Agnes Collier, then a thirteen years old student at Cheltenham Girls College, lost her mother and sustained devastating spinal injuries in a terrible car accident in 2009. Last November she received the biggest payout ever achieved in a UK personal injury case: £7.25m plus an index-linked Periodic Payment Order (PPO) of £270,000 each year to cover the costs of care for the rest of her life. Courts are increasingly favouring PPOs over lump sums to ensure that the injured party never runs out of money; in effect transferring the life expectancy, inflation and investment risk from the claimant to the insurer. There have been close to 400 PPOs awarded, mostly relating to catastrophic motor accident injuries especially affecting young people. The financial implications for the insurance industry are increasingly acute.

Reserving long-tail business is challenging enough but affixing a value to a PPO liability that might continue for 30-50 years or more is extremely difficult because no reliable actuarial tables on the life expectancy of severely incapacitated people currently exist. The index of care costs (ASHE 6115) to which PPOs are linked has its own unique trends that are proving equally hard to predict. Such uncertainty as to both the longevity and funding has a huge impact potentially on the adequacy of insurers’ claims reserves. Worse still the attitude of reinsurers, who are bearing the brunt of these large losses, is toughening. Some insist on a “capitalisation clause” that pushes the PPO tail back on to insurers or reinsurance premium hikes of 30-40%. Companies like Aviva, who ironically sold their US life business at the end of last year but have a fair share of UK PPOs, find themselves drifting into the scope of Solvency II provisions for annuities and the higher capital charges these represent.

PPOs are currently few in number but can be very large in quantum and a big headache for the industry. Unless a real danger of insurer insolvency emerges, Government is unlikely to take back the tail-risk. There has been some talk in the market about insurers pooling their PPO exposures and this might indeed widen the range of management, investment and reinsurance options. In addition businesses such as Swiss Re and Berkshire Hathaway have reportedly tried to joint-venture their life assurance and financial market capabilities to develop a new commercial reinsurance solution. If successful, it will not come soon enough for UK motor insurers tackling the daunting financial consequences of an ever-increasing number of PPOs handed down by the courts.

No one wants those seriously injured like Agnes Collier to run out of money. If investment assumptions prove inaccurate or care is required for a longer period than expected, then it is not unreasonable that as a matter of public policy the insurers of the party responsible carry that risk. However, society needs to understand that this comes at a price. Loading insurers’ balance sheet with uncertainty consumes capital, the cost of which will ultimately fall back on to the policyholder either via higher premiums, narrower coverage or smaller limits.