Ireland’s first PPO was settled in February 2019. Good news for claimants, but what does it mean for insurers?

After many years waiting, Ireland’s first PPO was awarded by a court in February 2019. The teenage girl who received the €610,000 per annum compensation had suffered brain damage at birth over 13 years ago. In common with several other claimants in Ireland, she had previously received interim settlement payments while judges awaited the commencement of the relevant provisions of the Civil Liability (Amendment) Act 2017 which would enable them to award a PPO.

The pedants among us might note that whereas a PPO in the UK is a “Periodical Payment Order”, in Ireland it is a “Periodic Payment Order”. However, there are two other more material differences between the two regimes.

1. UK PPOs tend to be increased each year by reference to an earnings index relating to care workers (ASHE 6115). By contrast, in Ireland, PPOs are increased in line with the Harmonised Index of Consumer Prices (HICP). This index is subject to a ministerial review every five years “to determine the suitability of the index concerned for the purposes of the annual adjustment of the amount of payments provided for under periodic payments orders”.
2. Irish PPOs may incorporate “stepped payments” (planned future increases eg in relation to expected changes in the claimants needs) but will not include the “variation orders” that can be made in the UK if the claimant’s circumstances change materially.

On both counts, this means that Irish PPOs will be subject to less uncertainty than UK PPOs. Insurers will welcome this. Over time, we expect plaintiff lawyers to lobby for stronger indexation, in line with earnings.

The existence of PPOs means that claimants who have suffered catastrophic injuries need no longer be exposed to the risk that their lump sum compensation is insufficient for their needs because they survive longer than expected, or that inflation or investment returns fail to materialise as projected when the equivalent lump sum was calculated.

PPOs also reduce the risk of over-compensation by insurers. However, this comes at a significant cost, as insurers will now assume the longevity, investment and inflation risk, and the liabilities will have to be “marked to market” on their balance sheets. These long-term risks will be somewhat unfamiliar to most non-life insurers. In addition, insurers will be exposed to reinsurance default risk over a long period.

Overall, PPOs are good news for claimants but not for insurers. Under the Solvency II regime, PPOs are extremely capital-intensive for insurers and are likely to give their investors cause for concern. Experience in the UK suggests that insurers will be willing to offer relatively generous lump sum settlements to avoid PPOs. This in turn influences plaintiff lawyer negotiating tactics. It will be interesting to see how this plays out in Ireland and how widely PPOs are used in practice.

The key message for insurers is to ensure that they fully understand the long-term risks and put in place measures to manage these, whether through reinsurance, claim settlement strategies or targeting market segments with lower PPO risks.