Willis Re: Periodic Payment Orders Increasingly Impacting the Motor Reinsurance Environment
London, UK, December 12 2012 Periodic Payment Orders (PPOs) are becoming increasingly prevalent in the UK motor
market, with the larger, more serious bodily injury claims more frequently settled in this way. Motor
insurers are confronting this trend at the same time as the increases seen in motor rates
since 2009 level off significantly. This is according to the findings of the annual UK Motor
Market Review by Willis Re, a leading reinsurance advisor and part of Willis Group Holdings (NYSE:WSH),
the global insurance broker.
Willis Re’s fifth annual review, which surveys approximately 75% of the UK Motor insurance market, a larger
dataset than in previous years, examines patterns in large motor claims. A summary of the report
can be accessed here.
Commenting on the main findings of the report, Grange Turner, Executive Director, Willis Re, notes that decisions
relating to reinsurance purchasing are becoming increasingly difficult for UK motor insurers to make.
“It used to be the case that a UK motor insurer would simply renew the same programme
year after year with the same reinsurers. The increased propensity of PPOs has changed all that.
Rather than pay claims on a lump sum basis, PPOs are paid at the intervals specified
for the lifetime of the injured party. The key impact of PPOs for both insurers and
reinsurers is that they introduce new elements of uncertainty around how claims have to be reserved:
how long the claimant will live; what wage inflation factors will prevail over that time period;
and what investment returns can be expected over the same time. Many reinsurers have become increasingly
concerned about taking all of these variables on to their own balance sheets.”
The Review finds that reinsurers reporting under the US Generally Accepted Accounting Principles (GAAP) are seeing significant
pressures on the reserves they set against the long term risks associated with PPOs, with many
of these reinsurers seeking to mitigate this risk by introducing compulsory capitalisation clauses; policy provisions which
force the insurer and reinsurer into a commutation of the claim, at pre-agreed terms.
Commenting on the implications of Capitalisation Clauses, Catherine Pearson, Executive Director of Willis Re, who oversees the
actuarial research work for the Review, said:
“We are not opposed to Capitalisation Clauses as such. In fact, Willis Re introduced the first compulsory
clause on to a large programme two years ago. Our concern is that differences in technical
points such as what Discount Rate is being used and how longevity exposure is being assessed
can have an enormous impact on how much insurers eventually recover from their reinsurance. We spend
a great deal of time explaining to clients the implications of the various Capitalisation Clauses being
proposed by the reinsurance market, and how these differ from a the traditional reinsurance product.”
The Review analyses the relative exposure to claims of different components of an insurer’s book and finds
that Claims development patterns are evolving over time, with both the frequency and severity of Claims
changing since the 2011 study. Katharine Windham, Divisional Director, Willis Re, comments:
“The study allows us to see broader trends in the market than can be identified by looking
at individual insurers in isolation, and, when appropriate, enables us to challenge the assumptions used by
reinsurers in their pricing models. For example, we analyse different parts of the account (e.g. young
vs older drivers) to determine their relative propensity to cause the largest claims. We can use
these relativities to create a risk index to see how a client’s overall risk profile has
changed over time, and quantify the change in risk or its relative position against peers.”
The full contents of the report are issued on a confidential basis to participating insurers who have
provided data for the study, but a summary of the report is available here.
About Willis Re
One of the world's leading reinsurance brokers, Willis Re is known for its world-class Analytics capabilities, which
it combines with its Reinsurance expertise in a seamless, integrated offering that helps clients increase the
value of their businesses. Willis Re serves the risk management and risk transfer needs of a
diverse, global client base that includes all of the world's top insurance and reinsurance carriers as
well as national catastrophe schemes in many countries around the world. The broker's global team of
experts offers services and advice that help clients make better reinsurance decisions and negotiate optimum terms.
For more information, visit www.willisre.com.
Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers
professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public
entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries,
with a global team of approximately 17,000 employees serving clients in virtually every part of the
world. Additional information on Willis may be found at www.willis.com.