Brokers: time to roll out those PPO solutions

It has been an unhappy start to the year for UK motor insurers, who once again have had to suffer a trying, late and expensive renewal of their reinsurance protection for the coming year.

According to reinsurance broker Willis Re’s report on the 1 January renewals, UK motor insurers suffered further reductions in motor excess-of-loss capacity and price increases of between 20% and 30% even for programmes that were not hit by losses during the past year. On top of this, Willis Re said there were quoting delays because of the late development of reinsurers’ pricing models.

The fact that the renewals process was a battle again this year shows that the industry desperately needs a solution to periodic payment orders (PPOs), which courts are increasingly awarding to compensate the victims of the most severe bodily injury cases after motor accidents.

PPOs caused reinsurers to shrink capacity and put up rates in 2012, and it seems the same has happened again this year.

The problem with PPOs is that they leave the industry on the hook if the victim lives longer than expected, or the cost of caring for them increases by more than what was estimated. These variables make the ultimate bill fiendishly difficult to calculate, and this uncertainty is something neither insurers or their reinsurers want on their balance sheets.

Insurers vs. reinsurers

A motor excess-of-loss policy, which pays out once an insurer’s losses hit a certain point, would transfer the risk from insurer to reinsurer. But reinsurers have started inserting so-called capitalisation clauses, which nullify the policy at a certain point in return for a lump sum, which the insurer then uses to pay any remaining claims. This throws the risk right back at the insurer. If there is not enough money in the lump sum to cover the policyholder for the rest of their life, the insurer carries the can.

These clauses are unpopular with insurers for obvious reasons, and it seems they are becoming increasingly vocal in their opposition to them. Willis Re noted in its report that there were “more polarised views on the issue of large bodily injury capitalisation clauses”.

This is testing industry relationships, and will do so further unless a solution is found. The obvious source for such a solution is reinsurance brokers. They pride themselves on being able to find ways to transfer or manage their clients’ most troublesome risks. They have yet to do this with PPOs, and so will need to step up to the plate.

Reinsurance brokers are working on the problem. Guy Carpenter, for example, is known to be looking at several possibilities, including a mutual structure that would pool insurers’ risks.

Any solutions were too late for the 1 January 2013 renewals. But the difficulties seen will hopefully spur on reinsurance brokers to cracking the PPO problem to the satisfaction of all before 1 January 2014 rolls around.