Information for actuaries valuing Periodical Payment Orders

Periodical Payment Orders (PPOs) have challenged actuarial professionals as they rose to prominence as a new means of settling third-party liability claims, consisting of regular payments in the future, usually for a claimant’s lifetime. This paper explores how this new settlement method has brought about new risks to consider for actuarial professionals working in Motor and Casualty insurance, or any other line where a claim for future periodical payments may arise. Life contingencies have entered the space of general insurance in a new way. In addition, actuarial professionals have investment risk to consider, and for PPOs the inflation risk is unusual, significant and not currently fully hedgeable. The paper highlights methods that could be considered for setting important assumptions, including mortality, indexation, investment return and PPO settlement propensity. For reserving actuaries, the paper explains that the nature of the liabilities does not lend itself to triangulation. Cash flow techniques are needed and actual-versus-expected results can be analysed for discount rate unwinding and mortality profit, for example. Scenario testing will be important to understand the sensitivity of the results and to explain them to senior management. Stochastic modelling is considered in the Capital Modelling section, amongst other significant considerations for actuarial practitioners working with PPOs in this field. Pricing is also affected, as PPOs are a proportion of large loss loadings. The paper also touches briefly on reporting requirements. This is to help provide some basic background for actuaries interacting with those undertaking financial reporting.