Managing exposure to growing periodic payment orders (PPOs) will be a substantial challenge for UK motor insurers, according to a new report by Fitch Ratings.
PPO exposure will place greater importance on motor insurers’ asset liability management strategies, according to the rating agency. It said that given the extended duration of these liabilities, the proportion of reserves allocated to PPOs will grow, as each year more PPOs are added to insurers' motor books than expire.
Fitch also said that the extended duration of PPOs presents longevity, inflation and investment risks for motor insurers, which are traditionally issues for life insurers.
It believes that Solvency II (SII) offers assistance to motor insurers looking to manage these risks and said the new regime will bring greater consistency to PPO reserving assumptions used across the sector, thus reducing the risk of some insurers materially understating their PPO liabilities.
SII disclosure will also provide additional insight into insurers' exposure to PPOs, according to the report.
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