Non-life insurers may have to fundamentally revise their investment strategy to address the increase in liabilities caused by the growing number of long-term payment settlements being made to seriously injured claimants, Towers Watson said yesterday.
Since 2005, claimants requiring life-time care due a serious bodily injury have been able to opt for a periodical payment order settlement, where they receive a reduced lump sum and inflation-linked annual payments. Many insurers have at least some PPO cases on their books.
Non-life companies that previously managed their assets against short-term claims liabilities therefore face the introduction of very long-term PPO liabilities onto their balance sheets, the consultancy explained.
Insurers also face additional difficulties and uncertainties from having to predict the life expectancy of those receiving payouts, and the index-link between PPOs and the Office for National Statistics' Annual Survey of Hours and Earnings.
Alasdair MacDonald, head of investment strategy for Towers Watson in the UK, said the UK non-life market had progressively moved more of its assets into bonds since 2000.
However, he said, 'it is not possible to fully match the PPO payments using bonds given their particular characteristics', including the potentially long payment term, the ASHE linkage and uncertainties associated with life expectancy.
'In addition, attempting to match the payments from the PPOs using long duration bonds is currently unattractive due to the very low level of yields,' he said. 'Conceivably, affected companies may have to fundamentally revise their investment strategy with their PPO exposure in mind.'
