Composite insurers ‘better equipped to handle PPOs’

Composite insurers - those with both life and non-life divisions - may be better-equipped to cope with the increasing use of periodic payment orders (PPOs) to settle motor bodily injury claims.

According to Towers Watson head of UK investment strategy Alasdair MacDonald, this is because the life sides of their companies are more familiar with managing long-term investment strategies to offset liabilities running for tens of years, and could share this know-how with their non-life divisions.

Non-life companies are well-versed at investing in short-duration bonds to offset their typically short-tail liabilities. But PPOs pay out over the lifetime of the injured party, which means motor insurers with PPOs need to look at holding long-term assets to match these liabilities. Non-life companies are generally ill-equipped to deal with this.

Internal expertise

MacDonald said: “Something that is bread and butter to one part of the company is really difficult to understand in the other. Composite insurers in the UK won’t have as many issues thinking about PPOs because they have got that expertise internally on the life side.”

But he added that any competitive advantage composites might have was likely to be short-lived, as non-life firms could seek external advice or hire experienced people.

Even with life and pensions expertise, companies could still struggle to adequately match PPO liabilities with assets. MacDonald suggested a starting point would be to invest in inflation and interest rates swaps, but the longer the duration, the more difficult they are to buy.

Assets are expensive

Also, non-life firms would find themselves competing with life insurers and pension funds. “You have got about £2 trillion of UK pension fund liabilities trading to buy roughly £500bn of index-linked assets, so the assets are expensive,” said MacDonald.

Furthermore, PPOs are linked to the Annual Survey of Hours and Earnings (ASHE), and there are no suitable assets available to hedge against this.

MacDonald suggested that a possible solution to both the investment and liability problems posed by PPOs was for insurers to pool their liabilities. “With some of the things you would want to do on the asset side [to offset PPO liabilities] you need a decent sized pot of assets to make them cost-effective,” he said.