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Fitch analysts: Motor insurers face increasing PPO risk in medium, long term

FitchRatings' analysts said March 31 that they believe periodic payment orders' exposurewill be a substantial challenge for motor insurers in the medium and long term.

The researchreport noted that given the extended duration of these liabilities, the proportionof reserves allocated to PPOs will grow. PPOs present significant challenges fornon-life insurers in managing longevity, inflation and investment risks, which aretraditionally managed by life insurers.

Fitchbelieves that Solvency II will bring greater consistency to PPO reserving assumptionsused across the sector, thus reducing the risk of some insurers materially understatingtheir PPO liabilities. Solvency II disclosure will provide additional insight intoinsurers' exposure to PPOs. It added that from 2017, insurers will be required topublish information on the value of reserves for each material line of business,including the best estimate and risk margin and the methods and main assumptionsused for valuation.

Additionally,Fitch believes that a decrease in the Ogden rate, a discount rate used to calculatefuture losses in personal injury and fatal accident cases, could result in a lowernumber of large bodily injury claims settled as PPOs, but would increase the valueof settlements and potentially make it more attractive to claimants. This would,however, increase the costs to the motor insurance sector.

Furthermore,Fitch said that PPOs bring several challenges to the reinsurance strategies of insurers,such as the introduction of capitalization clauses on some reinsurance programsor retention indexation clause. This means that the reinsurance protection mightnot be as effective as it has been in the past.