The rise of periodic payment orders over Ogden lump sums could bring further bodily injury claims woes
The Actuarial Profession’s recent report on the rapid growth in the number of periodic payment orders (PPOs) awarded by courts has highlighted an ongoing challenge for insurers.
Since 2005, courts have been able to award PPOs instead of Ogden lump sums in large bodily injury cases. Where awarded, PPOs replace the certainty of a lump sum with the uncertainty of an index-linked amount payable to a claimant annually for the rest of their lives, possibly 50 years or more.
Under PPOs individuals receive a payment, normally annually, which is increased by a prescribed index. The Court Act originally allowed for payments to inflate annually in line with the retail price index, allowing insurers to match the liability through the purchase of an annuity.
The landmark Thompstone v Tameside judgment in January 2008 confirmed that PPOs could be linked with wage inflation instead of price inflation and made PPOs more desirable as wages usually increase faster than prices. This has resulted in a swift increase in PPOs seen in the past three years.
According to the report, carried out for the Actuarial Profession by the General Insurance Research Organising (GIRO) committee, the number of PPOs has increased dramatically from a handful per annum up to 2007 to 25 in 2008 and 44 in 2009.
Prior to PPOs, courts would award lump sums designed to provide enough money for individuals to pay for care for the rest of their lives. These lump sums are calculated allowing for the individual’s future life expectancy and investment returns using a set of actuarial tables known as the Ogden tables. When added to awards for loss of earnings and other damages, the total lump sum awarded could easily reach £5m or more.
From a claimant’s point of view, PPOs are more beneficial because they remove the risks around investment. The government is also keen on PPOs because they remove the risk that individuals run out of money and fall back on the welfare state. PPOs transfer the uncertainty from the claimant to the insurer.
Key concerns for insurers
These developments create concerns for insurers in four key areas:
Partner at consultancy LCP Laura McMaster suggests that PPOs could end up costing insurers up to 30% more than if they had awarded a lump settlement. “PPO is something the insurance industry is struggling with at the moment. Although insurers don’t have to pay the money immediately, generally they are costing the insurance sector more,” she says.
• Lack of certainty
Then, there is the uncertainty surrounding the amount and duration of PPOs, a concept that is an anathema to many insurers. “The key challenge is the uncertainty. The rate of future inflation is unknown,” says RSA UK personal lines underwriting director Nathan Williams.
• Lack of annuities available
Barlow Lyde & Gilbert partner Charles Brown points out that while insurers have been able to buy annuities to cover periodic payment orders based on price inflation, no such product yet exists for those linked to wage inflation. This will put far greater pressure on insurer’s reserves.
Legal experts warn that the increasing popularity of PPOs could spell trouble for insurers when it comes to reinsurance. They argue that reinsurance products are simply not designed to cover these types of interim payments. In addition, the insurer cannot claim from the reinsurance company until the payments to the claimant cease – insurers will have the additional worry that their reinsurer could go bust by then.