The Rules, and the difference between and arm and a heart

Rules. They are there for a reason. When dealing with financial products like insurance, the financial regulator sets the rules. The rules are there for a very good reason: the consequences for the public for a large insurer getting into financial difficulty are enormous.

Ireland has had a very poor regulatory environment up until now. I have no doubt the blame for much of the excesses can be traced to the financial regulator and its inactions over the boom years. Now we have a new regulator, interested in imposing tougher standards on those companies whose businesses fall under its remit. Quinn insurance is one such company. The company is clearly in some difficulty, but I don't want to get into commenting on specifics in the Quinn case, because I'm simply not qualified. When it comes to a company's books,  I feel anyone who isn't a qualified accountant should refrain from comment.

What I want to talk about is the attitude to the rules. Once the regulator installed Grant Thornton as administrators, The Quinn group, we are told

fought back by orchestrating street protests and political action designed to reverse the decision.

Sorry, what? What?

There are rules, and when they aren't followed, either one complies with them and gets on with it, or one takes the penalties imposed, and moves on. One does not organise street protests and call in favours to change the rules. That's exactly how we got into this mess in the first place. Regulators must be empowered to enforce rules credibly, without fear or favour. Regulators should be empowered and encouraged to prosecute anyone who tries to interfere with their operation, from the Taoiseach on down. The regulator can, and must, act in the public interest, to safeguard the interests of the country, because that's its job. To do otherwise is to lead Ireland back down the road towards a banana republic.

In all of this, we are told to think of Quinn employees. I'm not thinking of Quinn's employees, but of their management. If Quinn is a viable business proposition (and again, I'm in no position to comment on the viability of this business, and don't want to. Go somewhere else for that), then someone will buy it, and the existing management will get the chop, thus saving the employees. If Quinn is semi-viable, then a restructuring plan from the private market under the supervision of the regulator will see it through. If Quinn is not a viable business any more, then many of the workers will have to be let go, and bits of the business carved up and sold out. This is a consequence of not playing by the rules, and Quinn's employees should be protesting outside their management's offices, rather than the government. Why? Because it seems the management broke the rules.

Systemic Importance. The rhetoric of 'systemic' importance is beginning to be bandied about again. This is a ruse, designed to distract from the very concrete balance sheet problems one large and clearly well connected company has, and the rules it is breaking. Forget this posturing. Regardless of its relationship with the nationalised Anglo Irish Bank, Quinn insurance should not be considered of systemic importance. It isn't. The worst case, and most unlikely, scenario, the total collapse of Quinn tomorrow, would result in the loss of 5,000+ jobs, and the transfer or payout of policies, and that's it. Nothing else would happen. These aren't small potatoes, but they aren't going to sink the Irish economy. That's the definition of systemic importance. Your heart is of systemic importance. Without it, you're a corpse. Your finger, even your arm, is not of systemic importance. I'm not saying it would be fun to lose either--but clearly, you can't make the argument an arm is a heart. Quinn is an arm, not a heart.

11 Replies to “The Rules, and the difference between and arm and a heart”

  1. This is a consequence of not playing by the rules, and Quinn’s employees should be protesting outside their management’s offices, rather than the government. Why? Because it seems the management broke the rules.

    I agree with the general point you are making. The regulator is there to regulate, and if companies aren't complying with the regulations, actions must be taken. The blame for this is obviously with management and Sean Quinn.

    But there is no point the staff protesting against their management. The existing management are more or less irrelevant to the future of Quinn, so what would such protests achieve? From the perspective of protecting their own jobs, the best thing the workers can do is make the regulator aware that their jobs are bound up in what decision he makes.

    1. Hi John,

      I see your point, but why would the employees of a company protest outside government buildings at all? Surely Quinn employees understand the blame lies with the person(s) that broke the rules, not the person(s) that caught them?

  2. Hi Stephen,

    I'm afraid I disagree with you on this, I feel that over-reliance on poorly thought through regulations gives the public a sense of security that is not deserved. It is the customer's role to specify what level of protection and confidence in their protection that they require and to choose their service provider accordingly. By strong-handing all service providers into operating their businesses in the same way we reduce competitive difference and hinder the growth of alternative business practices, which will either fail in the market place or succeed and bring savings to consumers.

    This point of view is of course at odds with the concept of bail outs. Should the business conduct itself poorly and become unable to continue operation then in the interests of all its competitors who were good at what they did, the business should fail, be liquidated and in doing so clear the field for future entrepreneurs.

    The protests are likely a response to 'undue' interference in the business' operation. You mention that "rules are there for a reason", and while I agree with the concept I fear that you may have lost sight of the source of the rules, common erring humans. Much as you state that one who is not qualified should not comment on the internal workings of the organisation, I posit that those who create the rules are equally unqualified. I doubt even, that any single group could hold the wisdom and knowledge necessary to craft such specific rules without hindering business operation; which is why we rely on iterative cycles of different business practices, each tested of its merits on the market until 'only the strong survive'. These businesses can then spend more of their capital researching more productive systems then the alternative of researching how best to avoid red-tape.

    Thank you for your attention,

  3. Hi Hugh,

    I'd agree with part of what you're saying--consumers should be fully aware, but no purchaser of insurance looks at the financial records of their insurer, they assume that due diligence is done by a regulator, and there is money to meet any claims made on their policies. That's a very simple rule the Quinns seem to have broken, and you don't need a PhD to come up with it.

    Would you prefer an unregulated insurance space, where I could set up shop as an insurer tomorrow, and leave just as quickly? That would be detrimental to the public good. Or take flying. Would you be happy if Ryanair wasn't regulated for safety, and took the seats out of the planes to maximise profits? Imagine you hit some turbulence, and broke your arm, who do you sue?

    For me, the issue here is one of a company operating in a highly-regulated space not following those regulations. Those are the rules of the game in that market, and trying to change them or get around them isn't good practice in any industry, especially not one as important as the insurance industry.

  4. Hi Stephen,

    Of course, consumer confidence isn't something that can just be given lip service when it comes to critical issues like safety. My concern arises with the disconnection between the regulators and those being regulated. By the very nature of politics, each business will seek to come out on top of its competitors when regulations are put in place or amended, and much scope exists for the regulations to be used as a tool to harm competition. My personal belief is that businesses looking to attract consumers who are rightly sceptical of the longevity of a contract would seek independent certification from private bodies (such as 'Underwriters Laboratories'), giving the business and the consumer the benefit of scrutiny in business practices without the drawback of inflexible regulation.

    That said, if a business in a regulated environment is not following the regulations, then it has an unfair advantage over the competitors who do; and if the regulator is to be worth his salt at all he should take appropriate action. I would just personally prefer an unregulated system, where such 'cheating' isn't possible and political influence over competitors is almost non-existent.

    Please do not fall into the trap of believing that only regulation can bring consumer safety however; it is very clear that it is in RyanAir's business interest to keep their customers alive. And no, I probably wouldn't purchase my insurance from you, but if your price made up for the risk I make in buying a policy from you then I would consider it, and to me, that's a much better situation than only having the regulator approved businesses to choose from.


  5. Hi Hugh, I think we'll have to agree to disagree on this one--the purpose of regulation is the protection of the consumer, first and foremost, and while neither the consumer nor the service provider might like these rules, they do perform a socially beneficial function. Consumers can never know everything about a company-having them regulated in key sectors actually increases take up of these services, because consumers trust the imprimatur of the government over that of a private company, and so do business with the company, knowing there is a fallback position. Which, in the case of Quinn, seems to be the government (and Quinn)-owned Anglo Irish Bank.

    I don't think regulation is the be all and the end all of capitalism, of course competition should be encouraged--now, for example, when an international buyer might be perfectly happy to take over what appears to be a damaged company.

  6. Hi Curious,

    I agree with you on insurance, it's one of the many areas where information, or lack of it, about your health and about the insurer your policy is with, make regulation of such an important market very important.

    When it comes to purchases where the price is pretty well verified, where the product's quality is well known, and where there isn't an 'informational deficit', like insurance industry, then I think regulations can be relaxed, more or less in line with what Hugh has in mind.

  7. Hi Curious,

    I agree completely that the level of information required for an efficient purchase is well beyond the grasp of most, including myself, but I disagree that the only solution to this is regulation. Perhaps you have forgotten the (admittedly, dying) insurance brokers? They, for a fee, understand and convey the information in a way that allows the customers to make informed choices without unnecessarily restricting the operations of the market.

    I admit, I believe in the idea that "where there's a problem with a market, there's a market for a solution" (in the general case) but feel that the Government is a little too quick to jump into the affairs of the market. Why not allow an insurance company to insure the contract of another insurance company? A small additional fee to the consumer (based on the unlikeness of any decent provider failing) would give them peace of mind.

    With regards to the public outcry for Government aid to families afflicted with a failed insurance provider I'd like to quote a 19th century US president:

    "I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood."

    Perhaps Mr. Duffy would ask what the family did with all the money they saved by not choosing a well respected provider?

    Thank you both for the interesting debate.

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