Setanta Motor Insurance – what went wrong

It would not be inappropriate for readers to ask whether this article is about another hit and run car accident. But in truth this is a sad story about a large insurance company that went bust.

Setanta Insurance Company Ltd was established in 2007 and was authorised to do business in Ireland by the Malta Financial Services Authority (MFSA) with an objective to sell private and commercial motor insurance policies to Irish consumers with the help of about 230 brokers.

It was founded by Mike Matthews in Ireland in 2007, with the backing of individual investors.

Unfortunately, the company got into difficulties and realised that a solvent run-off of the business was no longer viable. It decided to immediately dissolve and surrender its business licence.

One may question what is so unusual about Setanta, given that the news of motor insurance companies that went bust in Ireland is no rare occurrence. The answer is that Setanta was no small operator, covering about 75,000 policyholders – two thirds commercial motor insurance policies and the rest private motor insurance policies.

The 60 million dollar question is – why did the Irish authorities not foresee the downfall of the company? This article will not succeed to unravel the mystery, but hopefully it will give some circumstantial evidence.

To start with, Setanta was regulated under EU laws which allow the sale of insurance in Ireland, although it was regulated in Malta. Now that the apple barrel has gone rotten it is tempting to agree with John Bissett, president of the Irish Brokers Association, who remarked that this was not the ideal model.

In his words, he said that “the system in its current state allows insurance companies, which are primarily owned by Irish people and principally based in Ireland, to sell exclusively to Irish customers – but to be regulated in a different jurisdiction”. In his opinion, insurance entities operating in Ireland, selling to Irish consumers, should be regulated by the Central Bank of Ireland,” he said.

But it is not all doom and gloom – since there was an injection of new capital amounting to €1.354 million, yet certainly this was not enough to improve the company’s solvency margin and to prepare itself for the more exacting requirements under Solvency II. 

Surprisingly, there were only 22 shareholders in Setanta Insurance, who invested €8.4 million. With hindsight it is very clear that this capital base was not enough to save the company in its troubles, arising out of unexpected liabilities. Following Setanta’s liquidation, it is rumoured that some 1,750 claims by and against Setanta policyholders remained in existence.

The MFSA recommended the appointment of a liquidator who should be allowed to exercise his power according to law. Can this be an elephant in the room? Certainly it was the Irish Central Bank that first became concerned about the financial position of Setanta, based on market intelligence in September 2013.

Accordingly, it contacted the MFSA seeking assurance that Setanta was solvent and it had sufficient own capital to meet liabilities for all Irish insured clients.  But the good news did not materialise. Like a bolt in a blue sky Setanta surrendered its licence to the MFSA on 17th April, 2014, stating publicly that it would file for a creditor’s voluntary liquidation because the assets were insufficient to meet all outstanding claims. 

As an interim measure Artex Risk Solutions would continue to manage the run-off and Setanta would continue to manage claims. The necessary forms were submitted to the MFSA for a formal appointment of Mr Paul Merciera as liquidator, himself a retired audit partner and ex-CEO of Deloitte in Malta.

This appointment could not have come a moment too soon as it is well known that Mr Mercieca is an experienced accountant with an exemplary track record in corporate recovery. As some may say, Setanta was sailing close to the wind but was not technically in breach of legal solvency requirements.  The first meeting of creditors, held on 30th April, 2014, decided to appoint Mr Mercieca as liquidator although the committee’s first preference was Dr Louis Cassar Pullicino (a managing partner in the legal law firm Ganado & Associates) – he declined the offer.

Immediately the liquidator intimated to the MFSA his intention to cancel all policies issued by Setanta by giving a mere seven- or 10-day notice. This period of notice is being contested since in accordance with Irish Central Bank rules, insurance providers need to give a minimum of two months’ notice of cancellation – which technically means that Setanta Insurance policyholders will be insured for another two months under their existing policies. Policyholders who did not seek alternative cover and were involved in an accident over the course of these two months could leave themselves open to being personally liable if the liquidator found that there were not enough funds left to cover any claims.

As a consequence of this cancellation policyholders were ipso facto uninsured and had to seek alternative cover without delay because their claims would probably not be paid in full. The fly in the ointment was that in Ireland Setanta’s brokers continued to renew policies even after the MFSA directed the insurer to cease operations.

This had set the cat among the pigeons as Bernard Sheridan, director of consumer protection at the Irish Central Bank, said that the liquidator was still in the process of assessing the level of potential claims and quantify the assets and liabilities of Setanta. Only then could he estimate the actual shortfall.

The penny dropped when it was announced that there could be as much as €24 million worth of claims which might not be covered. On 2 March, 2016, the Court of Appeal in Ireland upheld the controversial High Court decision of last September. Against all odds it ruled that it is the Motor Insurers’ Bureau of Ireland (MIBI), rather than the Insurance Compensation Fund, which was potentially liable to cover outstanding policyholders’ claims.

The precise implications of the Court of Appeal ruling need be carefully assessed; however, early indications are that it will have far-reaching consequences for Irish motor insurers and the operation of the MIBI going forward. This is because the MIBI, which draws from a fund contributed to by motor insurers operating in the Irish market, had argued that the scope of its responsibility did not extend to liquidated insurers but solely to compensating the victims of uninsured or untraced drivers.

The MIBI had also argued that the Insurance Compensation Fund was the body primarily designed to compensate claimants in the event of an insurer’s insolvency. However, primarily based on an interpretation of the 2009 agreement between the Department of Transport and the MIBI, the High Court ruled that given the purpose and nature of the MIBI, it was potentially liable to cover any outstanding claims by and against Setanta policyholders.

Inevitably, the media commented that this cost burden would be passed on to Irish policyholders through higher premiums, and at a time when the motor market was already under considerable pressure from rising claims costs. The saga of the 70 shades of pain continues....