This week marks ten years to the day since PPOs were brought into existence when the Courts Act 2003 became effective. They have changed the face of large claim settlement and many other parts of the insurance industry.
For those who don't know, a PPO is an agreement to pay a severely injured claimant annual compensation for the rest of their life. Historically, a single lump sum of money would be paid to the claimant or their estate which would be invested to meet their future costs. PPOs are a fairer way of compensating the individual, but transfer these risks to insurers and, through the NHS, to society at large.
Many of the issues that the claimant passes on are still not fully understood. How long will severely injured people survive? What impact will medical advances have on their survival? How many claims will settle as a PPO? The fundamental changes in the solvency regime coming at the end of the year will affect how much money insurers will have to hold to protect themselves from the additional risks they bear.
As more and more claims are settled using these, insurers' balance sheets will become increasingly influenced by them. Reasonable assumptions could lead to over 25% of general insurers' gross liabilities made up of longevity risks, and that's without considering the company pension scheme. These risks will use up capital, which will require a return, causing a drag on the competitiveness of companies with these risks.
Residual PPO liabilities will become an even greater proportion of the insurers' liabilities as driving aids and autonomous cars reduce the frequency of motor accidents, straining competitiveness further.
To mark the passing of ten years since the Courts Act 2003 became effective a team of experts at Swiss Re have created a publication to look at the journey PPOs have taken, what the environment looks like and to look forward to what might influence them. My hope is that we can initiate debate on this vital topic and together we can shape the future. The publication can be found here
Sweden, France and Germany and other countries have had similar issues for decades now, what can the UK learn from these? What do you think the discount rate consultation will achieve? How will the aging population affect inflation? What concerns you most about these risks?
Category: Funding longer lives: Long-term care, Longevity risk, Other
Location: United Kingdom