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The Actuary The magazine of the Institute & Faculty of Actuaries

UK motor insurers cough up for PPO

Zurich, RSA and Allianz have confirmed they are seeing growing popularity for the ruling among third party bodily injury claimants, owing to better financial knowledge.

Using contributions from 13 insurers including the above, the institute found that PPO demand in the personal lines motor market had risen particularly among young people and PPOs could make up 35% of an insurer's liability in 40 years.

In the second quarter of 2005, two years after the PPO ruling, less than five claims were settled using PPO. In the fourth quarter of 2010, almost 20 were settled using this system.

Dave Southwell, head of personal injury claims at Zurich Insurance found while PPO was more popular, the insurer had seen the greatest demand from people over 60.

He explained: "They are more interested in PPOs for their future care. For some, a large sum of money places a large responsibility on them to invest it properly - which they may not want when they are more interested in their wellbeing. They want certainty about their future without the concern of investment return."

Agreeing with the actuaries, Southwell said that in general PPOs had increased in popularity in line with the "financial sophistication" of people.

He explained: "We were a lot less concerned about finances before the financial crisis. But now people are paying more attention to how they manage their finances."

He also pointed to insurers' and lawyers' growing familiarity with the ruling: "Insurers are more comfortable with PPOs and understand them more. They have a big willingness to engage. "In the early days, barristers and lawyers did not have the understanding they have now. There was an element of suspicion. But there is a lot more knowledge and expertise now."

But it is difficult to predict how the landscape of an insurer's liability would be made up of periodic payment orders in 40 years. He added: "At this early stage with the data available to us, I am not able to say with confidence what the picture will look like It depends on life expectancy. Some of the 17 to 25 year olds who are claimants could die prematurely and some will live longer."

Southwell also added fluctuating indexes could also affect the value of PPOs: "Average earnings in the UK have reduced over the last 12 months and while there will be a time lag, that reduction will manifest itself when the next Annual Survey of Hours and Earnings comes out. Indexes fluctuate. Phil Bell, casualty director at RSA said the rise in PPO demand, particularly among young people, came as no surprise.

"For a young person who has sustained serious injuries from an accident, there is uncertainty about the future for them - more so than perhaps older people - as they have a longer life expectancy so it was always the case that young people were going to take up this award.

"We are seeing a much bigger take up for young people because they are much more likely to be awarded."

Bell said insurers could still profit from PPOs: "We do not pay out all the money in day one so some of the uncertainty around life expectancy will be offset by the investment we do on it."

Allianz has also seen a "steady" rise in the number of PPO cases.

But Chris Dee, casualty and construction manager, Allianz Commercial said: "The market is still feeling its way with such issues, both from the insurer's perspective and that of the claimants and their representatives. Many are still opting for traditional settlements, even where larger sums are at stake."

Karl Murphy, of the third party working party in the actuarial profession said: "In last year's working party, we projected the proportion of claims reserves that may be held in relation to periodical payment orders for a mono-line motor insurer once they have reached a steady state of PPOs, ie there has been a number of years of PPOs in payment, under a reasonable set of assumptions around the number and size of such awards.

"Under the base assumption that we chose, some 27% of claims reserves would relate to PPOs. Perhaps more interestingly, if the insurer had £1m reinsurance retention, then some 62% of the reinsurer's claims reserves would relate to PPOs."

This article first appeared on The Actuary's sister site Postonline.