Periodic payments now account for one-third of £1m-plus claims

More than one-third of general insurers’ liabilities could soon be accounted for by open-ended periodic payment orders (PPOs) for severely injured accident victims, actuaries have estimated.

Presenting research last week into bodily injury claims trends, Actuarial Profession third-party working group member Karl Murphy said that around one-third of claims for more than £1m were now being settled with PPOs, as opposed to the lump-sum payments traditionally used.

He said: “30%-35% of liabilities of insurance companies could relate to PPOs, which has significant financial implications.”

Courts have been able to award PPOs - under which the claimant receives an annual payment - since a change to the law in 2003. But their use for large bodily injury settlements has increased rapidly over the past three years, since a court ruling allowed payments to be linked to healthcare inflation instead of the generally lower retail price index.

Better life expectancy, resulting from improvements in care, also means PPOs have become more attractive to accident victims, particularly those in their teens and twenties.
Murphy, who is also head of non-life insurance at Towers Watson, described the issue as an “iceberg” lying in wait for general insurers.

He said: “Currently this is less of an issue, but it will be a big proportion of companies’ balance sheets.”

He added that insurance companies would have to tailor their investment plans around the uncertain and long-tail liabilities in PPOs. “The risk has shifted as the length of liability has shifted,” he said.

The research shows that the number of large claims fell “significantly” in 2010, in line with the rise in petrol prices and consequent drop in vehicle miles. But the proportion of “very large” claims - those over £2m - has increased with the evolution of more sophisticated care packages for accident victims.

Working group chair David Brown said claims worth more than £1m now accounted for over half the total awarded.