited in Guernsey. When a bank get themselves involved in an insurance company, get involved in all sorts of speculative operations, is that the function of the bank? I know from experience that I would not be prepared to get involved in industry because my profession is accountancy, a profession I understand. I do not understand other areas and I definitely would not get involved in them. The competence of the bank to get involved in an insurance company, the competence of the Bank of Ireland to get involved in a building society and the competence of the bank to get involved in all these associated companies outside the State must be queried.
 I agree with what Senator Howard said about the contribution that Allied Irish Banks have made to the Irish economy. They were a very aggressive banking operation with highly qualified managers, excellent people to work with, but they had their ruthlessness. There is no doubt that many small businessmen will tell you what information they ask for when they go in looking for an overdraft facility. They look for projections, they look for three year's annual accounts; they look for cash flow statements. Most of all they look for security and that security is signed security by the applicant so that, even in the case of a company, the individual is held liable as far as the bank is concerned. When many companies here have gone into liquidation those who have suffered have been the State and the creditors. Rarely have the bank suffered, because their collateral has been guaranteed by the individual. Therefore we must query the circumstances in which the AIB became involved in a company in the insurance business, bought a company, without examining their books and records. It was most annoying to hear one of the directors of AIB say on television that they had bought a company but they really did not know what they were buying. That is a very sad reflection on a company who preached to us on numerous occasions about their management practices, sought management accounts at all times, lecturing us on what should be management procedures.
The Minister has said, and I have seen several statements to this effect, that heads should roll. I would like to know exactly what the Minister means by saying that some heads should roll, for example, who should take responsibility for this fiasco, as the Minister himself described it——
Mr. E. Collins Mr. E. Collins
Mr. E. Collins: I am sorry, I did not say that.
Mr. Conway Mr. Conway
Mr. Conway: I know the Minister here did not say that, that it was said by another Minister in another place. I accept that the Minister did not say that  here. But I want to know who in the AIB should resign, who should suffer——
Mr. E. Collins Mr. E. Collins
Mr. E. Collins: The Senator should be somewhat more precise as to who said heads should roll and where. It is not my information that either Minister Bruton or myself said that heads should roll.
Mr. Conway Mr. Conway
Mr. Conway: It was my understanding that Minister Bruton had suggested it, that the blame should lie with some individuals who got themselves involved in an insurance company, who bought a company, whose directors admitted they had purchased a company and did not know what they were buying. That was an extraordinary statement to make. Perhaps I am misquoting the Minister. It is a crazy situation that a company with the background of AIB could buy an insurance company and not know what they were buying. If the Minister did not say that heads should roll, I believe heads should roll. I am amazed that people in top positions in this organisation have not already done the honourable thing. We are told by this banking organisation that the reason that that has not yet happened is that it would lead to lack of confidence on the part of the public. Confidence cannot be very high in an organisation admitting to having purchased a company who in the United Kingdom were insuring the bloodstock industry, insuring areas not accepted by other insurance companies, for example, a football team so that they would not go down in their division. It was correctly said by other insurance companies in England that this company were obsessed with new business, with taking over new business. Their premiums, in 1982 amounting to £11.9 million and in 1983 £32.3 million, demonstrated that they were undercutting their competitors, that the only way they could increase their premiums was to underwrite risks which would not be handled by others.
We are told that the company's accountants produced accounts which were misleading; that may be so and it may still be proven to be correct. If that  is proved to be correct then it should be remembered that the auditors themselves have insurance, that it is right that the AIB should go after this firm of accountants proving that they were negligent. The preparation of accounts is done from the internal records of any company. One must come to the conclusion that the internal records of this insurance company left much to be desired. It may well be proven that the company records audited by the auditors were incorrect. If negligence can be proved there then enters in the auditors' insurance. That is an area at present being pursued. I understand that so far no decision has been taken on behalf of a court to give costs to the AIB.
If the Government are bailing out AIB and are doing so only for the security of the State because that institution occupies such a predominant place in the financial institutions of this State, then the State must be willing to accept a share in this bank. We are told that the reason is that that might lead to lack of confidence, that is if the State were to become involved in AIB. But there is already lack of confidence that any company should have taken such drastic action. If the State is willing to bail them out, the State should have a substantial share in AIB.
I agree with Senator Howard when he said that perhaps part of the solution might lie with their wholly-owned companies all over the world, that the AIB may decide to sell one of their subsidiaries. I cannot see that leading to any diminution of confidence.
Many times this banking organisation have, in their annual reports, scoffed at the public sector, calling it inefficient, bound up in red tape and so on. We must now ask: where does the inefficiency lie? Were even a grocery shop run in that fashion it would be out of business very quickly. It should be remembered that in September 1983 AIB took over the ICI. In January 1984, 14 months later, AIB paid £9.525 million for Irish Shipping's share in ICI. One must ask: what evaluation was undertaken by the AIB when we are told that, at the end of 1984, losses were in the region of £65 million? Yet  they were prepared to pay £9.525 million to Irish Shipping Limited for their share in ICI. We are told that the losses involved here will be in the region of £50 million to £120 million. I should like to think that that would be the case and no more. The Minister has correctly said that speculation on the amount of losses in this company would be damaging. I agree with those sentiments. We shall know what losses are involved only when the auditors have completed their review of the whole company in approximately five to six weeks time. If we find it to be in excess of this figure we will have to make other decisions.
There are areas in which banking organisations should not be allowed to be involved. Lessons should be learned here. It is time the Government looked at the situation where banking organisations, for whatever reason, get involved in speculative operations and examined the competence of a bank to get involved in these areas. I agree with banks extending their area of activity throughout the world provided their activities are in the banking arena and not in speculative businesses. I agree that the managers of the AIB in most cases have been top class people who have in many cases helped our economy enormously. For whatever reason, they decided to expand into the insurance area and it was detrimental to the bank.
Company law should be changed as the Minister has outlined, so that we will have proper control over directors and so that the various companies will be accountable. It is past time to reform company law.
The banking sector is not immune from the realities of commercial life. When they get involved in areas in which they have no competence it is a very bad day for themselves and for the State if they rely on the Government to bail them out. The Minister has acted very wisely and the Government are to be commended on the way in which they handled this. For reasons already outlined financial institutions are vital to the State and it is important that confidence in them be maintained.
Dr. O'Donoghue Dr. O'Donoghue
 Dr. O'Donoghue: I am sure I share the sentiments of everyone when I say that there is no joy for us in finding ourselves here for the second time in a short space of years dealing with a major financial collapse in the insurance industry. We must not only try to ensure that this problem is dealt with as quickly and as fairly as possible but we should try to learn the necessary lessons in the hope that we will not have to at some date in the future be faced with the possibility of a third collapse, or even more collapses. There are steps which can be taken. I would like to feel that they will be taken in the not too distant future.
I do not want to delay the House too long as the evening is progressing and other Senators wish to speak. I am tempted to go on at great length as I have a certain sense of familiarity with many of the points being made because I sat on and had the privilege of chairing a committee of inquiry into the insurance industry which sat from 1970 to 1976 during the preparation of its final report. Even then, over ten years ago, some of the issues now being talked of were already starting to surface. Some of the initial warning signs were there and we talked about the kinds of action needed to end them. While at least some changes were made in the wake of that committee and its report, we have by no means progressed as far as had been suggested then and we certainly have not taken account of subsequent developments in financial practices over the past decade.
In relation to how we should deal with the present situation let us try to clarify who should pick up the bill in this instance. Suppose the ICI were just a private limited company with no State shareholders, no banking shareholders and so on, I presume we would say, just like any other company that runs into difficulty, it should go bankrupt and presumably the cost in that instance would primarily be borne by the policyholders. No speaker so far has suggested that policyholders might reasonably bear some of the cost in this instance. Yet over and over again we have heard suggestions that for a number of years both in their Irish  and non-Irish business the ICI have been grossly undercutting the rates charged by other companies. If that is so, surely in the normal course of private enterprise behaviour if people buy cheaply and take the risks inherent in buying cheaply they must reasonably be faced with some of the loss.
In this instance, looking at the history of ICI, had they not changed hands a few years ago, would they still be essentially a form of semi-State company in which case had matters run would we have been aware of the situation so quickly? Apparently not. Apparently it would have taken perhaps another couple of years before the real scale of the problems would emerge. Who knows? We cannot say, because we do not know the extent to which the recent business practices of ICI were in any way the consequences of the change of ownership. Senator Ross suggested in this House, and I have heard it suggested outside, that perhaps after the change of ownership, the ICI management were tempted to chase new business too aggressively because they felt they had more or less unlimited financial backing from the new owners. If that is so, it is unfortunate. Had ICI remained largely associated with their former owners would the State have found itself faced with an indeterminate headache at some indeterminate date? Those are two of the possibilities.
The factual situation, which complicates it, is that ICI had come into the ownership of AIB progressively over the last few years and was finally totally owned by them since 1983. The reason that complicates the situation is as we have heard, that AIB being a major financial institution, we cannot afford to see a situation where AIB are jeopardised because of the losses involved in their ICI subsidiary. For the sake of the soundness of our banking system we have to ensure that the damage to AIB is contained. This is one aspect; another aspect which touches on the question of who should pay part of the tab in the way in which AIB came to take over the ownership and the responsibility for the  conduct of the affairs of ICI. As I understand it, when AIB were embarking on this acquisition there were discussions with the Central Bank and the Central Bank specifically directed them that they were not to devote an undue proportion either of their financial resources or of their management to the running of ICI. Rightly or wrongly as I understand the position AIB did that. They tended to leave ICI alone, certainly in the early months. It was only when the warning signals sounded and when questions were being raised that AIB found themselves forced to go in and take a closer look at what was happening in their newly acquired subsidiary.
I do not wish to develop that aspect of the matter too much. It is not my brief to try to defend AIB but there appears to be a complicated situation. We are not dealing with a simple privately owned insurance company. We are dealing with one that had ramifications with State companies and, especially now, one where there was a somewhat uncertain or confused statement as to how a bank were supposed to conduct their affairs when they acquired a financial subsidiary such as an insurance company. This is one of the areas we will have to pay attention to.
How did this happen? We will not know the full story for some time and I am not going to get into the irresponsible process of speculating about what may be and might not be. Even from the limited information we were given in the Minister's speech it seems as though at the very least ICI conducted their affairs in a rather imprudent manner. For that reason I do not think they deserve any particular support because, looking at ordinary commercial companies, if they behave imprudently they have to bear the consequences of their own folly. I have very little sympathy for ICI, but what about the sympathy for AIB? Are they entitled to any consideration? We have heard the case argued for and against why it is necessary to try to give some guidance on the limit of their liability, because otherwise we might damage the  confidence of depositors. Most reasonable people will go along with that. One area that has been commented on, and I agree with the criticism, is that they were wrong to suggest that they would maintain their dividend. I disagree with Senator Ross's remarks. He said he thought maintained dividend payments were necessary to keep up confidence, but surely not. The shareholders have suffered a loss. In effect, writing off the £86 million means that AIB have lost roughly 20 per cent of their total assets. Whether the shareholders like it or not, that is what has happened to them. Even if one allows that AIB may mitigate some of that loss in future years through being able to use tax losses, they have also lost the ability to earn money on that volume of assets. There is a loss whether one measures it as a once and for all sum now or measures it as a loss of a future stream of profits which they could have earned. If they have suffered that loss, that should be reflected in a reduced payment to their shareholders. Surely that is the way to bring home to the shareholders that there has been serious damage done to the company. There is no point in pretending that there has not been.
With regard to the misleading presentation of the ICI accounts, Senator O'Mahony said that the 1983 underwriting losses surely gave the danger signals. I would have to say, not necessarily in themselves, because once one hits periods of high inflation one expects the investment income, or money earnings, which insurance companies earn on the reserves that they must hold to settle their outstanding claims in the future to rise dramatically. If they were to be reporting no underwriting losses they would end up with much greater profits certainly in money terms and very probably, in real terms also. In order to avoid excessively high premium rates being charged there is nothing wrong with an underwriting loss appearing in a period of high inflation. One has to look at the profit and loss situation of an insurance company. That is one of the developments that happily we managed to get in the last few years instead of the totally antiquated  system that prevailed up to the seventies where one only saw the underwriting accounts and did not see the full profit and loss situation for companies. That meant that there was even less prospect of being able to get a reasonable snapshot picture of an insurance company's affairs.
The more substantive point is that what was lacking in looking at the affairs of ICI, whether one took account of their investment income or not or whether one looked at the balance sheets and so on, is that when one is dealing with an insurance company in the non-life area the real problem, aggravated through inflation in recent years and coupled with the changing behaviour of juries is that it becomes increasingly difficult to get reliable estimates of the eventual settlement cost for outstanding claims. In 1976 in our report — even in the polite language which had to prevail for a committee of 23 people representing all shades of opinion within the insurance industry as well as various outside interests — on this topic, we said:
Despite recognition of the special features of insurance the requirement under the various Acts to report annually in static terms on what is, in fact, a dynamic and evolving situation limits the usefulness to the Supervisory Authority of the prescribed accounts and schedules in assessing the financial stability of the insurance undertaking. The Committee considers it desirable that undertakings should be required to provide data in sufficient detail to enable the Supervisory Authority to satisfy itself—
(i) That the provisions in the balance sheet in respect of outstanding claims and unexpired risks are adequate and have been evaluated on the basis of sound business practice and statistical techniques;
(ii) That the insurance funds which these provisions represent are covered by equivalent and matching assets etc.
The crucial portion is, “the basis on which outstanding claims have been evaluated, including statistical techniques”. I am a  little bit saddened that it is only now, in the wake of the second collapse, that we have in the Minister's speech reference to the fact that he wants to look at strengthening the staff in his supervisory sector and take aboard actuarial techniques which have been used for a long time in the life assurance area. It should have been done a number of years ago. The whole basis of the insurance industry, as was made clear throughout that insurance report of ten years ago, was changing rapidly and we should not still in 1985 be talking about developing an adequate supervisory system nor should we still be left with the situation where by all accounts, ICI did not have anything remotely resembling a modern system. There were about three simple tests that could have been run for the ICI or any other firm. All you had to do was look, first of all at the statistical sample, the basis on which estimates for settling outstanding claims were done on a year by year breakdown. It is no use getting an aggregate figure and being told that at the end of 1981 you might have an estimate of £10 million for outstanding claims and in 1982 it is £15 million and in 1983 it is £20 million. One would want to see for each year in which the risk was incurred how the eventual settlement pattern runs out because typically what happens is that it is the smaller, less costly claims which are settled quickly in the first year or two after the premium was paid and it is the small number of very expensive claims which are typically settled three, four or five years later. They are the ones that play havoc with the company.
That is why we will not know for quite some time what the eventual outcome in the ICI affair is going to be, even though we are promised more accurate estimates from the auditors who are currently working on the problem. We have to recognise that at best all they can do is give us their up-to-date assessment which they will regard as reasonable. That is the first thing to look at, the actual statistical techniques and estimating procedures that are used. It is possible to compare  the practices of companies in this respect. I am sure the Minister will know from the work in his Department that there can be significant differences between companies in this area but it is a crucially important area to follow up.
The second thing to look at — and it should have applied to the supervisory authority as well as to the AIB, even if they were not intervening on a day-to-day basis — is the actual distribution of business by various categories, because it is one thing to write a large number of policies for motor cars or for householders but it is a totally different matter to get into once-off specific types of risks, for example, satellites, bloodstock, bush fires in Australia and so on. Any of those types of risks by definition have a very small number of cases, so if there is no claim on the one or two expensive race horses it is a very pleasant outcome but if there is even one Shergar-type situation or one jumbo jet disaster, clearly it can wreck any small to medium sized insurance company. Looking at the distribution of business can be a very important control check on these companies. We have to ask to what extent that type of assessment is carried out.
The third area is what sort of pricing policy was being followed, because if even half the stories are true about the way in which ICI were quoting premium rates, whether in Ireland or outside Ireland, we would have to ask whether the Minister felt he had powers to intervene and take steps, if necessary even to revoke the licence of the company.
These are the sort of questions that must be asked when looking at the behaviour of ICI. It seems to me that, given the complications in the matter, certainly policy holders should bear some of the risk. This may well become important in the future, because the Minister quite rightly, when giving the best estimates that we can have at the moment — of £65 million to £120 million — of the extent of the losses which may emerge, says that these figures are, of course, based on re-insurance contracts being sustained, as it must be assumed they will be.
 We know that there have also been suggestions about the format in which some of that re-insurance business was arranged. I presume that must be the basis for some of the speculation about the very large eventual losses which could emerge from this ICI case. I would have to say that on the face of it, and especially if they are outside this country, I do not see why the Irish taxpayer should have to pick up some of the costs.
One of the areas to explore very carefully, since this is the first time it has come up in our experience, is the relationship between supervisory authorities in different countries. I do not want to appear to be engaging in what might be called Brit-bashing, but London has prided itself on being in effect the leading insurance centre of the world for a very long time. Indeed when the UK was joining the EC, many people in the city of London felt that this whole financial sector was one in which the UK would have a particular expertise and, therefore, they would be able to generate a lot of business for themselves in the wider European context. If they have this expertise and so on, and they have far more companies and a much greater volume of trade, to what extent have the UK supervisory authority adequately discharged their responsibilities? Under the EC arrangements it is their responsibility to ensure the adequacy of ICI's London affairs. I know it is a fairly sensitive area but one which it will be necessary to explore, if not on this occasion, in the eventuality of any future difficulties between companies.
What happens if the parent authority is not satisfied with the quality of the supervision given by another member state? In this instance what happens if we in Ireland are not completely satisfied that there was adequate supervision in London? Do we have redress through the Commission and if necessary can we take them to the European Court? These are matters which ought to be pursued, even on a hypothetical basis. It has become important to prepare adequately for any possible future situation. Of course, it could apply the other way around. As  we know there are non-Irish companies operating here and what happens if anyone of them ever get into trouble and the finger is being pointed at the inadequate supervision of their branch activities in Ireland? That is one matter that has to be explored.
We have to put our own house in order; we have to explore our relationships with other supervising authorities and now we have to get the Central Bank to spell out policy, even if it is not the sort of policy that is published in great detail in the press. They will certainly have to clarify their attitude towards the investment and diversification activities of the financial institutions. In this instance they allowed a major bank to take over an insurance company but in effect hamstrung them by saying they could not really get too heavily involved either with their management or with their money. Rightly or wrongly that appears to have given rise to at least some of the delay in dealing with the issue, but on the other hand I am told that other companies in the financial sector have not been able to get approval for various kinds of involvements either by way of shareholdings and so on in other types of financial concerns.
It appears from the examples that have been quoted to me that there is a lack of consistency in the Central Bank's policy in this area. That may not be fully verifiable but somebody will have to take that matter up and if the Central Bank are to allow banks to take shareholdings in other financial type institutions, they must then work out a revised and adequate code of supervision. They cannot, as they apparently did in this case, just send a letter to AIB, discuss the details of it and then walk away from it. It is for that reason that I welcome the fact that the Central Bank have come forward in the past week to say that they will help with the financial arrangements for this rescue because it is a bank that needs to be rescued, not the insurance company, and it is the Central Bank that should look after the financial problems of banks. Unless there are some exceptional reasons, it should not be other  agencies within the State. As we know, if the Central Bank actually have to use any of their money it means eventually that the taxpayer is the one who is paying because if they did not have to use their money in that way it would be available to the Exchequer in the same way as any other tax revenue would be available. It is only a question of whether the taxpayer pays today or pays later.
The third area that we must examine is the reform of the legal system and not just talk about not having juries in a number of actions. That is important also but when we were drawing up this report on insurance, while we recommended a number of changes, there was also a split in the committee, but by a majority we suggested that in the case of motor insurance — and I suggest that this applies to many forms of liability insurance — we should get rid of the liability system. The old argument for having it was that there would be too much moral hazard if you did not keep liability. The notion that if you were just going to have what is called “no fault insurance”, people would behave recklessly. Many of the most expensive claims today arise from people who are not insured anyway. If one takes motor insurance one finds that the Insurance Bureau of Ireland figures rise drastically every year. This is because many accidents involving uninsured drivers crashing into insured drivers give rise to very expensive claims. Similarly, in many of the employers' liability cases, one cannot say that the existence of liability leads to any significant improvement in safety because of the employer being liable. Nowadays workers very often have a much more relaxed attitude to safety and it is not directly the employer who can have any real responsibility for many of the accidents that take place during working hours, whether in his premises or out on the road. Much of the liability concept is out-dated and irrelevant. The reason for many of the other claims mounting is that we are dealing with people and societies that are far more affluent, but the distribution of affluence is always very uneven.
Take the extreme case of some forms  of liability which a trader might face. If some famous pop star or footballer comes into one's premises to buy £50 or £100 worth of goods and he suffers an accident it may cost you a couple of million pounds merely because he is a very expensive commodity. That should be done away with. Any form of accident should essentially involve the paying of scheduled benefits. We should fix a scale of benefits which would compensate for loss of earnings during the period of injury up to a maximum figure, perhaps twice the average earnings, and if there are highly paid pop stars or footballers let them take out their own personal insurance and not have it as a liability on anybody else. The same concept could be applied to most motor insurance.
We should get rid, too, of the notion of insurance companies completing a transaction by paying a single figure. I do not see the point in having an insurance company paying £1 million in a severe injury case. Sometimes that sum would be inadequate if, unfortunately, the person lives on in great pain and suffering for up to 50 years. Sometimes it is grossly excessive because the person concerned might die six months afterwards. We should not be developing the kind of society where we provide in an irrelevant way for many of the hazards of life. Surely what most people want is that if an accident occurs, any expenses whether by way of medical treatment or loss of earnings, up to a reasonable figure, should be covered and then lump sums calculated on whatever arbitrary basis suggested by way of an ex gratia payment for various injuries, broken arms or legs and so on. That would introduce one crucial difference into the whole system.
Some people may ask how can life companies get it right and non-life companies get it so wrong. The non-life business as it stands is becoming more and more of a lottery or a guessing game because no insurance company when they take on their premiums this year can tell you how much they will have to pay out in the next one, three, five or ten years on these policies. The only way it can be made a manageable, sensible, practical  business is to specify the amounts in each case and the way to specify even for the long duration accident cases would be, not to pay a once-for-all sum to permanently disabled people but to pay annual sums so that on a gradual basis a predictable manageable sum can be developed. There would not then be these violent fluctuations in the declared results of insurance companies and opportunities which can give rise to the sort of situation we are discussing tonight, whether they result from incompetence, foolishness, fraud or just plain stupidity. The only consolation we have in this case is that at least the problem was spotted within 18 months of its starting to develop and it was not allowed to drag on and become a real nightmare.
For that reason the Government were right to act as quickly as they did. Whether they should have gone as far as they did in apparently indemnifying AIB is a more contentious matter. In the first instance, AIB were the people who made the investment. They were the people therefore who would have collected the profits had the venture been successful and in general they have to pick up the tab for the losses. The only mitigating element for them is that in so far as they were constrained by the directives of the Central Bank they may be entitled to some sort of consideration. But since the taxpayer is not yet paying out any money we should welcome the Bill, have it in operation as quickly as possible, wait for more accurate information in the not too distant future and then see what can be done after that. I have not touched at all on whether this new company should continue actively to trade as an insurance company or whether we should embark on a policy of running it down. Part of the answer there will have to be taken on the basis of whether there is a sufficient availablity of insurance in various classes. We know that for some categories of business there appears to be a reasonable choice of companies. In other cases, we are told that it is extremely difficult. At any rate, that is the context in which to look at the question of continuing this company.
 I emphasise that I do not see any long term solution to many of these problems, no matter how well we improve our supervisory procedures and so on, unless we really bite the bullet on the whole concept of liability. One of the first areas in which to start, because it is of economic importance is the question of employer's liability. The fact that employers are paying £20 a week or more to insure their workers must be a real drag on employment. I see no moral justification for it, quite apart from the economic damage it is doing. I do not see that it is necessary to provide against genuine hardship; the way to cope with that is along the lines I have suggested, by scheduled payments which could be provided at a nominal cost by comparison with the present system.
Mr. O'Leary Mr. O'Leary
Mr. O'Leary: I welcome the Bill and it will have my support. The action taken by the Government is wise and the House would be doing a service in passing this legislation speedily. It is of great importance to the insurance industry and the banking fraternity and their lack of interest in this debate is surprising. It appears that the rescue package of the Government and of the Oireachtas is taken for granted. They can sit at home and relax, confident in the knowledge that we work as late as is necessary to clear up the mess which they created.
As public representatives we must look at how we have behaved ourselves and how the people who represent us have behaved. I am conscious of the rule of the House whereby individual members of the Minister's staff cannot be criticised. The custom is to criticise the Minister and, therefore, I have to address my remarks to the Minister. I am doing so in the knowledge that it is not his personal responsibility or that of his predecessors, but the personal responsibility of other people whom I cannot finger in this House tonight.
The problems in the Insurance Corporation of Ireland were clearly signalled in the information which was available to the Minister's Department over the last three years. I would like to run quickly  through a few things that the Minister has said and quote some statistics which will give credence to what I will say. The Minister in his speech said that ICI were a company whose state was satisfactory over a long period of years. The company were trading normally and had a consistent track record of steady profitability and were disclosing a very comfortable surplus of assets over the required solvency mark. Later on in his speech the Minister said:
As regards the system of supervision employed in Ireland, my Department receive the accounts of insurers annually and undertake detailed analysis of the information supplied in relation to the different classes of insurers' business.
Further on he said:
Arising from the tests applied to ICI, my Department began to be concerned about the adequacy of the technical claims reserves set up by the company in relation to its Irish business.
The Minister does not specify when that occurred but followed on by saying:
During 1983 the Department communicated formally to ICI their concern at this aspect of the company's operation.
Presumably, the concern manifested itself during 1983 on the consideration of the 1982 accounts. I have considered in detail the accounts of two insurers: one of course is the Insurance Corporation of Ireland and the other the Hibernian Insurance Company. These are matters of public record. I picked the Hibernian Insurance Company because, contrary to what people say, they are a very fine insurance company with a consistent record of conservative and sound reporting to the Department.
There are two very significant areas of business where underwriting profit and losses have occurred over the recent past — the motor insurance and liability insurance in general. Liability insurance in some of the reports which are before the  House are divided into two, employer's liability and public liability in general. In respect of some of the reports, that division is not made. These reports are available and form the basis of the book which is published annually and is known as the blue book although it is not blue. In the book in question are statements of assurance business as presented to both Houses of the Oireachtas in accordance with section 27 of the Assurance Companies Act, 1909, and section 5 of the European Communities Non-life Insurance Account Regulations 1977. That indicates quite clearly the state of play of each insurance company on an annual basis and, presumably, forms the basis of the investigation and the monitoring to which the Minister refers in his speech. That book is backed up by individual statements from each company. For example, in respect of the year 1983 there is a statement from the Hibernian Insurance Company which goes through in detail the various underwriting profits and losses of that company which are recorded on each category of business during the year. It summarises all those and shows whether the company made a profit or a loss.
In 1983 the Hibernian Insurance Company made a very healthy profit. The same kind of information is available in respect of the Insurance Corporation of Ireland. One of the significant things about these reports is that they are not static as suggested in the insurance report. Whether it happened after the report to which Senator O'Donoghue referred or not, they update the information available in the previous years. They not only reported the position in 1983 but they give the position in 1982 and 1981, 1980, 1979 and back as far as 1978. You can see the emerging pattern over the years, how the company are behaving themselves and how their reserves were deemed to be adequate or inadequate. For example, in respect of liability insurance, in 1978 the Hibernian Insurance Company provided a sum of £4.85 million for claims which they anticipated would arise during that year, amounting to £4.1 million. Every year as they reported to  the Department, up to this year, they have adjusted that figure upwards and downwards with more up-to-date information, always referring back to the accidents that occurred in 1978.
Therefore, that company over the years have been able to reduce slightly and gradually the amount of money which they provided in respect of accidents occurring in 1978 so that at the end of 1983 when the whole situation was nearly washed out they could say that the total amount of money which they needed to provide was £3.45 million. For 1980 the information is the same. They said originally in respect of 1979 that the amount of money which they would require to provide in respect of accidents which occurred in 1979 under liability was £5.4 million. They thought later that they would require £6 million. It is a very small increase over a period of years, especially when you take into account high inflation during that time for a very stable situation. Throughout that time that pattern emerges in the Hibernian Insurance Company's reporting system consistently year after year.
If we look at the situation of the ICI and the position that obtained in 1978 we find precisely the same thing. They have a classification of insurance called liability. In 1978 they deemed it appropriate to provide £4.1 million in respect of accidents which occurred in 1978. By the end of 1983 that had increased to £7.3 million. Similarly you can go to 1979 and say that they originally estimated that £5.3 million was required to provide for the claims in respect of occurrences during 1979 and what is needed according to their estimates now is £11.7 million, more than double.
Steadily over the years in respect of the ICI every year the matter was reconsidered and a greater and greater sum of money needed to be provided. This is where the Minister comes in, although not personally. The Minister said that during 1983 the Department were concerned, but I say to him that the Minister should have been concerned considerably before that. I have not looked at previous years, 1977, 1976, 1975, but I can say in  respect of 1981 that the 1981 accounts of the ICI showed an increase in respect of the 1979 liability provision from £5.3 million to £9.1 million. That was available to the Minister during 1982. In other words, during 1982 it was quite obvious that consistently over the years ICI had underprovided the amount of money necessary in respect of the claims they had to meet. It was also quite clear, if you looked at other insurance companies, specifically the Hibernian Insurance Company, that that did not apply. Consistently from day one with all the uncertainty with regard to quantity, number and type of claim, they were able to estimate accurately within plus or minus 5 per cent the amount of money for which they would ultimately be liable. ICI were unable to do that to within 100 per cent.
That information was available in the Minister's Department not during 1983 but certainly during 1982 and maybe much earlier. Therefore, the Minister should look very carefully at the kind of advice and monitoring which took place in his Department over those years. Part of the responsibility in respect of this internal problem in so far as it relates to the problem in Ireland is within the supervisory authority and capacity of the Minister. The Minister is responsible for that, as is quite obvious to anybody who was examining these accounts. I was not examining them but it is not my job to examine them. I am sure the other Members of the Seanad were not examining them. It is not our job to do so, but there is a section in the Minister's Department to examine these and that was not being done, or if it was being done it was being done badly.
It is grand to say that the responsibility is in some way magically tied to the perverse awards from juries. I have no objection or hang-up with regard to investigating whether the jury system is good now or will be in the future. The Minister should bear in mind that the average amount of a motor claim which is awarded in respect of any accident in Ireland consistently over the years is in the order of £1,700 or £1,800. What appears in the newspapers are cases in  which awards of £200,000 or £100,000 of £50,000 are made. That is not typical. The average cost of a claim is £1,700 or £1,800. For that to be the case it is obvious that the overwhelming majority of payments must be very small indeed. It is also obvious that the problem with the Irish insurance market is not that bigger sums are being agreed, with or without the jury, but that we do not take the standard of a motor car seriously, that we do not take the problems of protecting our employees seriously and that too many accidents occur.
The problem relating to ICI did not occur only in respect of liability insurance. There were also consistent under-provisions in respect of motor insurance: £500,000 in 1982, £1,600,000 in 1981, £800,000 in 1980 and £2 million in 1979. I am sure that other companies have under provisions from time to time but they are matched now and then by surpluses, and that was not done in the case of ICI. The supervisory function of the Department should have alerted the Minister and the House through the Minister. They should have alerted the Government about the problem which was being built up with regard to ICI.
As a result of a small investigation of these facts from information available in the Library of this House I extracted those startling figures. Those same figures were available not only to the Minister but to the board of AIB. I cannot see why the board of AIB should suggest that they were in some way not able to read the signs with regard to the assessment of the liability in respect of this risk. I might say that I am a very small shareholder in AIB, but the attitude of their board of directors is in my opinion an absolute disgrace. The way in which they have sought to duck responsibility in this is disgraceful and any one of them who had the interest of the shareholders at heart and who investigated the affairs of ICI prior to the take-over would have seen the danger signals there in respect of the business in Ireland. Forget the business in the UK.
We cannot remove from responsibility  the directors of ICI. It is not without significance that these are some of the same gentlemen who presided over the debacle in Irish Shipping. The names keep cropping up. Foreign adventures seem to have a fixation regarding the directors common to ICI and Irish Shipping. I cannot say anything about the insurance business in London undertaken by ICI but it would appear to have been entered into in an extremely irresponsible way. As a result, the responsibility for this must be shared by the company, by the board of Allied Irish Banks and as pointed out by Senator O'Donoghue, probably by the supervisory authority in the United Kingdom. I am not aware of how the supervisory authority in the United Kingdom operate, but it is possible that they too should be the subject of our investigation.
I am in favour of giving the Minister the authority to commit £20 million of Irish funds to this project but I am not in favour of writing a blank cheque in respect of any unascertained amount of insurance losses abroad. The Bill in no way commits the Government over a period of time to that and we should not do so. We should be quite firm about this. I do not mind picking up losses incurred within this country or picking up moderate losses in respect of adventures abroad, but once one gets into the realm of £150 million or £200 million, or a figure of that kind, it is time to cry halt. This is a limited liability company just like any other. There is limited liability available to the shareholders of the company, and if we are pushed too far we should use it.
I understand that the future health of Allied Irish Banks is very important to the economic welfare of the country and I commend the Minister and the Government for taking such steps as were necessary to restore the confidence of the people in the validity and future of Allied Irish Banks. It is only right and proper that should be done. However, we must broaden the discussion slightly to recognise that banks in general and banks operating on a wide scale basis in Ireland in particular, retain a special relationship vis-a-vis the economy. It has been proved  by this Bill that the Government cannot afford to allow a bank to suffer from financial pressure. The Government, whether they like it or not, must step in and pick up the tab in respect of these foreign adventures by the Allied Irish Banks, or any other bank that may get involved in a similar type of venture.
There is no such thing as a free lunch. For every unwritten guarantee which the banks have of being backed by the Government there is a corresponding responsibility and duty. They have a responsibility and a duty not to get involved in businesses in which they have no conceivable right to be in. Banks should not be in a business like insurance where there is virtual unlimited liability in respect of some risks. There should be an Act of the Oireachtas which stops banks from being involved in businesses like that. The ability of banks to expand their portfolio and their business activity should be restricted by size and/or type of operation.
When the banks were campaigning against the bank levy, they pretended to the Members of the Oireachtas that they were only ordinary limited liability companies who should pay ordinary taxes and should be treated in the same way as any other limited liability company but that is not the case. They have a special relationship with the Central Bank and with the economic health of the country. We have our responsibility to them as a result of that, but they have responsibilities towards us as well.
I am not enthusiastic about the appointment of an administrator and I do not think that appointment should continue indefinitely. I have no objection to an administrator being appointed in respect of any business which has already been transacted but if it is intended to keep this company in business in the future, it should be run by a board of directors like any other body, the normal future trading activities of the company should be isolated from the past and the responsibilities for normal trading should be taken from the administrator.
The appointment of the administrator is peculiar. He is not appointed by the  Minister but by the court. He does not take instructions from the Minister. If this administrator, or any other administrator commits this Government and this Parliament to picking up the tab for his actions, he should be under the control and authority of the Government and the Oireachtas. If it is decided to continue trading in the Insurance Corporation of Ireland — and I understand that is the intention and I wish them every success — it should be done by setting up another company for the purpose of carrying on future business and restrict the administration to the winding up of the old company. I do not want to delay the House or to make any other criticisms of other sections of the Department nor do I want to get into a deep discussion with regard to the type, range and scope of claims and their methods of processing which could well be discussed by this House and the other House in the future.
There are profitable insurance companies in Ireland making money. I have mentioned one but there are many others. They make money by prudence. They do not make money by an irresponsible acceptance of risks. Similarly, as members of the public and as legislators we must recognise that there are circumstances in which risks we might like to see accepted — for example, very young people driving cars — cannot be accepted. It is not a question of how much we will accept them for, maybe they just cannot be accepted. That is something we have to recognise. Maybe it is not right that people should be entitled to drive cars at 17 years of age; maybe young people should not drive cars until they are 18, 19 or 20 years of age, for their own protection and for the protection of members of the public, because of the difficulties which this category of driver has in getting insurance. We have to educate the public too in that regard. We have a duty in these matters.
I welcome the Bill and wish it a speedy passage. I hope that from time to time the Minister will make available to us sufficient information so that we can discuss the affairs of this company. Finally, I would like to say to the Minister  that when he is deciding which of his officials should hold the shares in this company he should appoint an official who was not supervising the company up to now rather than the officials who were. We should reward virtue and punish transgression rather than the other way around.
Mr. E. Ryan Mr. E. Ryan
Mr. E. Ryan: I do not propose to dwell on the responsibility of AIB or ICI in this matter because that has been dealt with adequately and fully by many previous speakers. At this stage of the debate perhaps we should be looking to what lessons can be learned from this debacle, what we can do to ensure that it does not happen again, or what we can do to improve the system, quite apart from preventing something as dramatic as happened in this case. Having regard to what happened the PMPA a few years ago and what happened the ICI, it would be possible not to call into question the effectiveness and the adequacy of the supervisory authority. The position of the PMPA was widely known and commented upon for almost ten years before it actually collapsed. I recently came across an article in Business and Finance dated 1975 in which the solvency of the PMPA was questioned and very compelling figures were given to show that solvency was very much in doubt. The position of that company was continually questioned and brought to the notice of the supervisory authority for eight years before the crash happened and yet nothing was done until the position was so serious that it was too late to do anything. Huge losses were incurred and the insurance companies and, of course, ultimately the policyholders had to pay for the mistakes that were made in that regard.
It was widely commented upon and known for several years that ICI were taking risks that other companies would not take. They were under-pricing, taking policies and giving cover at prices which made no sense whatever to other companies and it is quite clear that they were unrealistic. Senator O'Leary has taken  figures from the blue book which show that they were making inadequate provision for the claims that were arising. It would be impossible not to reach the conclusion that the supervisory authority has not been effective over these years. I am not necessarily blaming the officials of the Department. They must not have had adequate resources to do this job. I do not think they had the expertise to do the job. It was commented upon that one of the rather absurd things that happens in the Civil Service is, and it happened in this case, that the officials in the Department who were given this job gradually built up some expertise in the matter but were moved to another section. That is just one example of what happened in that Department.
The fault, in so far as there is fault, lies with the Minister of the day, the key person who was in charge of the Department, not necessarily the present Minister but successive Ministers who did not organise the supervisory authority adequately, did not give the resources, did not provide the necessary expertise, the actuarial advice and so on. This led to these two very unfortunate occurrences, one of which we are dealing with today.
There is another aspect of the supervisory authority which I should like to comment on and that is the proposition that was made in the Minister's speech that the supervisory authority are not responsible for what may happen when a company in this country have an office abroad. It is asserted that in such a case that is the responsibility of the supervisory authority in the other country wherever the office may be. The supervisory authority exists to ensure that an insurance company remain viable, that they are able to pay their claims, that there is no breakdown affecting the citizens of the country and no breakdown of a major kind which may even affect the economy of the country as almost happened in this case. There is little use in having a supervisory authority examining under a microscope the home business of an insurance company and ignoring what happened abroad, as happened in the case of the ICI. If the foreign business is  in trouble and if risks are taken which could lead to a very serious collapse of the company, then quite obviously the Irish office would be affected and, would be unable to pay their claims. Irish citizens would be affected. It is really pointless to have a situation where what is happening abroad is not the responsibility of the Department or the Government if it gets out of control.
Placing responsibility on a foreign supervisory authority can be useless and in this case it appears to have been ineffective because London is, as Senator O'Leary said, regarded as a place where there is a very high degree of simplification in regard to insurance. Consequently one would expect that the supervisory authority there would be highly sophisticated and highly effective. Nevertheless, they did not seem to be able to realise what was happening in this case. If that is the position in London, what is it like in several other countries which may have an insurance company with offices here and we may be relying on the supervisory authority in those countries to ensure that the Irish company's foreign office are not doing something which may lead to trouble?
There are EC regulations and the supervisory authority in the other country would probably insist on examining the activities of the Irish company in their country. I see no reason whatever why the supervisory authority here should not accept responsibility for the company's activities abroad and why it should not get the returns from that country and look at them in exactly the same way as they look at what happens here at home. There would not seem to be any insurmountable difficulty for an Irish company which had an office in London in sending two sets of returns, one to the supervisory authority in London and the other to the supervisory authority in Dublin so that the supervisory authority here will know what is happening and ensure that the activities of the company in London or abroad are under control. If they do not do that, the end result will be that the company may get into trouble and that  could affect not merely the people abroad but the citizens of this country.
In the course of the debate in this House and the other House there was a good deal of talk about the legal system and legal costs. We are debating the collapse of ICI which was not due to their activities or trading in this country but mainly to what happened abroad in America and so on. Nevertheless in the course of the debate we found that not only abroad but in this country they were trading at a loss and that a great deal of new money had to be injected to keep them from getting into trouble. Again, the question of the legal system in this country has been referred to on a number of occasions.
The legal costs in this country are certainly high but overall they are nothing like some of the figures suggested in the course of the debate. Examples were given of cases in which costs were four or five times the damages, where the plaintiff got something like 20 per cent of what the legal costs were. It is possible to pick out a case like that but it is far from being typical. The statistics are there. It is quite easy to find them. They have been reported on on many occasions. They have appeared in a number of different reports over the years. They have been fairly consistent over the years.
For many years 16 per cent of all the money paid out by insurance companies for claims consisted of legal costs. In recent years when VAT was put on legal costs, that added another 23 per cent so that that figure went up to between 20 per cent and 21 per cent. Of the total amount that insurance companies pay out in claims to people injured in accidents, marginally under 80 per cent goes in damages and marginally over 20 per cent goes in legal costs. That is the figure. I am not suggesting that it is an entirely satisfactory figure. I am not suggesting that every effort should not be made to try to bring it down. That is the figure, and not the kind of figure that has been bandied around in the course of the debate on this matter.
Every effort should be made to look again at the system of dealing with claims,  the system whereby an injured party brings his case before the court and looks for damages for the injuries and loss he suffered. One of the first matters that comes up for discussion and comment is the question of juries. It has been suggested that juries should be abolished. The Minister for Finance said in the other House that this question was under consideration and was going to be modified. I am not quite sure what “modified” means. I hope it means abolished. I believe juries should be abolished. I do not think they serve any useful purpose. It should be remembered that we had the same system as the one which exists in the UK. We had the same system when the State was founded here. The UK had juries for negligence actions. Because of the war effort, during the Second World War they decided that they could not spare people to act on juries. They abolished them for the duration and they never went back to juries. They have managed very well since then without juries.
I believe juries no longer serve any useful purpose. They should be eliminated at this stage. It would be a very useful contribution to bringing down the cost of claims and the cost of the legal system. For the same kind of injuries, the damages given here by a jury are very often twice as high as those given in the UK. For example, in the case of the loss of an eye, or a fractured hip, or something of that kind, the damages given here are in or about twice as much. That has been the position for some time past.
It is not surprising that damages are not only too high but sometimes too low. They vary very widely indeed. Because for some time now every member of the public has been entitled to be on a jury, it used to be householders only. This means that people probably only act on a jury once or twice in their lives. In a serious action where a person has serious injuries, probably most of the jury have never been in such an action before and have no idea of what is an appropriate amount of damages to give. Not only have they no idea, but there is a strict  rule that neither the judge nor counsel can assist them in the matter, or suggest to them what an appropriate amount should be. Because of that, damages vary widely. By and large they tend to be generous. Very often they are too generous and this leads to an appeal and extra cost. That means a new trial and the whole procedure costs very much more than is necessary. That is the position about damages. Without juries, damages would be less and the cost of ascertaining what damages should be would be less.
It must be remembered that it is not only in regard to damages. Juries also have to decide very difficult points of liability, not only in road accidents where the average member of the jury possibly drives a car and may have some idea as to the rights and wrongs and the obligations of drivers, and so on, but in many cases they are dealing with accidents in factories, and so on. They have to deal with very difficult points in regard to the obligations of an employer. In such cases it is not surprising that juries come to conclusions that do not appear to be correct. There are appeals on these points. There are new trials and an accumulation of costs.
The whole system of juries leads to more and more appeals, new trials and accumulation of costs. The jury trial itself takes much longer than would be taken without a jury. A case which could be dealt with by a judge in a day can take two days and sometimes longer before a jury. This leads to extra costs. The whole system leads to a very much higher cost of trying cases as well as much higher damages. I hope when the Minister said that the Government were considering modification of the jury system he really meant abolishing it. It would be absurd to tinker with the system.
I am not suggesting for one moment that abolishing the jury system is the only thing that can be done or should be done. It is a very important first step. There are other reforms which could be introduced. Most of these could be introduced more effectively in the absence of a jury. Although some of the points made by Senator O'Donoghue could be very  useful, they would raise some important constitutional issues. I am not sure that they could be introduced without very serious change in the law.
One of the points which has been made, and which has often been referred to, is the question of the delay in having a case brought before the court. Although that was the case some time ago, I have to say that a great improvement has been made in this regard in recent years principally due to the former President of the High Court, now the Chief Justice, and the present President of the High Court. The position now is that a case that is set down for trial can be heard within about seven months. If it is not heard within seven months, then it is not the fault of the system. The courts are now geared to deal with the list that is before them within seven months, which is as satisfactory and efficient as one could expect. The delays in the law, if they exist now, are not the fault of the system. They may be the fault of the person himself, or a solicitor, or somebody who does not avail of the system that exists.
The question of appropriate damages must arise in the context of what I have been saying because there are, of course, many different views about this. Those who support the retention of juries say that the awards in the UK are sometimes ridiculously low and that it would be wrong to adopt that system. They argue, why should awards be less than they are here at the present time? Who can put a figure on pain and suffering? Who can say that the figures very often awarded in this country for pain and suffering are wrong, that they are too high, because it is impossible to measure pain and suffering? Of course, it is impossible to measure pain and suffering and it is quite true to say that if a person gets, perhaps, £100,000 for the loss of an eye the argument can be used, would you voluntarily lose an eye for £100,000? Of course, very few people would. But there must be some limit, some yardstick, some system. Certainly, the system that applies in this country at the moment tends to give awards which are unrealistic and which, I think, are impossible to continue. The  fact of the matter is that the insurance industry cannot continue to afford to pay the kind of damages that have been paid in recent years. They cannot afford to pay the damages which some people here arguing in favour of juries say are merely adequate.
One must look at the whole condition of the insurance industry at present to realise that there is a limit to what can be paid in damages. It is quite obvious from recent events that the insurance industry is under very severe strain. When you look at what happened to PMPA and ICI, when you look at recent figures from the blue book which show, in regard to damages and in regard to losses arising from the insurance industry's insurance of motor accidents and factory accidents, that in 1981 there was a collective loss of £24 million on this kind of insurance. In 1982 there was a collective loss to virtually all the insurance companies. There was not a single one that made money. In 1982 it was £74 million. In 1983 it was £97 million, almost £100 million and we do not yet know what the figure is for 1984. In these circumstances, it is quite clear that an insurance company can only remain solvent and in business by increasing premiums drastically.
On the other hand, there is an outcry because premiums are already too high. The insurance companies would be the first to admit that premiums are too high. They have to try to collect premiums. They know the resistance from their clients but, on the other hand, if damages are going to continue to be paid on the basis of what has been done up to now, then premiums will have to go up. We must face up to the fact that premiums will have to continue to go higher and higher — which would have a very serious effect, not only on motorists but on employers who would find it almost impossible to remain in business. We cannot have it both ways. The damages must be curtailed in some way or the premiums will have to go so high that the whole system will be inoperable. Possibly one of the good things that arises from the matter we are discussing is that we are being forced to face up to this  dilemma. This whole matter is very unfortunate for the people who are involved in one way or another and for the economic life of this country. I can only hope that we will learn some lessons from it, that there will be a tightening up, changes and reforms in the areas which I have mentioned and in other areas, and that some good will come out of what has happened.
Professor Hillery Professor Hillery
Professor Hillery: I propose to make a few general observations on non-life insurance and, like Senator Ryan, to focus on the jury system in High Court actions. The non-life insurance industry in Ireland, in common with experience in other countries in the EC, the USA, Australia and so on, has suffered serious underwriting losses in recent years. The most common reason for these adverse results in all countries is a greater claims consciousness by the public, aided by an increasingly involved and interested legal system. Actions by trade unions also have contributed in encouraging their members in relation to accidents which, of course, they feel is their legitimate function. Then there is the extraordinary increase in crime-related claims — for example, burglaries, house breaking, car thefts and particularly arson.
Our legal system can be criticised on two fronts. Penalties imposed by the courts are usually inadequate and the widely fluctuating jury awards in High Court cases have now brought the £600 million non-life insurance industry to a sorry state. According to the 1983 blue book of Irish-controlled undertakings, premium income was £243,172,000 of which the Insurance Corporation and the PMPA combined have £115,245,000. In other words, almost 50 per cent of the non-life business has now been forced into State hands. Failure to manage by insurers can be a contributory cause of losses to the insurance industry. Indeed, the serious lack of management control in the Insurance Corporation has already been underlined by the Minister in his opening statement and was an important  contributory cause to the present problem.
Much emphasis has been placed on the London branch of the Insurance Corporation. The same company, however, has Irish underwriting losses of approximately £43 million which is very serious in itself.
I welcome the reference the Minister made in the other House to the review of the jury system. Like Senator Eoin Ryan, I want to make the case for the abolition of juries in High Court actions. I welcome the fact that Senator Eoin Ryan, himself a practicising lawyer advocates the abolition of juries. But I suspect that his views on the abolition of juries are not shared by a majority of his profession. Consequently, the onus rests fairly and squarely on the Minister for Justice, Deputy Noonan, his Department and through him the Government, to bring forward legislation which I hope will propose the abolition of juries and not to tinker with the problem in some other way.
First let me take personal injury actions in Ireland. The jury are required to make decisions both as to the liability and the amount. However, the reality is that the normal jury have no competence to decide on what is an appropriate amount to award for any particular injury or disablement. Senator Eoin Ryan underlined the lack of experience of jurors in serving on juries. It is unrealistic to expect 12 people, with little or no knowledge or experience of such matters, not only to take decisions on legal liability but also to assess damages. Inevitably this results in awards which are inconsistent, unreliable and totally unpredictable. Moreover — and perhaps this is one of the most compelling reasons for the abolition of juries — latterly jurors do not anymore represent what is termed ordinary citizens. For example, in practice most people in business and the professions manage to extricate themselves from jury service. With increasing frequency teenagers are serving as jurors. Ireland is the only country in Europe where compensation for personal injury is assessed by juries. The level of compensation awarded for personal injury in  Ireland is considerably more generous than is the case in Great Britain where the jury system was abandoned in civil actions some 40 years ago. The level of motor insurance premiums is directly related to the level of compensation paid. The British motorist, therefore pays far less for his insurance than does his Irish counterpart. High premiums encourage people to remain uninsured. It is estimated that one-fifth of Irish motorists have no insurance, a point to which I shall return later. The unpredictability of jury awards inhibits early settlement of claims and encourages claimants to develop exaggerated and unrealistic expectations of the compensation which they should receive.
It also leads to far too many very expensive appeals to the Supreme Court. To those who argue that the Supreme Court is there to control excessive awards in the High Court, I say this is absolutely no answer to the situation. Appeals to the Supreme Court are a very expensive process. The unreliability and unpredictability of jury awards, as well as being unfair to defendants, can create injustices for the injured parties. Two people with identical injuries would be most unlikely to obtain similar damages from two different juries and in all probability would be awarded significantly different sums by way of compensation. Such a system is manifestly unfair to both plaintiffs and defendants.
The jury system is cumbersome, unwieldy and timewasting. Because it is necessary for the issues to be explained in the most minute detail to the members of the jury, trials continue for much longer than if they were held before a judge alone. A battery of professional witnesses may be required, such as doctors, engineers, architects and so on, to give verbal evidence and be subjected to cross-examination, all for the benefit of the jury. Much of this could be dispensed with and replaced by documentary evidence, such as medical reports, if there were no jury.
The delays are such that a large backlog has developed in the High Court, a very serious matter in itself. The jury system is  extremely expensive. In most High Court actions four lawyers act for each party — a solicitor, one junior counsel and two senior counsel. In my book this is one big racket which must be terminated. The professional witnesses, to whom I have referred already, must also be paid — and this compounds the cost problem — sometimes for merely sitting in the courthouse waiting to be called. It is estimated that the cost of litigation accounts for some 20 per cent — Senator Ryan said 20 to 21 per cent — of the total amount paid out by insurance companies in injury cases. Twenty per cent may sound a relatively reasonable proportion of the damages but when this is translated in terms of money that has to be paid out by insurance companies it is a very substantial sum.
As far as the Bill before us is concerned, the unpredictability and unreliability of the jury system, coupled with the delay in having cases brought to trial, creates severe difficulties for insurance companies in attempting to estimate outstanding liabilities. This has been a key problem in the case of companies that have got into trouble in the recent past. This has been a major contributory factor in the problems and losses which have affected a number of companies recently.
I want to focus now on the grave impact of the jury system on employer's liability insurance and its consequences for thousands of industrial jobs. Employer's liability insurance this year is expected to cost industry approximately £70 million, an average increase of 30 to 50 per cent on last year. This cost on industry has very serious implications for employment. The Government profess that unemployment is the key social, political and economic problem facing them. To take remedial action in this regard is one way of protecting existing jobs. Money which is urgently required to maintain output and employment, not to mention increasing both, must be diverted to pay higher insurance costs. As a consequence, thousands of industrial jobs are placed at risk. The insurance companies are forced greatly to increase the cost of employer's liability insurance because of  the excessive level of damages awarded by juries in the High Court together with the huge legal costs associated with the system. As in the case of personal injury claims, appeals in respect of employer's liability awards made in the High Court have been subsequently reduced on appeal to the Supreme Court.
Of course, cases are heard before the Supreme Court sitting without a jury. Appeals to the Supreme Court are no answer to the problem because of the very expensive legal costs inherent in making such appeals. Because of the excessive levels of damages awarded by juries in employer's liability cases Irish industry ultimately must pay for the excessive jury awards through increased premiums. The losses incurred by insurance companies, mainly as a consequence of jury awards in respect of employer's liability claims, have increased from £11 million in 1981 to £34 million in 1983. The ultimate consequence of this is increased premiums on Irish firms with the obvious consequences for job maintenance.
I put it to the Minister that there is an overwhelming case for the abolition of the jury system as it applies to employer's liability insurance claims. I hold the same view with regard to personal injury claims. For both types of cases the jury system has since been abolished in Britain, where judges sitting alone decide on the levels of the claims. Over time these judges have built up precedents on the level of damages. The British experience shows also that, without juries, there are fewer and quicker trials and quicker settlement of claims with consequential savings. Judges sitting alone will bring a degree of logic and realism to the levels of awards in injury cases and this will reduce premiums to a more acceptable level. The consistency that would flow from the judge's decisions, sitting alone would encourage solicitors acting for their clients to settle before going to court and thereby reduce legal costs. While some cases are settled before they reach court, a solicitor is normally unlikely to settle the case before going to court because, given the unpredictability of  jury awards, he does not know what his client is likely to be awarded.
I want to return to the indication of action on juries by the Minister for Justice and by the Government. I welcome the fact that the Minister for Justice is reviewing the question of the jury system. I hope firm proposals will be brought before the Government in a short time. Last year I criticised the jury system when speaking on the Road Traffic Bill, but there has been no action in the meantime. It is regrettable that we have to have one further crisis before we get action from the Minister and the Department of Justice.
I take issue with a number of points the Minister for Justice is reported to have made, as indicated in the Irish Independent of 28 March 1985. The Minister is reported as saying that it did not necessarily follow that a judge sitting alone would recommend a lower damages figure than a jury. This is incorrect. Time after time the Supreme Court, sitting without a jury, have reduced, on appeal, excessive awards made by High Court juries. In the same article Deputy Noonan is reported as saying that the insurance companies had not demonstrated that the abolition of the present jury system would result in lower awards. That follows logically from experience. Many claims are settled outside the court, but they are heavily influenced by the level of awards granted in the courts. I am convinced that the abolition of juries would result in lower awards and I would be very surprised if the Minister for Justice could demonstrate otherwise.
The question of uninsured drivers has serious implications for the level of premiums and for the viability of insurance companies. In the present economic climate many drivers cannot afford to pay higher premiums. Therefore, they take risks and hope they will not be caught. It is estimated that Ireland has the highest level of uninsured drivers in Europe. There are 20 per cent here compared with 8 per cent in Great Britain and as low as 1 per cent in other European countries. There may be a case for some leniency in the first offence of uninsured driving  but I strongly urge that in the case of a second or subsequent offence the fine should be the equivalent of the value of the vehicle.
I call for the abolition of the jury system in High Court actions. Without the abolition of juries in personal injury cases the present untenable situation can only become worse. Senator Ryan has echoed this by saying that the insurance companies cannot afford to go on making the types of awards they are obliged to make. Given the crisis we now have in connection with the Insurance Corporation of Ireland, it behaves the Government to take action forthwith on the jury system. Secondly, the cost of employer's liability insurance should be brought into line with other countries. Thousands of jobs which are genuinely at risk at present because of high insurance costs would be that much more secure after the abolition of the jury system.
Mrs. McGuinness Mrs. McGuinness
Mrs. McGuinness: I support the Bill in that I support the Government's action in the crisis with which we were presented with regard to the Insurance Corporation of Ireland. The Government had to take emergency action because they had a direct need to uphold the position where employers have to keep up the employer's liability insurance for their workers and their public liability insurance. The Government could not allow a situation to develop where a major insurance company failed, putting many people out of employment because of the insurance situation. Secondly, the Government were put in the position where, in order to maintain the viability and stability of our banking system this kind of action had to be taken. Given the situation with which they were presented, the action they took was the right one. They had to deal with the emergency as they found it.
That does not mean that there are not questions to be asked about the background to this situation. Quite a number of aspects have already been mentioned in the debate. I am pleased that in various statements the Minister for Finance and other Ministers have said that it will not be the taxpayer who will pay for the difficulties of the Insurance Corporation  of Ireland. It may not directly be the taxpayer, but whatever kind of levy is put on the banks or on the insurance companies, this will come back in the end to the ordinary person who is either using the banking system or buying insurance. It is no use to imagine that this finance will come out of the air. Whatever additional cost is put on the banking system or the insurance system works its way down to the consumer of these services. Whether we pay as taxpayers or as people who have bank accounts or insurance policies, we can be sure that eventually we will pay.
When the crisis arose over the PMPA Insurance Company there was a feeling in this House, in the other House and among the public that this was an individual crisis, a once-off situation, where this insurance company had got into difficulties and had to be rescued. With this second crisis and the various facts that have been revealed, it appears that the insurance industry is suffering from a very severe sickness. We need to look at the insurance industry and the various factors that go to make it up. It is essential that the Government should do this through their supervisory authority, and by other means. Otherwise we will find ourselves repeating rescue operations and dealing again and again with what might be described as crisis management, rather than planning ahead and making sense out of the insurance industry.
A great deal of attention has been drawn, in particular by Senator Hillery, to the jury system. I have no axe to grind about this because this is not an area with which I am particularly familiar or with which I deal. But, it is not nearly enough just to say the jury system is appalling and, if we cure this, the situation will clear up. There may be excessive awards and there may be difficulties with legal costs, but the vast majority of cases never come to a jury to be decided. A lawyer can practice at a lower level for years and deal with the initial drafting of proceedings in personal injury cases or employees injury cases without a case coming to hearing. The vast majority of them are settled so that the jury decisions  are not as statistically frequent as might appear.
While I do not want to go into all the details of what Senator Hillery said, he has some rather odd ideas about the rules of evidence as they apply before a judge sitting alone, as well as before a judge sitting with a jury, as far as documentary evidence is concerned. He is a little over-optimistic about the consistency of judicial decisions from one judge to another as regards either money matters or any other matter. When Senator Hillery talks about the level of Supreme Court decisions and the reduction of jury awards he should remember that it is only in cases where the awards appear to be particularly out of line that they are appealed. One cannot make a very telling argument about the level of awards from the cases that go to the Supreme Court.
However, my feeling is that we must as a community think a lot more about our own part in this and not just try to get out of it as easily as we can by saying, it is the jury system and if we do away with that everything will be lovely. The reason there are so many personal injury claims through road traffic accidents is that there is a very high level of road traffic accidents here. There is a very high level of road traffic accidents where drink is a factor. Only an average of 40 per cent of people here wear seat belts despite the fact that this has been legally compulsory since 1979. The figure is something like 40 per cent here and something like 90 per cent in Northern Ireland where the law was brought in more recently. Most people know, and any lawyer dealing with personal injury actions knows, that the wearing of seat belts is not just a safety measure and if one does not wear a seat belt it is regarded as contributory negligence and, therefore, may cut down the award given. Those who drive around the city of Dublin or, indeed, in rural areas and look at the standard of driving will come to the conclusion that it is no wonder there is a very high level of road accidents here.
There are very large numbers of awards in personal injury actions because  there are very large numbers of accidents, regardless of the level of each individual award, and that is something we are all responsible for as a community. Do we go out driving when we have had too much to drink? Do we forget to wear our seat belts? Do we take unnecessary risks when we are passing other people on the road? They are the factors that build up claims and raise insurance premium levels for motor insurance just as much as the jury system.
With regard to employer's liability, how much attention do we really pay to safety at work? We have had fairly recent legislation on safety at work and yet there is a feeling among people that insurance will pay off for any amount of carelessness, whether carelessness by the employer or carelessness by the worker. That is the kind of public attitude which builds up claims and causes the rise in employer's liability insurance. We need to look at those issues as well as the legal issues. I am not saying we should not look at the jury issue, of course we should and we should look at the legal costs issue too to try to cut them down as much as possible, but we cannot just escape our own responsibility.
I very much support what Senator Eoin Ryan said about the need to look into the supervisory system of insurance and to ensure that we do not just supervise what happens here but supervise what Irish companies do abroad. We need to look into the part played in this situation by auditors, both as protectors of shareholders, as protectors of creditors and as protectors of the public. Their role is envisaged in the Companies Act as being also an element in the supervision of what companies do. It is important that we look into that and make sure they are fulfilling that role properly and are not shifting their responsibilities on to somebody else. As far as the supervisory role of companies operating abroad is concerned it is essential to try to set up and operate properly some kind of system, for instance within the EC, which would supervise companies from one country to another and create warning signals when difficulties are about to occur. One  cannot help saying this because in this case it is so difficult to understand how it is that the authorities in Allied Irish Banks can say that they were unaware of difficulties and that until their auditors told them what was happening in London just a few weeks before the Government took action, they did not know. I am a person, for instance, who has virtually no expertise in high finance, a person who simply reads the newspapers and the odd business magazine and so on, and yet certainly it was drawn to my attention months ago that there were problems with the Insurance Corporation of Ireland operations in London in particular. I really find it incredible that the management of a major organisation like Allied Irish Banks first of all can say that they did not know what was going on and, secondly, did not read what was in the newspapers and immediately carry out very full investigations.
The Government in dealing with this matter not only must safeguard the public and the banking system but must make the management of Allied Irish Banks feel their responsibility for this. I know that the decision of the bank to pay as high a dividend as it would in any case has caused considerable concern and, indeed, rage among ordinary members of the public. Yet I can well understand that part of the reason for that was that the bank must maintain their secure image to investors and so on. The fact is that the public has an image of shareholders in the bank as being rich individuals who have money invested in this way whereas, in fact, probably most of the shareholders are institutional shareholders or small investors. It is a simplistic way to look at the matter and say they should not have paid any dividends if they made such a mess of things. I would suggest that if the Government are considering imposing levies through the banking system, or through the insurance system that the other banks and insurance companies should not be asked to pay up to the same level as Allied Irish Banks who, after all, have the responsibility for this. Whether it takes a long time or a short time, their management must be made to feel  responsible by being asked to pay very considerably more towards the rescue moves than any other financial institution.
I support the Bill but the need for such Bills in the future should be reduced or, if possible, eliminated by looking at the whole insurance sector and trying to deal with all the factors I have mentioned. There should be a very distinct improvement in the supervisory system so that early warning signals come through to both management and Government before matters reach the stage they reached in this company.
Mr. Smith Mr. Smith
Mr. Smith: The shock absorbing capacity of the public has been sorely tested in recent years with major closures of one kind or another but the extraordinary saga of ICI hits at the very nerve centre of economic life here. It is most regrettable that it should happen, both from the point of view of the private sector and the banking industry as a whole. I accept that the Government have an extremely difficult problem and that it was absolutely essential to mount a support operation for AIB and ICI to ensure that the banking system and the insured were protected. However, I do not accept that the taxpayer is out of the woods. In that regard I should like to refer to Minister Collins's statement that the prospect of the direct Exchequer funding was to all intents and purposes removed. That statement, and another later and the evidence available to the Government lead me to believe that there is an uncertainty as to where all this will end. Because of that, I want to indicate to the Minister the disquiet, difficult to describe, among the public at the initial decision of the Government to take over the Insurance Corporation of Ireland and at the prospect that the ordinary taxpayer already beleaguered, would have to undertake the heavy burden of financing a share of the rescue package. We can accept that the Government should have intervened but it is clear that they did so in the initial stages without considering the full implications of this decision. It is abundantly clear  that the Government did not negotiate with the AIB on the basis that the taxpayer would not have to pay any share of the rescue package. The Government too readily accepted that there was no other solution. We had an early statement that the Cabinet did not have a clue as to the total extent of the loss and that a mini-budget could not be ruled out.
In the earlier moments of this shattering collapse the Government indicated that AIB, the Central Bank, the insurance companies and finally the taxpayers would have to carry the can. It is fair to say that the Government, by this earlier action, inflamed public opinion and unintentionally or otherwise did no service to AIB who themselves, in their smug presentation of the case, scored an own goal.
My colleagues and others have referred this afternoon to the difficulties in the insurance business. They are in two areas, at management level and at policy level. This is the second major insurance collapse within two years. We still have not learned the lesson from these experiences. Other Senators have outlined in some detail — I will not go into it at this late hour — the well-known documented facts relating to the problems in the industry and these are again more recently evident in the recent edition of the blue book.
Insurance companies operating within the EC are obliged to present their annual accounts and meet strict solvency margins before their annual licence can be renewed. Can the Minister inform us if this requirement is being met in other areas, or is there a possibility that some other accounts are deficient, cannot be understood or hide some serious aspects of their businesses? It is extraordinary that the insurance licensing authorities in this country and in the UK, as far as this saga is concerned, could not have known about or been more suspicious of this situation since many people outside that arena altogether had information available to them.
It has been said that there is only 30  per cent of the business of this company operated in Ireland and that the Department of Industry, Trade, Commerce and Tourism were primarily concerned with that aspect of it and that the remaining 70 per cent of the business, which was London-based, came under the auspices of the Ministry of Trade in the UK. Were there any contacts between the two Departments or when was the last time that any substantial contact had been made between the two Departments on a company involved in both countries and obviously not meeting the EC requirement as far as solvency margins were concerned? Has the Minister information from AIB as to the investigation that they commissioned before investing the £30 million indicated? The argument is made that at that stage AIB were minority shareholders and did not have access to all the information, but for a bank who do the rest of their business very well it seems in that instance that the management or the people concerned left a lot to be desired.
The disquiet among the public had to be seen to be believed. Even though some Fianna Fáil Senators have taken the credit for the action by the Government it is quite clear that their own backbenchers have to share in some of that credit. In the light of the earlier action by the Government most people would ask whether, in the event of ICI making a huge profit for the bank, the taxpayer would share in these gains? It was obviously proven that there was inadequate research, that there was indecisiveness, particularly as far as the transactions in London were concerned, yet the initial proposal was for part of the rescue to be carried by the taxpayer. Is it true that the management of ICI in London were involved in extremely high risk and wildly speculative insurance cover? What information do we have in relation to this aspect of the whole business? It is in this precise area that the ongoing difficulties are going to present themselves.
Some speakers have referred to the fact that when AIB took over this company the profits for the previous years  and their track record were very good. How can one be satisfied about the track record of any company where, on the best evidence put forward by the Minister, it could take three or four years to know the extent of their liability in certain cases? What then would the profits for 1985 mean, if there was a profit, when unknown claims which were on channel but might not be paid for a couple of years could totally shatter that kind of situation? That is why the solvency margin area is so important in all of this. Have we any evidence or information as to what the next few years are going to tell, particularly as they relate to the London office? Would it be true to say that the London base, with the wrong pricing policy, attracted the business that I have referred to and was an easy prey where other insurance companies were very reluctant to become involved? It is clear that that office in particular, and that is not exonerating what has taken place here, has done a blatant disservice to this country and has to be held accountable for the ineptitude and downright carelessness. In their scope and potential the activities of ICI in London border on the criminal.
It is quite clear — and other Senators have made this point — that the problems in ICI were there at the time when AIB took over the company. Was there a deliberate deception or what kind of modern accounting and data technology was being used? The Minister of State for Industry, Trade, Commerce and Tourism placed the cost of this whole debacle between £50 million and £120 million and £120 million at the very limit. In the next breath he tells us that it will take five or six weeks to know the extent. Is he entirely satisfied that the £120 million is the outside limit? Would the AIB have jeopardised their public standing and credibility if that was the total extent of the problem?
One can argue that no bank can live with an uncertainty of this magnitude but when one now knows that the Central Bank was prepared to become involved in the funding of the rescue package, could that not have been done initially,  or is there a lot more yet to come which AIB could not possibly stand up against for the future? One has to assume, or is forced to assume, that when the AIB took the extreme action they took, they were afraid that the continuing problems could dismantle their whole business. Thankfully the action of the Government, while I do not agree with the stance they adopted in the first week or ten days, has at least averted that kind of more serious problem though the situation is serious enough.
We welcome the intervention of the Central Bank. The Central Bank should ensure that they monitor much more closely any future involvement by any of the commercial banks in risk business outside the parameter of normal banking business. After this experience the most rigorous examination should be applied by the Central Bank in any proposals of a similar nature.
One of the overriding principles in all of this has to be that where a person or the bank invests in a project where they hope that their money will be richly rewarded, they cannot transfer the loss if the gamble goes wrong. There has been a lot of criticism of the AIB during the afternoon and in this instance the condemnation of the management and the whole process of the examination of ICI is justified. I would like, however, to put it on the record that the AIB is an essential part of Irish economic life. It has taken a morale battering in this case. It is an institution that has made a lot of strides. It underpins about 25 per cent of the banking business and has a sizeable part of our external business. Through its network of services, its borrowings and savings, it affects the public and both commercial and public life to a very considerable degree. By and large it has performed well in the economy. Its financial strength and liquidity is of serious concern and obviously in this matter public confidence plays a very significant role.
I wish to support those Senators who have encouraged the Minister in regard to the line he took in the earlier part of his statement in the matter of improving the monitoring and regulatory process.  One can perhaps blame the Department for some errors in this regard but I am one who believes in the importance of having the skills in the Department to monitor and regulate these processes. However, there is no replacement for good management. The availability of the best personnel in the world to monitor these kinds of situations would not prevent ultimate failure if management were to fail. All one can hope for is that the warning lights that Senator McGuinness referred to would be detected as early as possible and that the long and final chapters in bolting the door when the horse has gone would be reduced to a minimum.
It is clear from what has been said during the afternoon that the ICI in their business transactions had lower reserve ratios than the rest of the insurance companies. It is clear also that the mounting claims were considerably more that the reserve capital and that if you work this in reverse, the profits for earlier years could be very easily without real foundation.
We need a shake up in the whole insurance industry. We need changes in the legal code. Reference has been made to the abolition of the jury system. Companies need to have a proper pricing policy. I accept in general what Senator McGuinness said with regard to this but I differ from her on a fundamental point, that is, where she puts a lot of the blame on the public for the accident ratios and other claims where they feel that insurance companies are easy prey and open to exorbitant claims. I put it to the House that many insurance companies in the way that they present their policies attract this problem because selling insurance is all about indicating to the public what will be available to them in the event of this or that happening. As well as making the public aware of what they may be entitled to, the companies themselves in sponsoring and promoting their schemes attract some of the problems.
One has only to think for a minute of the effect of some earlier closures. I referred to the PMPA and I have in mind people in my own constituency, at least  half a dozen, who are in the very relatively small investor category and who were involved in PMPS. I do not have to indicate the trauma that these families and others suffered in that respect. This is one of the reasons for many people in other areas asking why in this instance it seemed as if the bank were being allowed off the hook, whereas many others down through the years had to carry the can for the mistakes of senior management in other companies. The Minister referred to the intervention of the Central Bank and to the funding. Am I correct in assuming that in this case, unlike the PMPA, there will be no further levy on insurance companies, or, alternatively, to what extent are other lending institutions outside the AIB to be involved in the rescue package? When ordinary people make mistakes they are asked to dispose of part of their assets and in this case, since the AIB have been involved in a number of quite successful ventures, they should be asked to dispose of some of their assets as a solution to this problem. Their readiness to do this, provided it does not do any long term damage to them, would help to alleviate public disquiet and, perhaps, have the effect of renewing confidence, even to a greater extent, in the bank. I ask the Minister to ensure that when the Central Bank are working out this solution — I suppose it will be done in secrecy — the most equitable scheme for all concerned is worked out because in the final analysis, this will find its way back to the public in one way or another. It is crucial that the taxpayers are protected and that the AIB, the lending institution and the insured public are enabled to continue their business at a high level.
I have a final question in relation to the establishment of this semi-State organisation, small as it is. What are the proposals in relation to the slimming down of ICI and will they be continuing at a high level of operation? If this is so, the State should be involved to the minimum possible and only in circumstances where there is absolutely no other course. We generally welcome the Bill. We will be supporting it on Second Stage  and hope that the measures contained in it will resolve this problem.
Mr. Cassidy Mr. Cassidy
Mr. Cassidy: I will not speak for long. To say there is a crisis in the insurance industry is putting it mildly. The collapse of the ICI is affecting not only the insurance industry but the financial world. Their creditworthiness has been shaken to its very roots. The banking and insurance industry are supposed to operate under strict Government guidelines. What went wrong with the monitoring system on this occasion? Did we not learn the lesson from the PMPA? There are more questions to be asked about the collapse of the ICI. Are the controls governing the insurance companies adequate and being implemented? Do the staff have the confidence to monitor these large and complex industries? Has the Minister given the staff necessary resources to carry out their statutory duties?
What is the point in these large insurance companies making audited returns to the Department if these returns are not accurate accounts of their trading position and of their financial situation? I suggest the introduction of inspection procedures that would give the Minister and his representatives full access at any time to all the records of every insurance company. Not alone would this protect these large institutions but it would also protect the interests of the small depositor, policyholder and the employees who have found themselves completely at risk in recent events. A number of functions, including the role of the Registrar of Friendly Societies, should be included in this review which should be carried out as urgently as possible. If these officials are to discharge their duties competently, it is incumbent on the Minister responsible to ensure that they have the training, resources and statutory powers to carry out their functions properly.
It would seem that not only were regulations flouted nationally on this occasion but that guidelines laid down by the EC were also transgressed. How many more crises do we need before the Government take appropriate action? We have had a  number of Government appointed bodies looking at the problems of the insurance industry both before and after the PMPA crisis and it appears as if we have learned no lessons.
The time has come for complete reappraisal of the whole insurance system in this country. For example, one out of every five cars is without insurance cover. This does not take into account the most recent phenomenon of the car thieves. I ask the Minister to look at some of the systems that are in operation in motor insurance throughout the world. For instance in certain American states, basic third party insurance is automatically linked with the car registration and licence. You cannot drive a car without the basic third party insurance.
Our uninsured rate here of 20 per cent as against the rest of Europe which is around 3 to 4 per cent probably reflects our general attitude to law breaking. Schools could also play a role in educating young people in good citizenship, especially in relation to respect for the law. It does not take a financial wizard to realise that the increase in house burglaries and car thefts inevitably cause major financial problems for insurance companies which, in the final analysis, are paid for by the taxpayer in the form of increased insurance premiums and an extra contribution to the Exchequer. The Minister will have the full support of all responsible citizens if he introduces a radical overhaul in this area.
If the board of AIB, with all the financial expertise at their disposal, could not identify the critical position of ICI when they took over, what chance do the understaffed, ill equipped if well meaning amateurs in the Department have of dealing with the complexities of 20 insurance companies, many of them controlled from outside the State?
Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins) Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins)
Minister of State at the Department of Industry, Trade, Commerce and Tourism (Mr. E. Collins): I wish to thank the Members who contributed to this Second Stage debate. I welcome the comments made by Senators which have been, by  and large, responsible and generally supportive of the difficult decision which the Government had to make in this matter. I appreciate the concern expressed by Senators in relation to how the losses which will arise in the ICI will be met. These concerns were also foremost in the mind of the Government in dealing with the issue. There have been some suggestions, including one from Senator Ross who is generally supportive of the Government's action, that the Government had a change of mind on how the administration of ICI should be financed. There has been no such change of mind or change of direction on the part of the Government. The initial Government statement on the evening of 15 March, when a takeover of administration was announced, made it quite clear that the financing would be broadly based and would involve the Central Bank, and the banking and insurance sectors generally. It has always been the Government's objective to minimise and to avoid, if at all possible, any burden on the taxpayer. The decision of the board of the Central Bank on 27 March 1985 should make it possible to obviate the need for recourse to the Exchequer and has been widely welcomed. It is fully consistent with the Government's statements from the outset. While the Government were clear that there should be a contribution from the Central Bank and the banking sector generally to the resolution of the problem they could not make the decision to this effect on behalf of the Central Bank, which is entirely independent of Government. That independence of Government is a vital part of the whole structure of our economy.
Senator Howard asked about the precise role of the Central Bank in the financing of the rescue. The initial funding of the fees of the administrator is likely to be made in full from the loans from AIB which will be routed through the Central Bank and hence to the insurance compensation fund. The Central Bank have made it clear that they will be discussing with the Allied Irish Banks Group and other licensed banks the appropriate  form and apportionment of the funding to be provided by the Central Bank. This will, therefore, be a matter for the Central Bank to deal with in the first instance. However, I understand that if any question arises of the Central Bank themselves putting forward any funds, these funds will come from the bank's reserves which are generally used to support the currency rather than from the surplus of the Central Bank which is surrendered to the Exchequer each year.
I think it appropriate that I quote for the record of the House the basic statement of 27 March of the Central Bank as given in the Dáil by the Minister for Finance on 28 March:
The Board of the Central Bank... decided, having regard to its statutory responsibility in relation to banking and financial systems generally, to indicate its willingness to provide sufficient funding, in conjunction with the banking system, within the dimensions of the problem indicated by the Minister for Industry Trade, Commerce and Tourism and subject to the end-year reassessment referred to by him, to deal with the problem as it arises so as to obviate the need for recourse to the Exchequer.
That is the central statement regarding the funding of administration. I would not like to go further than that statement.
It is important that I stress the role of the Central Bank. They anchor the whole Government policy in securing AIB as one of our leading banks and also in ensuring that the Insurance Corporation of Ireland, now in administration, will be brought back to a healthy state in a matter of time under the administrator.
The next matter I would like to deal with at some length refers to the supervisory role of my Department and here I must reject many of the criticisms made by Senators. EC directives harmonise basic insurance supervision throughout all member states and make it quite clear that the supervision of the branch's activities is the responsibility of a supervisory authority of the member state in which  the branch is located while the supervisory authority of the head office must oversee the solvency of the global activities of a company. In order to perform this latter activity, however, the head office supervisor is dependent on the branch supervisor to vet and examine the accounts of the branch which feed into the head office accounts. I want to reiterate that because I referred to it in my opening remarks and it seems not to have been taken up correctly by some Members. The Department of Trade and Industry in the United Kingdom, which was the supervisory authority for the branch activities of the ICI in the United Kingdom, had not communicated any concern to my Department about the UK branch business of ICI. Given this fact and in the light of reassurances received by officials in my Department from both Allied Irish Banks and the Insurance Corporation of Ireland at the meeting in November 1984, my Department had no reason to question matters further at that stage.
Like many Members of this House I realise the public disquiet at this most unfortunate debacle. There are serious questions regarding the management of ICI, especially their management in England and the decision on management control of the AIB. There is obviously a serious lack of management control, particularly in relation to the flow of information between London and Dublin which is most disquieting.
The question has been raised about the limit of liability. On the best information available to me which is based on examination of the company's figure from within, the losses incurred in London fall within the range of £50 million to £120 million. I have to stress that £120 million is the upper limit of losses and is in no circumstances the most likely figure. Also they are based on the principle of the reinsurance contracts being sustained, one must assume. However, it is now up to the administrator in his task to carry out a full investigation, and the position will be fully reviewed when all the information comes to hand.
I will try to deal with some matters  raised by Senators in the course of the discussion. I must admit that some of the matters raised were not directly related to my Department and therefore I would not wish to deal at length with them. Perhaps I should dispose of the question of the jury system because it has been raised by a number of Members. The Minister, Deputy Bruton, stated in the House that access to juries for actions in relation to liability cases may be modified. This is a matter primarily for the Minister for Justice who, I understand, will be bringing in proposals before Cabinet in the next few weeks. I do not wish to enter into a debate on the merits or demerits of the jury system or the consequences of change in that it is the responsibility of the Minister for Justice, but the Government will be examining this within the next few weeks.
The question of a 2 per cent levy was raised by a number of Members. I should state that that levy is the maximum levy under the Act and any change would require legislation.
Senator Fallon suggested that there was undue activity on the part of my Department when rumours circulated in November 1984 in relation to ICI. That is not correct. It should be clear from my earlier statement that my Department were not inactive, indeed we were extremely active and brought great force to bear on the issue when it came to our notice. This culminated in the investment of £30 million by AIB in ICI. That happened towards the end of last year which, as far as we were concerned, assured us that the company were in a sound financial position.
Senator Fallon also asked what would the Central Bank do if the losses exceeded £120 million. It would be quite wrong to speculate on losses in excess of this figure. I am disappointed some Members felt obliged to quote what I can only call excessively speculative figures in this area. The figures I am relaying to the House are based on the best possible information available to my Department at this time. When a fuller report is available and a clearer picture emerges, we will make that information available to  the House. It will have to be made available in any event because of the need for funding arrangements.
Senator Fallon also referred to the position of the Insurance Corporation Life company. The future of this company will be determined by an administrator who must have the sanction of the court for any decision to sell this profitable and sound company, if that is the course of action he proposes to follow. He now has responsibility for what we all readily acknowledge is a sound and profitable company. The matter is now in the hands of the administrator.
Senator Fallon also referred to reports that ICI have arbitrarily cut reserves for claims in their 1983 accounts. I do not know if these reports are true — as far as I know they have not been substantiated. I have already referred to the fact that my Department detected inadequacies in these accounts on examination and found also, following independent actuarial investigation, that the additional capital provided by AIB restored the Irish business of the company to a satisfactory footing. The later problems appear to have arisen almost entirely on the London business conducted by the company.
Senator O'Mahony asked about transactions on share options available to executives of ICI. I do not have any information on this matter nor can I at this stage give any undertaking that I will be able to provide this information, as it falls outside the scope of my Department's supervisory function.
Senator O'Mahony also asked me to consider an amendment to the Bill to avoid the possibility that AIB's losses could be offset against any liability which they might have to capital gains tax. The Senator will appreciate that this is the first time this point has been made and I could not undertake to put forward an amendment in an area which is primarily the responsibility of the Minister for Finance without full consideration. I will, however, bring the Senator's comments to the attention of the Minister.
 It has been pointed out by some Senators that there has been a genuine and considerable loss to Allied Irish Banks and especially to their shareholders. That is a visible and measurable loss. Senator O'Mahony criticised the fact that the people who are at the centre of ICI and Irish Shipping seem to be the same people and that some of them are very trigger-happy when criticising Governments or the public sector. I take the criticism made by other Senators also in that regard. Frankly, I do not think we are going to achieve anything by going too deeply into that. We had a situation which had to be resolved and the Government acted wisely and quickly in meeting their responsibilities.
The position with regard to the blue book and ICI is that the blue book is a very useful book. It shows a flow of developments over a period of years. It allows my Department to see changes in companies' affairs over a period and it allows us to take remedial action, as we have done on a number of occasions and as we did with ICI. On not infrequent occasions we asked companies to come in and justify figures and then remedial action was taken. We appointed consultants to examine books where we felt it was necessary. While we may now be strengthening this section of our Department, it has not been lacking in expert advice and, where necessary, it was brought in from outside. I have full confidence in the qualifications of the staff in the insurance division of my Department and I reject the criticisms which have been levelled at them this evening by some Members.
We must remember that insurance companies are owned by shareholders who have their responsibilities and are run by a board of directors who have their responsibilities and by officers of the company who have a legal responsibility, but, above all, the auditors of these companies have a very serious and onerous responsibility. We in the Department have to take these people on trust and depend on their professional integrity when examining their annual returns. I referred to this matter in my opening  speech and I do not wish to go over the same ground again, but it bears repeating because we are a supervisory authority; we are not an auditing authority in the sense that we go through all the books. We examine the figures which are given to us very minutely and we take corrective action as and when we deem it necessary.
I do not think I can support a call for a public inquiry. I am satisfied that the action taken by the Government in appointing an administrator and the powers which he has will lead to the publication of the full facts of this case over a period of time. For that reason, a public inquiry is not called for, nor can it be justified.
Senator Ross stated that the AIB should pay more, and other Senators echoed that quite clearly. They said the responsibility for this affair rests squarely on the shoulders of AIB. However, as I have said, the Central Bank will be taking up the matter of the apportionment of contributions to the insurance compensation fund. I think they will act very responsibly and reasonably.
Senator Howard made a number of points, some of which I have dealt with. He fully realises that the Government acted in the best interests of the work-force and the policyholders of ICI. That is quite clearly part of the reason why we moved as efficiently as we did. We look forward, as do other Members of this House, to the full report of the administrator. That will have to be an in depth study of the management within ICI and the relations between ICI and the AIB. The AIB, as far as I am concerned, acted correctly and swiftly in advising both the Central Bank and my Department when this matter came to light. They did so in a correct manner because they were aware and they made us aware of the need for corrective action. We swiftly took action which secured the integrity of one of the most important banks as well as the future of the ICI, albeit under an administrator.
Senator Howard suggested that the AIB should divest itself of valuable assets. He mentioned the First Maryland Bank in the United States. It is important  that our banking system is seen to be strong, to thrive and to be international. We have a very open economy. We trade abroad and it is only proper that our commercial banks should be aware of the markets that lie outside of this country and, having been established abroad, act on behalf of Irish companies overseas and create business. This is a matter which is outside the realm of my Department and is really a matter for the banks.
Senator Lynch indicated that there were meaningful changes in the Bill. I have outlined that in regard to the Central Bank. We had intended from the very beginning to have the Central Bank involved and I am glad that they decided to become involved. As regards the question of insurance companies withdrawing from Ireland, he blamed me as Minister with delegated responsibility, for neglect. He mentioned the reply I gave in the Dáil on 30 January 1985, as reported in the Official Report at column 1031 et al. I was not asked a specific question in relation to the ICI. I was asked if I was aware of the crisis position that exists in the writing of non-life insurance, the number of insurers who sustain substantial losses each year and the difficulties that are created for insurers and consumers alike who take steps to insure the protection of all interests involved. I answered:
I do not accept that a crisis exists in the writing of non-life insurance business in this country. Non-life insurers in Ireland are operating in difficult conditions, in common with most other insurance markets worldwide. The industry has taken corrective measures, including premium rate increases, to improve matters and these are already showing fruit. Excluding the largest motor insurer, which as the Deputy knows is under administration, [that is the PMPA] and the inclusion of whose reported results would distort the true picture, underwriting results improved in 1983 over 1982 with losses reduced from 21 per cent to 18½ per cent of premiums written. Market underwriting performance improved in five of the seven main  accounting classes, and two of those classes recorded an underwriting profit during 1983.
It is important to bear in mind that, while financial results may vary from year to year, the Irish insurance industry is basically sound and customers need have no worries about doing business with it.
As the supervisory authority for companies operating in Ireland and for companies whose head offices are in Ireland but who trade abroad I can still stand over that statement. That was the best information available to me at that time. I, therefore, reject that there is any negligence on the part of my office or my advisers in the insurance division of my Department.
Senator Lynch exaggerates when he suggests that the PMPA and ICI between them control 60 per cent of the motor insurance market. According to the blue book for 1983, the motor market share of both companies amounts to only 35 per cent. Senator Lynch also suggests that the placing under administration by the Government of both the PMPA and ICI should be seen as an attempt to nationalise the insurance industry. I do not think he is serious when he suggests that. I doubt vey much if we would have picked two such companies to take over the motor insurance market.
Senator Conway made some comments regarding AIB directors' fees which are outside my control. He also referred to the bad judgment of AIB in acquiring ICI. He said they seemed to be obsessed with gaining new business. I hold no brief for the AIB decision or the management of ICI, especially the management of its London office. Many questions will have to be answered over the next few months.
Senator O'Donoghue in a long discourse raised many matters. I am aware of his participation in the inquiry into the insurance industry and I am familiar with many of the points he raised in the course of his contribution. He dealt with the reference in the report of the Committee of Inquiry into the Insurance Industry to  the basis on which outstanding claims are evaluated. I should pay tribute to him for the work done by the committee and by the Senator himself who chaired the committee in its final period of work. The Senator will be aware that many of the steps which he referred to have been brought into effect by my Department as a result both of developments in supervision and of the implementation of the relevant EC directives. These steps form the basis on which my Department identified the problems of the ICI in relation to their Irish business. Sophisticated techniques have been used by my Department on a consultancy basis since 1978.
The point which I made in my opening speech was that actuarial expertise was required continuously on an in-house basis. It will be my aim to achieve this at the earliest possible date so that supervision can be undertaken even more efficiently using this in-house facility and the most modern techniques and facilities. I am not saying that provision has been lacking. It is clear that it has not been lacking in the case of ICI's Irish business, as I indicated quite clearly in my opening remarks. I will refer to the PMPA at a later stage. I am aware that there are limitations and I would like to redress them as speedily as possible in order to avail of the best expertise that is available on a broad scale.
Senator O'Leary compared the adequacy of claims provisioning for Hibernian Insurance and ICI and drew some conclusions from this in relation to the quality of supervision undertaken by my Department. In passing, Senator O'Leary referred to Hibernian Insurance as being an excellent company. I am pleased to support him on that. I suggest that he might have a discussion with Deputy Pádraig Flynn on his untimely and unjustified comment with regard to that company. Under-provisions for claims are not unique to ICI. It is quite wrong to generalise from the out-turn for a few years of one or two classes of business, and to conclude that a company were, or are, in  danger of insolvency, or that my Department provided poor or inadequate facilities.
In the case of ICI serious questions about the adequacy of their provisioning first arose in the 1981 accounts. The company were repeatedly tackled on these matters in 1983 and 1984 and correction of the under-provisions was arranged at my Department's insistence. Initially these corrections were made from the free reserves of the company but, in November 1984, it was necessary for AIB, as the shareholders, to increase the share capital of the company by £40 million and to inject £30 million.
Turning to the more general points about the adequacy of claims provisions, I have already indicated that under-provisions were not unique to ICI. The record of Hibernian Insurance has been as good as Senator O'Leary said. However, the company are perhaps exceptional in the quality of consistency in their provisions. Comparison of ICI with Hibernian Insurance, therefore, gives a misleading picture. Whereas all insurers are liable to be wrong in their original estimates for claims, this does not mean that the insurers will become insolvent. It is quite nonsensical to use the benefit of hindsight to prove such a case in one instance.
My Department have identified inadequacies in various insurers from time to time and have insisted that such problems be put right. This is done as matter of course, and in the normal process of supervision without any publicity or trumpet blowing on the part of my Department. It has to be done in a confidential manner because the protection of confidence in insurance companies is vital to their very existence. I would object if the quiet efficiency which is shown in the work done by officials in my Department were to be ignored in favour of selective criticism which is given with the benefit of the very inexact science of hindsight.
Supervision is not just an annual look at the yearly returns of the insurance companies or the production of the blue book. It is an on-going examination of the insurance companies which come  under the responsibility of my Department and, therefore, of my insurance division. We have been extremely careful in continually monitoring insurance companies. I do not wish anybody in this House or elsewhere to feel there was any slackness or negligence on the part of officials in my Department or on my own part. That is not the case. It is patently untrue. The blue book published each year gives us a trend and allows us to see movements. We certainly tackle the problems as they arise and come to our notice.
Senator Eoin Ryan referred to the PMPA and rumours about it going back-over a period of ten years. It is no secret that successive consultancy studies on PMPA were carried out using the best expertise available. These varied from consultant accountants examining the full accounts, to claims experts sampling of standing claims estimates, and actuarial evaluation of re-insurance arrangements. Apart from some minor concerns which were corrected up to the year 1981, not one of those studies — and there were seven or eight of them in total — pointed to any serious deficiency in the reserves of the PMPA.
At the end of 1981, however, a claims expert identified a change of reserving practice not mentioned in the accounts. It was then necessary to quantify the effect of that change in order to establish where, and to what extent, under-provisioning existed. This study took 15 months to complete. When it became available and its conclusions were confirmed within a short time by an independent study, the action taken in October 1983 was initiated.
I repeat this in some detail for the benefit of the House because it exemplifies and reaffirms my Department's active role in monitoring insurance companies. The PMPA were closely policed through special consultancy examinations as well as departmental efforts over a long period. Rumour alone could not justify any action until a problem was shown conclusively to be in existence and that problem was identified and dealt with in 1983.
 There is an important point there. There have been rumours about many insurance companies here and elsewhere, and about other financial institutions too. These rumours can be malicious. Certainly there cannot be adequate grounds for direct State action without adequate reason which in every case would have to be shown to the satisfaction of a court. Rumours, of course, have another quality. They can prove a rumourmonger right if what is speculated about happens in any form at any time in the future. But that is not an adequate reason to spread rumours or to react excessively to them. I say that in general terms. We have had a responsible debate here tonight which has avoided, by and large, references to rumours.
I have noted the comments made by Senator Ryan and Senator Hillery on the effect of the existing jury system on insurance costs. I am not unsympathetic to some of their comments. As Senators are aware, the Government have decided to modify the right of access to decision by juries on the extent of damages for personal injuries. As the subject is not immediately germane to the Bill before the House, and pending the detailed proposal which the Minister for Justice will be bringing before the Government, I do not think I should comment in detail on the matter at this stage. I think I have made it quite clear that it is not the intention that the taxpayer would foot the bill, as pointed out by Minister Bruton and myself.
Senator McGuinness raised the question of traffic accidents. It is a fact of life that the level of non-insurers of motor vehicles is between 10 and 20 per cent. Perhaps the figure is nearer 10 per cent. The report of the Prices Advisory Committee on motor insurance indicated clearly that there was a problem for society to solve. If people do not want to tax or insure their cars or put on their seat belts, or drive properly or while sober there is little I can do to change their minds on that. In regard to industrial accidents, I am aware of a report on safety in industry which indicated that there was a need for  safety in the workplace. I understand that the Minister for Labour is examining what action to take. These are measures which, even if you have statutes, cannot be implemented. If the general populace wish to ignore them, we are going to continue to have high levels of uninsurance and of accident rates. There is a need for greater consciousness and civic spirit among the people, in order to tackle the problems of insurance and the high level of awards made by the courts.
Senator Smith raised the point that we were not out of the wood yet. We will continue to monitor insurance companies in a very detailed, professional fashion. Senators can be assured that supervisory responsibilities will be carried out by my Department in a very professional manner, as has been the case heretofore. I express my gratitude to Senators for their generally constructive and supportive comments. I have not replied in detail to all of the points made. I know the Senators do not wish to be delayed unduly here this evening.
Professor Dooge Professor Dooge
Professor Dooge: This morning.
Mr. E. Collins Mr. E. Collins
Mr. E. Collins: Are we gone past the midnight hour? I believe that the necessity for the Government's action has been widely understood and that the Government's concern to avoid a burden on the taxpayer arising out of that action has also been appreciated. I have confidence in recommending the Bill to the House.
Question put and agreed to.
Agreed to take remaining Stages today.
Bill put through Committee, reported without amendment, received for final consideration and passed.
Mr. E. Collins Mr. E. Collins
Mr. E. Collins: I want to express my gratitude to the Members of the House for the speedy passage they have given to the Bill.
Seanad Éireann 107 Insurance (Miscellaneous Provisions) Bill, 1985: Second and Subsequent Stages.