Comments by Minister Micheál Martin at the Insurance Institute of Ireland Annual Conference

Comments by Micheál Martin TD Minister for Enterprise, Trade & Employment at the Insurance Institute of Ireland Annual National Conference Strategic Innovation – Choosing the Right Business Model Friday 30th September 2005

I greatly appreciate your invitation to me to address your Institute’s Annual Conference. The Insurance Institute has been at the frontier of professionalism for anyone connected with insurance or related financial services since 1885 and that is no mean achievement. As Minister responsible for enterprise, I want to acknowledge the importance of the Insurance Institute both in the corporate world and in the undisputed growth story that Ireland has become.

Here and across Europe, economies are experiencing a deep-seated transition. Every year more, lower value manufacturing activities find a more profitable base in developing economies that have unassailable cost advantages. If a significant portion of our manufacturing base moves quickly, it is inevitable that linked business services will also move, decline or lose some of their raison d’etre for being here. The knock on effect on services and their capacity to sustain current employment levels, let alone their ability to innovate and develop higher order activities, could be seriously damaged.

I think, however, we are ahead of the curve on this one and I’m confident we can stay there. Recently I launched the annual report of the National Competitiveness Council and behind all the topical comment about prices and costs, a very important number jumps out. Since 1998, Ireland’s share of world services trade has grown from a half percent to 2 percent. Ireland is now the 14th largest per capita exporter of services in the world. In this, financial services and insurance have been hugely important in terms of jobs, revenue and the potential for more growth, at the knowledge intensive end of the business.

Ireland is an international financial services centre and is well respected for insurance activities in Europe and worldwide. In addition, major insurance companies, such as Sun Life of Canada, Churchill and Assurant have set up services centres in regional locations throughout Ireland. Further evidence of the importance of the international insurance sector is seen by the decision of over 200 captive insurance companies to locate in Dublin and the fact that the international non-life sector earned gross written premiums of €14 billion in 2003. This reinforces my view that hard nosed investment decisions are not made in favour of uncompetitive and lowly rated economies.

This is very important for Ireland because I see your industry as the bridge between the market place and maintaining economic growth. In a world where all sorts of barriers and distortions to world trade are falling away, your knowledge and experience is what counts in extending Ireland’s reach into new and global markets. As freer, but more competitive commerce becomes the norm under globalisation, expertise in services innovation is an indispensable skill that companies must build into their corporate culture. I know from research done for Forfás that innovative service companies on our island grow faster and export more than non-innovative companies. That’s why your activities are important to us and why we’ve begun to investigate whether new policies can change the pace, depth and direction of innovation, right across the whole services sector.

This broad theme was well described by Eoin O’Driscoll’s Enterprise Strategy Group, which outlined some of the potential obstacles to Ireland’s continued enterprise success. Developing a sophisticated enterprise base of international repute demands greater innovation, across both products and services and a far deeper understanding of market dynamics and customer needs. This is one area of the ESG’s work that directly relates to your conference and to which I notice Joe Grogan referred. I believe that creating a continuous positive loop between innovation and market knowledge is the key competitive advantage firms must acquire and strengthen, sometimes simply to survive. Innovation will prove commercially successful if it is genuinely customer driven.

Public policy also has a role in stimulating change for its clients – the taxpayer. In one area we are doing it by investing increasing amounts in the hard end of R&D, in building centres of science excellence and attracting world renowned researchers to come here and work with Irish scientists. But the detail of that I’ll leave for another day.

The Personal Injuries Assessment Board was one of the key initiatives of the Government’s Insurance Reform Programme. With the PIAB, the Government took a risk, in following a path of innovation that was very unpopular with some and radically changed entrenched, costly and inefficient procedures for claims handling. Public policies that stimulate innovation can make a huge difference for ordinary people. The success of the PIAB shows that innovation in services can be just as exciting and transformational as new high tech gadgets or leading edge lifestyle products. One indicator that we have made a difference in prices and costs is that the cost of motor insurance has dropped over 12% in the 12 months to August 2005.

In the insurance area, the Government has pushed through a series of initiatives that have not only led to reductions in insurance premiums for both consumers and business but have also contributed to a very healthy insurance market. Healthy profits are to be welcomed. But these must facilitate a lowering of the cost of doing business in Ireland, which will loop back again to increases in profits across many business sectors including of course, insurance. Insurers, enterprise and consumers must all share in the benefits.

In your knowledge centred businesses, value comes from the way you manage and blend customers, markets, products, people and technologies. Out-performing our international peers will depend heavily on the ability of insurance professionals to communicate marketplace opportunities and implement new services that capture consumers’ imagination. That is the accepted wisdom but I would like to mention an interesting discovery that you might bear in mind during other presentations later today.

A study last year into services by the Institute of Innovation Research at the University of Manchester found that tailored schemes are likely to be more effective in supporting service firms, than broad and homogenous training. Innovation and competitiveness are the more likely outcomes, when training and skills improvement are more specific to sector needs.

Perhaps the Irish insurance industry has discovered this before the University of Manchester. Because I know for a long time now, the Institute’s sponsored education programmes have ranged from certificate, diploma, associateship and up to degree status. These are in addition to a huge variety of industry specific training courses -all relevant to the insurance sector and all focussed on the different business segments of the industry.

I am interested in the education and training aspect of the Institute because more advanced insurance activities will only evolve, and foreign investors will only decide to locate here, if Ireland can provide a solid, experienced and qualified base of insurance practitioners. The Enterprise Strategy Group looked in depth at our skill requirements and noted that raising education levels is essential in an environment of constant change. People are the enablers of innovation and higher value activities - and the education system must adapt to produce the skills to drive successful enterprise. I would like to think that the ESG had the Insurance Institute in mind when it proposed its One Step Up recommendation, because the architecture for this recommendation is evident in the work and education services provided by your Institute.

Maybe this is one, little recognised, domestically nurtured and developed, competitive advantage that has driven our successful insurance and financial services sector.

I would like to say a few words about innovation in services because that is the theme of this year’s conference. Driving innovation in services is very different than product innovation or manufacturing based R&D. For one thing, the customer must perceive a real value in the new service and be prepared to accept, perhaps a big change in their relationship with the service provider. Services are a “people business” underpinned by all manner of intangible relationships and perceptions. Getting innovation right is tricky and it means getting really close to the service channel and to the customer. Getting the service model right, requires a special interaction between you and the client. This interaction must also bring into play the so-called “soft technology” (e.g. qualifications, skills and expertise) that contribute on both the supply and demand side.

In another respect, service innovations are often connected with organisational change. Some of these can be enormously transformational, such as, moving to call centre based operations or indeed internet use. Across your companies, creative teams have to be built that will stretch the boundaries of the possible, because increasingly, new products and services are emerging where disciplines intersect and interact. If firms are to be competitive and employment sustained we have to be equally as imaginative in delivery as we are in product development. There is no other way.

Whether it’s the insurance sector or the broader services industry, it is a clear, global fact, that winners in services innovation are those that have an unusual degree of adaptability and customer responsiveness. These are the companies whose distinctive, competitive adaptability propel them into strong positions in big regional or world markets. I want to see many of them develop from Ireland and from your industry.

We are already strong in attracting important companies in the global insurance market. Everyone here knows about the stellar performance of insurance and financial services. Recent success gives no guarantees for the future. The strength of the sector will depend on increasing the base of sophisticated insurance services provided from here. It will be important for the future development of the insurance sector that we continue to be recognised as a country where efficient and prudent regulation continues to be the rule. Ireland faces continual pressure from countries like Luxembourg, Gibraltar and Bermuda, who lose no opportunity to sharpen their competitive advantages.

It is equally important that the development of our company law keeps pace with best practice internationally and that the transposition of EU directives takes appropriate account of the specific needs of the international insurance sector. A “one-size-fits-all” approach to legislation and regulation may not necessarily be in the best interest of the international sector - there needs to be a balance between prudential regulation and regulatory simplicity and efficiency. The Regulatory Impact Analysis process, devised under the Department of the Taoiseach’s Better Regulation agenda, reinforces our quest to find an equitable balance between the interests of all those interested in the continued success of the sector.

It’s just over a year since I became Minister for Enterprise, Trade and Employment. In that time I have visited many companies at all parts of the value chain – some struggling and others delivering a super performance. Whatever the company or sector, I have been left with one crystal clear impression. Each company has its own strategic issues to manage and there are different market nuances even within the same sector. Building company competitiveness is best left to entrepreneurs who know their business inside out.

My mission is to make sure that the business environment in which you prosper and create jobs is the best that a modern, wealthy, economy can provide. Competitiveness is important because it provides the country with the opportunity to improve our living standards and quality of life. The drive to constantly improve our competitiveness is not an end in itself. Increasing competitiveness gives us the capacity to expand jobs and sustain exchequer revenue. Of course being number 1 in everything is neither necessary nor desirable but we have to put ourselves in the best position to sustain growth and expanding expectations.

I have had the benefit of leading both IDA and Enterprise Ireland on a number of overseas trade and investment missions. One thing I have learned is that it is foolish to be complacent or to minimise the fundamental changes taking place in the international business place. These changes present exciting new opportunities and some formidable competitive challenges, but never easy or simple choices – either for business or Government. Neither can we defer making sometimes hard and difficult choices for longer-term advantage. On this topic I would like to make a few comments about near term choices that will determine economic performance over the next few years.

Ireland’s consistent economic and social progress has confirmed the competitiveness strategy that has been pursued consistently by successive governments and the social partners over the last 15 years. Our style of partnership agreements has been influential in providing economic stability and supporting fairly impressive economic development. The partnership talks now getting underway will strongly influence our competitiveness and economic progress for the foreseeable future. However, probably more so than for a number of years, we are faced with an increased potential for global risks to threaten growth, trade and investment flows. We owe it to ourselves and to those looking for good careers and income security to be prudent with our expectations.

From my perspective, we need to have a shared understanding that a successful society needs a dynamic but competitive economy, capable of responding, with ease, to the evolving demands of international competitiveness. In common with other advanced economies, progress will rely on stronger productivity growth and flexibility, whether in making things, selling services or capitalising on our reputation as a great and adaptable workforce.

Successful, advanced economies display high returns to all stakeholders and we should be no different. If our income levels are based on solid and sustainable productivity, that really support high living standards then I will worry less. But if our rates of pay are out of kilter with our competitiveness position we have a serious threat to both jobs and living standards. I don’t believe driving down wage rates in a high cost economy is the solution. But wage moderation is certainly a good approach if it gives us the breathing space, to reposition activities with the help of new technology, organisational change or other innovations.

Ireland faces challenges to our competitiveness on several fronts. Increased competition both in Europe and globally makes it difficult to compete on the same basis as in the past. As a high output and high reward economy, our future prosperity will be grounded on productivity. Productivity improvements are the surest way to help us regain the higher ground international competitiveness. This is an area that the National Competitiveness Council has already pointed to as being problematic and it’s one that I’m personally very concerned about. Indeed, I’d urge everyone to listen carefully to Joe Macri’s presentation on the topic, later today.

Achieving higher productivity now is a real priority both for individual firms and government policies. Consistent productivity improvement allows us to have higher standards of living and achieve more ambitious social objectives. If we don’t place a priority on higher productivity today we forego the opportunity of higher real incomes tomorrow.

I don’t think anyone would disagree that we are rightly ambitious in transforming ourselves into a high technology, high income economy. But in this process we have to be aware that many jobs rely on a lower cost business model. Many commentators have pointed to an emerging worry about our labour costs and this is an area we have to collectively watch. But it is one that individual companies can also do something about if they put a new emphasis on driving productivity. Companies that achieve higher productivity can beat competitors’ costs. This not only makes for higher profitability but also makes it possible to invest more for the future. For my part, I want to help individual companies accelerate productivity gains and I’ve mandated Enterprise Ireland to open a new Productivity Improvement Fund to stimulate this process. We’re putting up €20 million to help companies achieve ambitious new productivity targets so that they can become more profitable and their jobs made more secure.

We will continue to enjoy higher real incomes only if we become more productive and smarter at both winning and creating new markets, new products and new services.

I believe we can do this. We are transforming Irish enterprise. Our agencies are focussed on achieving productivity gains, investing in R& D, winning new markets and sales and raising skill levels. These are the necessary supports that will give the next generation a sounder platform for growth. But I do have some concerns.

In terms of GNP based hourly productivity in 2003, we ranked only 8^th of 13 countries surveyed by the NCC. I know there can be technical arguments about measurement problems but whatever way we look at the issue, productivity rates like this will not be near good enough to ensure that we compete, win and sustain competitiveness.

I want to communicate a message of change and encourage real transformation in how we do business more productively - both across the public sector and among private enterprise. We have to move from an enterprise philosophy of jobs and growth, to one of competitiveness and productivity. I think a good start has been made with new programmes being set up by both the IDA and EI. These will fund productivity and competitiveness improvements among their clients. But that is only part of the effort. Our Agencies are important to our innovation driven strategy, but most employment is not in companies assisted by these types of agencies. While the services sector now employs two out of three people at work, and is likely to be the source of future employment for our citizens, its productivity lags in the growth league. High costs in the services sector are feeding into costs in other areas of the economy. If this continues and is not compensated for by productivity improvements we risk damaging the competitiveness of the broader economy.

Annual conferences such as yours are as much about networking and doing business as much as anything else. I hope that what you hear from the line up of very distinguished speakers, will spark your innovative ideas and I hope this conference is an outstanding success for the Institute.

ENDS

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