Jill Kerby

CAN A TIGHTER HEALTH INSURANCE MARKET DELIVER PRODUCT AND PRICE?

You’ve probably heard or seen the radio and television ads for the newest health insurer in the market – Irish Life Health, which has been created from the merger of Aviva Health and GloHealth.

Together they now insure 425,000 individual and corporate customers; the VHI remains the biggest, with c1.1million members and Laya Healthcare with 550,000.

The new company’s managing director, Jim Dowdall, the former CEO of both the merged companies (at different times), insists the merger will enhance, not restrict competition, despite reducing the number of players in the market to just three. It certainly convinced the Competition and Consumer Protection Commission that this would be the case though it’s hard to imagine the CCPC or the EU ever tolerating just three motor or home insurers. 

Nevertheless, the arrival of Vivas back in 2004 certainly forced VHI and BUPA (which preceded QuinnHealth and Laya) to raise their games as they scrambled to match the new types of plans, benefits and innovation that Vivas introduced – especially for the lucrative and demanding corporate market. Dowdall stepped up that pressure when Aviva Insurance took over Vivas a few years later, and he remained as the MD of the new Aviva Health operation.

In 2012, having left Aviva, Dowdall set up the fourth and smallest of the health insurance providers, GloHealth. It moved even further in offering innovative, focused plans that suited both individual healthcare needs and budgets.

Active sports players who joined GloHealth for example, could opt for more sports injury coverage than was offered by more standard policies. Families could load up on out-patient cover and benefits more suitable to their needs while older people could pick and choose higher value treatment cover or accommodation packages. Both GloHealth and Aviva were also at the forefront of ways to access diagnostic consultations with nurses and GPs by phone or on-line.

“This is a market where scale is particularly important,” Jim Dowdall explains. He diplomatically describes it as “unusual”, “highly politicised”, and with state operating rules that “keep changing”, referring to the health insurance levy that can account for 65% of the price of lower value entry plans, and the hospital bed charge of over €800 a night for insured patients, “even if they end up on a trolley or recliner”.

He concedes that this is probably why there haven’t been more Irish or foreign operators here since BUPA first arrived to challenge the VHI’s monopoly in 1996.

But he also warns that health-care costs are likely to keep going up for as long as there are “non-negotiable charges” imposed by the state.

“The population is ageing. We may think the cost of health care is high today. But wait and see how expensive it becomes in the future, with better medical outcomes and diagnosis. More cancer and heart cases will be treated and will put higher demands on the public system. But that’s why it’s even more important to tackle the artificial drivers of our health insurance cost increases.”

The government, he said, needs to recognise that people with insurance are “alleviating the pressure on the public system and should be rewarded for this, not discriminated against.” Last year alone he says the HSE collected €150m from the public hospital bed charge.  With the levy, this is driving up the cost of insurance and preventing people from buying levels of cover that will keep them from accessing private hospital service.

He also believes that innovations like the GP video consultations that Irish Life Health customers now enjoy is a way to take pressure off the public system, and deliver value to customers.

 “For example, a parent who opts for it doesn’t have to take time off work to physically bring a sick child to the doctor. A prescription can be issued to your local pharmacist. And you don’t have to pay the €50 or €60 charge. We pay the GP directly.”  He promises more of these kind of the community based, primary care services.

I asked the specialist health insurance broker Dermot Goode of TotalHealthCare.ie what he thought of the merger:

“I think more competition, more players would be better. But Irish Life Health is going to shake up the corporate market, no question. They will leverage the Irish Life brand and its existing corporate life and pensions business.

“And that isn’t a bad thing for the individual consumer because under our Community Rating system, everyone has access to every plan on the market, including the corporate ones. I expect there will be some very good new plans coming out at very competitive prices.”

Finally, a welcome concession to bewildered health insurance customers everywhere: Dowdall also promises that Irishlifehealth.ie will streamline their product selection to make it simpler to comparison shop. “There really has been too much product out there”.

VHI and Laya, please take note.

CARTEL OR NOT, YOU NEED TO GET THOSE MOTOR PREMIUMS DOWN

Good luck to the Competition and Consumer Protection Commission in trying to establish whether the motor insurers and brokers have set up a cartel to rig insurance premiums.

This is a small place. And the number of motor insurers is smaller than it used to be. And it hasn’t been unusual in the past for financial players to announce a rise, say, in their interest rates - in the case of banks – or their premiums, in the case of health insurers, around the same time.

But when it’s happened in the past it was mostly a case of them opportunistically and very publicly following the leader, sheep-like, rather than a secretly conspiring to do so. In the case of the banks, the sheep leader is often the ECB after they’ve upped their rate.  Motor, home and health insurers take every opportunity to react to the latest statistical reports on weather events, accident rates or further expensive policy measures (in the case of health insurance) taken by the government for all their premiums to rise.

And while motor premiums are up c38% on average over the past year, not every driver has seen the same percentage increase and it is that kind of evidence that the CCPC will probably need to find to prove their case.

Even if they do, price-fixing, while a criminal offense, is more likely to result in fines than jail-time, so don’t expect to see any insurance bosses or brokers doing ‘the perp walk’ anytime soon.

The insurers are correct, however, in stating that the higher premiums we’ve seen are due to the higher cost of claims. But they are disingenuous in suggesting that it’s mainly been due to the high settlements the courts award in injury cases or the big fees that the legal profession continue to rake in from these cases.

In a major survey conducted by The AA in early 2015, both of these factors feature, but are only two pieces in a much bigger picture that includes

-       a relatively high number of uninsured drivers;

-       a high level of fraud that the industry is not dealing with effectively enough, particularly in the use of software technology used in other jurisdictions.

-       not enough Even more significant, claimed the AA is that premiums were set at far too low a level and for too long after the economic collapse occurred in order for the insurers to maintain their market share and compete for new or transfer business.

And a factor that is completely underestimated is that the insurance industry is not achieving the kind of investment returns that it once enjoyed, and on which it not only meets it’s claims and reserves but also its own overheads and the dividends it pays its shareholders.

In this, they share the dilemma also facing the pensions industry – where safe bond yields and fixed interest returns are at historic lows and therefore cannot meet defined benefit pension scheme promises to workers, and anyone who has come to rely upon a bank deposit yield. The culprits in this case are central banks and their nearly decade long, retrograde low-to-zero rate interest policies that have clearly failed to “stimulate” moribund, debt-bound economies.

Unfortunately, blaming central bank policy on top of everything else doesn’t offer much consolation if your motor insurance has become affordable. For that you need to take some action of your own to try and bring that bill down.

Here are few suggestions:

-       Always challenge a higher premium. Speak to your broker and instruct them to seek a better deal. Or call your (direct) insurer and ask how you can find some savings. Remind them, if this is the case, that you have no penalty points/ that the car has an alarm/is parked inside a garage/includes your spouse as a second driver, etc.  Tell them you will move your business if they don’t reduce the premium.

-       Use a broker. Or switch to a new one. They should be able to find you a better premium if you have a clean insurance record and often will offer a minimum 10% “savings” on your renewal quote by sharing their commission with you in year one.

-       Agree to a higher “excess” payment to bring down the premium.

-       If you have an old car that is not particularly valuable, consider only carrying third party, fire/theft coverage.

-       Drive an older car – they cost less to insurer (but can cost more to tax, maintain.)

-       Drive a vintage car. Insurance can be very low on cars that are 30 years plus.

The road haulage industry wants to be able to tap into the wider EU insurance market for much cheaper cover. So should the rest of us.

It wouldn’t solve the high awards problem or the number of uninsured drivers here, but it couldn’t hurt.

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

THE PENSIONS FUNDING GAP IS GETTING WIDER

The dire financial legacy of the Celtic Tiger years for ordinary folk was greater than just lost jobs, negative equity mortgages and high levels of personal debt.

And while most Irish people are steadily reducing their debt mountains, the 2008 crash with surge in unemployment also had a devastating effect on the amount of deferred income being allocated to personal pension funds, according to the pension provider, Aviva. 

Our pensions gap – the difference between actual pension savings and retirement income expectations – has increased 38% since 2010. The same gap in the rest of Europe is just 6%.

According to Aviva’s latest Mind the Pensions Gap survey, the generation of Irish people who will retire between 2017 and 2057 are going to need to collectively save an additional €27.8 billion a year if they’re to enjoy a satisfactory retirement income to meet their perceived needs.

This means, on average, an additional €12,200 gross savings per annum or €1,017 gross per month. These figures take into account the payment of the State pension, but excludes tax relief on pension contributions.  About 47% of respondents believed they would need between half and 100% of their final salary for a comfortable retirement.

“This is the second largest savings gap per head of population in the eight EU countries included in the report,” stated Aviva. “The UK’s gap is the highest at €13,200 and Germany’s, at €11,600, ranks in third place.”

Given the existing level of personal debt, higher taxes, lower asset values and for younger workers, the high cost of rent and child-care costs, saving an extra €1,000 a month could be an insurmountable for many.

So do we need to lower our retirement expectations, or just be more creative about how we can match those expectations with financial reality?

First, this news about the financial pension gap widening isn’t as bad as the ‘average’ assumes.

As the Aviva survey shows, if you’re a 30 year old worker, your annual saving shortfall in 2016 is €5,100 gross (or €425 per month gross). It was just €2,500 gross in 2010 (€208.33 per month). (At 20 it is ‘just’ €4,400.)

At 40 the funding gap is currently €6,700 a year; at 50, €9,700 and at 60, the average Irish worker would need to put away €28,000 a year for five years to achieve 70% of their final salary level in retirement (including the current c€12k state pension.)

A younger worker, especially one with the decent employer to match their contributions could realistically fill the gap after tax relief is taken into account and even with only a steady 3% growth rate in their fund, could expect a satisfactory private/state pension income in 35-45 years time. But it would require them accepting that they still have to forego spending today in order to have the money to spend tomorrow – a very long tomorrow.

Essentially it means living within one’s means, and not on credit. Lifestyle adjustments, especially if the person aspires to home ownership, will be pretty drastic if they hope to have both a mortgaged home and a well-funded pension fund.  Even the latter might be interrupted if the worker also had to factor in years of costly child-care and education costs.

But will the government step in to bridge the gap between lifestyles that cannot include pension funding (due in part to their own policies) and a realistic retirement income for every retiree?

There is still no sign of it yet. Housing costs remain unaffordable for a large majority of young workers who have to pay higher spiralling rents or older workers who remain in negative equity or arrears.

There is still no universal pension scheme here – supported by Aviva – which would automatically enrol all workers and employers (public and private sector) who do not currently participate or operate an occupational pension.  Private sector workers continue to subsidise higher value, defined benefit pensions for public sector workers and politicians.

Nor is there any sign about how the government, as the third pension pillar, would help fund a universal pension scheme. There hasn’t been any government support for designating a portion of the hated Universal Social Charge to workers’ individual scheme funds.

Finally, there is no sign that the artificial manipulation of interest rates by Central Banks will end anytime soon, to allow fund managers a fighting chance to achieve real, balanced risk investment returns for pension fund members in the form of solid long term bond yields.

The reality today is that only a minority of well informed, prudent private sector workers who contribute sizeable amounts of deferred income into an extremely well run investment fund are going to enjoy a well endowed retirement in the future.

This is a crisis just as serious and just as great as the Irish health service or homelessness.  And it’s on its way sooner than you think.

(You can download a copy of Mind the Gap at www.mindthepensionsgap.ie )

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

INHERITANCE TAX SYSTEM NEEDS MORE THAN JUST TINKERING

Should inheritance tax-free thresholds be loosened in the next budget? Should childless people be free to leave larger sums to their nieces and nephews or even a ‘stranger’ who is dear to them?

These are some of the suggestions being made by Fianna Fail in the lead-up to the October budget, and one that’s sure to generate plenty of controversy.

Inheritance tax is one of those issues in Ireland – like property tax and water charges - that gets people’s blood boiling.

Most people I have spoken to over the years believe that having paid copious amounts of tax already on the cash or assets paid with cash that they wish to leave to their loved ones – income tax, VAT, stamp duty and property tax (where a family home or holiday home is being passed on) and innumerable sneaky levies, the government should only help themselves to a modest amount of the capital value of your estate upon your death.

Others, and they are a minority, believe inherited money is unearned, favours people who are already well off and therefore should be subject to confiscation by the state “for the common good”.

Here in Ireland, capital acquisition tax, it’s formal designation, has undergone quite a few changes in recent decades, with both the amount that can be inherited tax free as well as the band rates of taxation moving up and down in tandem with the strength and weakness of the national economy.

There is a growing expectation that the Minister for Finance will raise the parent to child inheritance tax-free benefit from €280,000 (raised from €225,000 in Budget 2016) to about half a million euro (still below the tax-free rate of €542,544 in 2009, after the financial crash).

This will reflect the rise in property prices over the past six or seven years, especially in Dublin. Property remains the single largest transferrable asset within families.

But one opposition party, Fianna Fail, is calling for the other inheritance tax thresholds to also be increased at least in line with the increase in the parent-child one. These include the threshold between siblings, aunts/uncles and nieces/nephews and between strangers, that is, people with no blood ties.

The tax-free CAT limits for these two final categories are currently €30,150 and €15,075 respectively. In 2009 they were €54,254 and €27,127.

But the reform argument should go further than that. Over the years I’ve received many letter from readers who are single or childless. Some are only children so have no siblings or nieces and nephews to whom the law would allow them to leave their estates partly-tax free.

These owners of a home or other assets for which they paid with (mainly) post-tax income say that while they may not have close family members, they do have “loved ones” – godchildren or close friends – that they would like to endow with larger sums of money upon their deaths. 

One reader, after last year’s same sex marriage referendum even made the point that “inheritance laws no longer discriminate against same sex couples. I welcome that. 

“But my husband and I were never able to have children. I am an only child and neither of us feel any obligation to pass on our estates to our siblings. Their children will be generously endowed by their own parents.

“But as a woman unable to have children, but with a godchild who I love like a daughter as her mother died when she was only 11, I feel it is most unfair that I cannot leave her a substantial legacy when I die.”

Rather than tinker with the tax-free thresholds, the entire capital acquisition tax system needs an overhaul.  In order to make the system more equitable the government could consider adopting a CAT system that taxes the estate, not the beneficiary, as applies in the USA, UK or Canada.

For example, no inheritance tax applies on estates worth up to $5.45 million in the United States, while the estate tax-free limit in the UK is only £325,000. However, in both the US and UK a liberal system of trusts and lifetime tax-free gifts will lowers the impact of the 40% tax rates in both countries, to beneficiaries.

In Canada no inheritance or estate tax applies but the value of the deceased person’s estate is subject to their income or capital gains tax rates on the imputed ‘sale’ value of their assets. Beneficiaries then receive their share tax-free.

Setting a €1 million tax free threshold to an entire Irish estate over which 33% CAT would still apply would certainly satisfy the desire of many people to leave generous bequests to non-lineal beneficiaries, and still “reward” the government.

As families and relationships change and evolve, so should our antiquated and arbitrary tax laws.  

Michael McGrath and Michael Noonan should both take note.