Insurance Downgrades Due to Personal Injury Exposure

Insurers which are dealing with multiple personal injury claims are facing the prospect of a downgrade from credit rating agencies. This is largely due to Periodical Payment Orders (PPOs), which are an alternative to lump sum settlements in personal injury cases. Under a PPO a claimant will still receive a lump sum, but a smaller one, which is then periodically topped up to cover costs such as medical expenses and to compensate claimants for loss of earnings.

PPOs were introduced by the Courts Act 2003 which gave courts the power to grant claimants settlements to cover them for the rest of their lives. Two years after their introduction less than five claims were settled using PPOs whereas by the end of 2010 almost 20 claims were settled in this way. This increased trend has been driven by low interest rates amongst other factors. 

Credit rating agency Moody’s has warned that the increase in PPOs could expose insurers to inflation risks (future increases to the costs of care), tie up capital and suppress earnings. It also exposes insurers to unknown longevity risks, namely that, if a claimant outlives medical expectations insurers will have to continue to pay out, unlike lump sum settlements where if the claimant outlives medical expectations then they simply have to accept that their compensation payments will fall short.

PPOs on the whole are not a bad thing. They are particularly useful in helping claimants manage their payouts, but the downside for insurance companies is that it means they will have to deal with many long term claims.

Insurers used to pass this risk on to life insurance companies through annuities, however low interest rates have meant that this is too expensive for life insurance companies to guarantee fixed payments. Furthermore, in the UK the annuities market is restricted in that it does not cover all medical conditions, particularly those of a more serious nature, which ironically are likely to be subject to PPOs.

It is the uncertainty over the eventual costs that are causing concerns, particularly for small or general insurance companies who may not be used to dealing with personal injury claims under PPOs, whereas this is something that life insurance companies are somewhat familiar with.

The real worry is that the impact of these PPOs will not really be known until a few years down the line when it might just be too late to reverse its affects.

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