APRA calls for review after insurers fail on business interruption insurance wording

The prudential regulator will require insurers to review risk management and policies to ensure no repeat of the ongoing business interruption court fight.

Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell. Picture: AAP

The high-profile failure by the insurance industry to update business interruption insurance policies has sparked a call by the prudential regulator for insurers to review risk management.

The Australian Prudential Regulatory Authority has written to a number of general insurers calling on them to submit reviews of their risk management frameworks.

The move comes after the insurance industry was found by the High Court to be unable to block pandemic related claims from a swath of policies sold to businesses.

The industry, which has said it never priced policies to cover pandemic related claims, left the door open to legal challenge after failing to update policies to reflect a change in legislation for years.

“The resultant legal uncertainty, and significant financial exposure for insurers, has raised concerns about the strength of insurers’ risk management frameworks,” APRA said.

The prudential regulator, which oversees and licenses insurers in Australia, said it was taking the action to ensure no repeat of the court tussle over claims.

The regulator warned the review shouldn‘t be seen as a tick and flick exercise, noting in its letter to insurers the responses shouldn’t exceed 20 pages in length.

“The review will also focus on cyber risk, however APRA expects insurers to ensure their risk frameworks are robust across all product areas and potential exposures,” APRA said.

APRA deputy chair Helen Rowell said the pandemic had “raised clear concerns” about how well some insurers were managing risk.

“Although the legal disputes around BI cover for some COVID-19 claims have yet to be fully resolved, the fact that so many insurers were selling policies with outdated wording exposes clear deficiencies in risk management,” she said.

The insurance industry has launched a series of test cases in Australia seeking to clarify the grounds on which businesses could make pandemic related claims against their policies.

The first case ended in insurance industry defeat in the High Court, affirming a unanimous decision by the NSW Court of Appeals.

However, only about 10 policyholders have been paid by the major insurers so far as a result, with many awaiting the outcome of a new round of legal arguments.

A second case is now underway in the Federal Court covering a suite of questions that may open the door to more policyholders for larger claims.

Chubb, IAG, Swiss Re, Allianz, Guild and QBE are all caught up in the second test case.

This comes after Hollard and HDI Global SE were subject to legal questioning in the first test case.

“As well as examining the root causes of the BI problems, we are keen to identify whether similar hidden issues exist in other insurance products. The growing threat posed by cyber adversaries makes this a prudent place to probe,” Mrs Rowell said.

The self assessment will focus on three areas and will review the robustness of insurance risk management, whether they were effective in the context of the business interruption issues, and what areas of improvement may be needed.

Mrs Rowell said APRA would review the self-assessments returned by the industry to “identify material concerns” and if warranted impose supervisory action.

“The consolidated findings will also be published to send clear messages to all insurers around observed weaknesses, better practice, and the importance of maintaining robust insurance risk management frameworks,” she said.