Reinsurers’ last-minute U-turn on PPOs prevented motor capacity squeeze

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Reinsurance broker Guy Carpenter said UK motor reinsurance rates across its portfolio increased on average by 25% in the 1 January 2013 renewals.

At a press conference on the 1 January renewals this morning, Guy Carpenter’s EMEA chief executive Nick Frankland said the rate increases were driven by the increasing use of periodic payment orders (PPOs) to compensate severely injured victims in bodily injury cases.

But Frankland also noted that the renewals were made easier by some reinsurers’ last-minute U-turn on PPO capitalisation clauses, which broke a deadlock in negotiations.

Under capitalisation clauses, reinsurers pay insurers a lump sum in return for cancelling the reinsurance policy at a certain point. This transfers the risk of PPO claims deteriorating, for example if the patient lives longer than expected, back to the insurer.  

Reinsurers have been keen to include capitalisation clauses into reinsurance policies to protect themselves against PPO deterioration. But these clauses have proven unpopular with the insurers buying the reinsurance policies, creating a deadlock.

Frankland said: “The UK motor renewal was very late and difficult and for a long period of time it appeared the PPO issue might be insoluble. Certain of the big carriers that had traditionally provided that element of coverage were proving seemingly intransigent in offering coverage. They wanted to put clauses in to capitalise or crystallise PPOs from the outset and not carry the deterioration risk on their books.”

Some reinsurers changed their minds, however. Frankland said: “The market essentially turned around and split into two components – those that wanted to capitalise and those that didn’t, and there was enough capacity in those that were willing to take PPOs as they are that came into the market.”

Frankland said reinsurers had been tempted to assume the PPO risk by the recent rate rises in UK motor. According to Guy Carpenter data, the income base for the UK motor insurance industry has grown 20% over the past two years thanks to rate increases.

Despite the U-turn by reinsurers, Frankland said capacity was still squeezed to an extent, with total capacity falling 20%.

The 25% UK motor rate increases Guy Carpenter saw are broadly in line with the 20% to 30% rate rises rival reinsurance broker Willis Re reported yesterday.