Insurers and reinsurers are split on whether companies would benefit from some sort of industry pooling solution to deal with the size and duration of payments that Periodical Payment Orders (PPOs) may entail, research conducted by Towers Watson at a seminar on the topic has found. Of those who favour this option, 58% are optimistic that such an arrangement will actually occur.
Delegates at the standing room only event in the Old Library at Lloyd's of London used instant voting technology to answer a series of questions related to PPOs. Responses also showed that while companies are typically aware of the surface challenges that PPOs present, few have made significant operational adjustments so far to allow for their deeper implications, according to Towers Watson.
Since 2005, claimants who typically require lifetime care due to a serious bodily injury have been able to opt for a PPO comprising a reduced lump sum and inflation-linked annual payments. Despite a small drop in the number of new PPOs in 2011 compared to 2010, the total awarded has increased markedly since 2008.
With the average life expectancy of PPO claimants to date standing at 41 years, Towers Watson estimates that PPOs could represent up to 35% of insurers' liabilities in years to come.
A significant challenge facing non-life (re)insurers, notes the company, is that Solvency II will require PPOs to be valued in the same way as index-linked annuities, using life insurance actuarial methods.
Karl Murphy, UK Non-Life Insurance Practice Leader for Towers Watson, said; "By titling the event 'Beware the PPO iceberg', we were trying to allude to the fact that companies may have spotted the tip of the 'iceberg' , but may not fully appreciate what's lurking under the water line. Many companies have no or very few PPOs as yet on which to draw the experience of how to manage or invest for them over what, in some cases, could be 60 years."
Results from the voting that took place at the event included:
* 77% of attendees said that senior management was aware or very aware of the PPO issue.
* Only 6% have already made changes to investment strategy to accommodate PPOs and only 11% have built specific models for PPO liabilities and incorporated them in to their wider capital models. Reinsurers are more likely than primary insurers to have done both these things.
* Just 17% of primary insurers have increased or plan to increase the number of reinsurers with whom they work in order to offset the risk of a reinsurer going under as a result of the duration of payments
* 85% were in favour of an agreed classification for injury types to assist with cross-industry consistency in calculating and reporting potential liabilities
* Just over a quarter have made adjustments to reserves to accommodate life expectancy and variations to life expectancy over time. Reinsurers have been more proactive in using survival probabilities than primary insurers.
Karl Murphy added: "Of all the non-life insurance events organised by Towers Watson, this one generated unprecedented interest from the moment we issued invitations. Companies are starting to realise that the impact of PPOs reaches far and wide into their operations."
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