The Australian Prudential Regulation Authority (APRA) has released the findings of its review into the robustness of the general insurance industry’s approach to risk management following the BI issues during the peak of the pandemic, where restrictions triggered an array of claims on BI policies.
The legal uncertainty about whether cover applied, alongside the significant potential financial exposure for insurers and the impact on consumers was substantial, revealing weaknesses in how insurers managed their exposures, says the APRA.
Following this, the Authority required 10 insurers to conduct a self-assessment against the robustness of their risk frameworks in the context of BI and extend this assessment to other product lines that could also be vulnerable, including cyber risk.
It notes, “In all cases, the insurers found weaknesses that required remediation and have implemented work programs to address them.”
The APRA observed that failure to update policy wordings to reflect the change in the Quarantine Act legislation was one of the major themes within the self-assessment. This opened insurers up to the legal challenge to “make good” on claims in a pandemic scenario, it suggests.
Reinsurance contract wordings were out of step with direct insurer policy wordings as well, notes the Authority, an oversight that could have left some insurers without sufficient reinsurance cover.
Other themes included in the self-assessment were the burgeoning of complexity in policy wordings and distribution channels, without commensurate controls to identify, prioritise, quantify, and manage exposures, and the inadequate attention to strong control effectiveness testing, including its frequency and intensity.
APRA Deputy Chair Helen Rowell commented, “The self-assessment exercise affirmed APRA’s view that insurers took their eye off the ball of sound insurance risk management.
“While the legal uncertainty has largely abated in recent weeks, the BI issue was a near miss for insurers and one which cannot afford to be repeated.
“APRA expects all insurers and reinsurers to review their approach to risk management in light of these findings, and we are determined to ensure the various remediation plans of the 10 insurers involved are fully implemented.”
In her speech at the Risk Australia 2022 conference in August, Rowell covered issues arising from the unclear pandemic coverage under BI insurance and outlined the significance of learning from this experience to avoid a repeat in the future.
