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After years of making hay and exploiting the boom times to the full, the insurance industry has happened upon distinctly more challenging times.

And while some say it has all the components of a perfect storm, others are remaining more optimistic, terming the current gloom a ‘cyclical downturn'. Either way, cost-cutting, relocation and outsourcing loom large on the horizon for all.

Nine months into the year, Ireland's life companies are almost universally recording drops in business, as justifiably spooked punters shy away from equity and property-linked investments. Pension income is holding up well so far, but if unemployment numbers continued to trend upwards, life companies know that business may too become shakier.

In addition, general insurers look likely to unveil some grim figures over the coming years as the true cost of the recent motor insurance landgrab becomes clear. Several players have admitted premiums are now being written at a loss, most say they will push for rates increases in the year, but all fear one of their peers will break rank, making rises impossible.

All the while, new rules introduced in the summer look set to dramatically reduce the numbers of Ireland's 420,000 L-drivers, potentially snatching swathes of high-premium business away from motor companies at the worst possible time.

And, as if motor wasn't enough to contend with, trends in mortgage protection, life and home insurance have begun tilting downwards, inextricably caught up in the slipstream of the general property market.

It makes for grim reading at the headquarters of the parent companies that control most of Ireland's major insurers. After years of cashing in on the Celtic Tiger boom, multinationals are now listening with bemusement as their Irish divisions tell them serious growth is unlikely to be forthcoming for 2008, 2009 and possibly as far out as 2010.

Talk of cost-cutting inevitably follows, since increasing rates is a complete no-no in the prevailing economic environment. For some, the belt-tightening may be confined to slashing bonuses and consultants' fees; for others it could be as drastic as large-scale outsourcing, relocation and job losses. And so, the scene is set for a decidedly challenging 2008, as insurance companies dig deep in search of their competitive reserves.

The life side

Accounting for €30.4bn of gross premiums in 2006 alone, life insurance is the single largest segment of Ireland's insurance market. With €24.13bn in 2006, single-premium investment is where most of the money is channelled, though margins are typically low. Between 2005 and 2007, the single-premium business was positively booming, recording revenue growth of more than 20pc each year. No more.

Over the last 13 months investors have watched in horror as equities, the backbone of many a single-premium product, began to spiral downwards, with the once stellar Iseq shedding 40pc of its value since its peak in February 2007.

All the while, property, the other stalwart of single-premium products, has begun to look much shakier, too. Amid the investment outlook sea change, Hibernian, Irish Life, Canada Life and Standard Life are just some of the big names to quietly admit single-premium business just isn't what it used to be.

"Everyone is seeing a reasonable slowdown in lump-sum investment, it's very different to even a few months ago," says one insurance insider, adding the falls are "potentially more than 10pc". Life Strategies boss Jim Murphy knows the trends better than most, having spent years compiling industry research. "For 2008, I'd expect overall life income to be down, unless things really pick up in the second half of the year," he says. "We've had phenomenal growth for the last few years, but it does tend to go in cycles.

"In the early 2000s, when the dotcom boom burst, the life insurance industry suffered for a few years, too. "For 2008, a huge amount depends on the extent of the equity market turmoil."

In the meantime, insurance companies are trying to find novel ways to lure punters' money. Canada Life boss Tom Barry points to the success of his company's UK and European property funds as proof that equities aren't "it" for single-premium products.

Other insurers have set up funds to help investors cash in on the weaker Iseq, while guaranteed products are also being pushed en masse. Executives admit, however, these relatively "niche offerings" won't be enough to offset the plummeting popularity of more traditional investment products.

"In the main, investors are essentially keeping their money in cash, until they have clarity on the outlook for the equity and property markets," says Kevin Murphy, chief executive of Irish Life's retail business. "The lump sum market isn't going to pick up until the latter half of 2008 when some certainty comes back." It's a brighter picture over at the pensions side of the house, where the majors report business as usual so far this year.

"Pensions are generally tax-relief driven rather than market driven," says Irish Life's Murphy, noting pension income is typically "more resilient" than the single premium. February's dismal unemployment levels, the highest seen since August 1999, could spell longer-term trouble, however, given the limited need for pensions' amongst the unemployed.

The battle for motor

While life insurance companies are facing into what is essentially a cyclical low, general insurers are facing into far more uncertain times. Six years into a brutal premium-deflating turf war, the need for short-term price rises has become the topic of the hour at general insurers across town.

The chief executives of both Hibernian and FBD have publicly said they expect some "hardening" in motor prices, but neither have since gone out and upped their own rates, their hands seemingly tied by fear of pricing themselves out of the market.

The established corporates, the Hibernians, Axas, Eagle Stars and FBDs of the world, appear to have lost their appetite for growth at any premium level; indeed, Axa's motor book has contracted by 10pc in recent years as the insurance giant has spurned the race to the bottom.

The maverick in the game, however, is Quinn Direct, which has been "leading the market down" in pricing terms, to quote Goodbody's. The strategy has seen Quinn's motor book swell to 20pc of the market, becoming Ireland's second-largest motor insurer, whether the company is happy with this scale is anybody's guess. Just how low Quinn can go is another big unknown. As a private company, Quinn is freed from the burden of detailed reporting, so the market has few tools for assessing its financial health.

The market does know Quinn's business model on motor is radically different to the status quo. Settling claims as quickly as possible is sacroscant, with assessors literally sent to accident sites to write cheques. "When claims go on for years, the costs increase exponentially, as experts and lawyers are added to the bill, so Quinn's way is a much cheaper way of doing things," says one industry insider.

Those savings give Quinn extra room on pricing, as does Quinn's reserving strategy, which is reportedly at the lower end of the range. The latter circle, at least, will be squared in 2012, when new solvency rules (Solvency 2) require all general insurers to adopt common reserving standards. The harder circle to square is whether Quinn has any appetite for further premium falls. A small hint, perhaps, comes from Quinn Direct boss Colm Morgan's response to how a fall-off in learner drivers would affect his business.

While Axa boss John O'Neill speaks of a need to ensure very inexperienced fully licenced drivers aren't "over exuberantly priced down" on passing their tests, Morgan takes a different tack. "The insurance market has reacted to falling claims in recent years by reducing premiums," he begins. "If the upcoming changes to learner driver regulations result in reduced claims costs, these reductions will undoubtedly be passed on to drivers and Quinn will lead this."

His comments must be viewed in the context of the July's learner driver rules having an impact, and Morgan firmly believes they won't, so, in that sense, his musings are purely hypothetical. The sentiment is still ominous, though, since Morgan is the only insurance boss in town still voicing an apparent appetite for premium falls, in any shape or form.

The impact of the new learner driver rules is a divisive subject amongst insurance experts. Since July, L-drivers face fines of up to €1,000 if caught by driving without a fully-licenced passenger, in a move expected to radically reduce Ireland's learner driver numbers from their current 420,000. Learners generally pay higher premiums than their similarly experienced peers,and drivers have traditionally seen a substantial fall-off in premiums once they become insured, two factors that further the belief that provisionals are effectively the cash cow of the motor insurance industry.

It is a belief that would seem to be supported, too, by data from the Financial Regulator's office, which shows that provisional drivers overwhelmingly deliver a higher "premium surplus" than their fully-licenced peers. Morgan, however, seems almost offended by the idea learners are "cash cows". He is quick to point out that the "crude" data from the Financial Regulator's omits admit costs, which he says are typically higher for provisional drivers given the cost of recruiting them.

He adds that while premium surpluses are higher for L-drivers in absolute terms, the percentage profit on L-drivers is broadly in-line with fully-licenced, since learners pay higher premiums. In short, Morgan believes a potential fall-off in L-driver numbers would have "little or no impact" on Quinn, since Quinn isn't making more money on learners as things stand.

Axa's O'Neill, however, sees more significant ripples. For starters, dramatically reducing the number of L-drivers would help Ireland's international reputation, since our "current laissez faire rules look very silly to external commentators". Reducing the number of learners could also prompt an overhaul in the way insurers price motor policies, he says, and Axa is already "slicing and dicing" data with a view to doing this. "We're in danger of being over exuberant in reducing premiums once people pass their tests," says O'Neill.

"There's no evidence that the claims experience gets dramatically better after the test is passed, it really has more to do with experience than a full licence; but the implication has been that if you passed your test, you've been driving for two to three years.

"The shorter waiting lists mean we now have the bizarre situation where you can pass your test six months after starting to drive, so we have to look at things again." Axa are now searching for a new pricing model that removes the heavy emphasis on licence status, in a move likely to lead to higher prices across the newly-licenced, ending automatic price downs.

Others, too, may follow Axa down the data crunching route. "The pricing here probably isn't as sophisticated as it should be," says one insurance expert. "If there's a significant shift, like 250,000 people being taken out of a specific category like L-drivers and put into a more general category, then some insurers are going to have to look at how they do things and start pricing in other factors instead."

Innovate as they may on motor pricing, the hangover from the recent price wars will loom large in general insurers' accounts for the coming years. "It takes about three years to know the full production costs of policies being written now, and the worry is that people simply won't have charged enough," says O'Neill. "You'll see mixed reporting this year, and then our projection is for a very lean year in 2009."

All the while, insurers also have to contend with rising inflation, with medical costs soaring by about 10pc each year and staff cost inflation running at 7pc, while the investments holding general insurers' capital have been caught up in the general market chaos, causing large swathes to be moved into low-yielding guaranteed securities or even cash. "It's the perfect storm -- inadequate pricing, poor investment return and the recognition of strong claims inflation," says O'Neill.

The end of the tunnel?

The search continues, then, for the light at the end of the tunnel. "The economic situation can become a self-fulfilling prophecy," says one insurance insider. "Chief executives are going back to their parents saying the market conditions mean they can't expect to grow. "They're planning not to grow and not growing is what their plans are based on. "If income falls and parent companies are keen to keep profits up, that means cutting expenses."

Hibernian has already outsourced 580 jobs to India. Another insurer is considering decentralising some of its functions from a leafy Dublin location, in pursuit of a better cost environment outside the capital. Others are cutting back on the use of consultants, while performance-related bonuses are coming under pressure across the sector. Despite the heat from head offices, sources say the majors are "in it for the longhaul", with no one planning to exit stage left as their Celtic fortunes turn.

"One thing's for sure though," adds one, "you won't see anyone new coming into the market this year."

Laura Noonan