Irish consumers could enjoy major savings if new competitors were to enter the insurance market here, writes Harry O'Rahilly

Judging by last week's Irish Financial Services Regulatory Authority statistical returns on the non-life insurance industry, Irish insurers' profitability surpasses the European average by some distance.

Moreover, while margins have increased year on year for the past five years, preliminary 2006 figures published by Allianz and Aviva indicate that the margins will widen again this year.

Illustrating relative profitability, the graph (right) shows the average underwriting profit per €1,000 premium of Irish insurers compared with those of major insurance groups.

The Irish insurers' figures are based on underwriting profit as a proportion of earned premium income, while the group figures are derived from reported combined ratios (key industry metrics of claims and costs as a proportion of premiums).

The graph shows that Irish underwriting is far more profitable than the combined group operations of the insurers listed. Importantly, given that Allianz stated that its underwriting performance on a group-wide basis for 2005 was strong, the profitability enjoyed by underwriters in Ireland is nothing short of extraordinary.

But what savings could be generated by the consumer were profit margins to come down to the level experienced by Allianz across all its territories? Assuming costs remained the same, Irish premiums would fall approximately 15 per cent from €3,669 million, saving the consumer some €560 million for 2005. Such savings will only be generated by a dramatic change in the competitive environment.

Current pricing policies have been driven by continued economic growth and in turn demand for insurance cover.

However, competition has not kept pace with market demand. By facilitating the entrance of new competitors, policymakers could maximise the benefits derived from measures to reduce claims and costs (eg Personal Injuries Assessment Board, Garda Traffic Corps, random breath testing). Given Minister for Enterprise and Employment Micheál Martin's recent announcement of the provision of Government assistance to create 1,000 new jobs to service Quinn Direct's international markets, it would be welcome were the domestic market to receive comparable action to bring about a more competitive playing field.

Inaction however will likely see the persistence of current levels of super-normal profitability.

• Harry O'Rahilly is principal with policy consultants Elea Group and a former equity analyst with Deutsche Bank.