'Eye off the ball': BI wordings lapse stems from risk governance weaknesses

The industry’s failure to update business interruption (BI) policy wordings to take into account pandemic-related legislative changes, leading to legal disputes after claims were declined, is most probably not a one-off risk management lapse, the Australian Prudential Regulation Authority (APRA) says.

APRA says a self-assessment it ordered 10 general insurers to undertake in response to the BI coverage issues has identified weaknesses in their existing risk oversight frameworks that require remediation including attitudes towards emerging risks such as cyber.

The 10 insurers, whose identities are unknown, have implemented work programs to address the issues, APRA says in a statement today about the findings of the self-assessments it ordered them to undertake in July last year.

APRA says the self-assessments were completed four months later in November and it has discussed the results with each participating insurer.

“The self-assessment exercise affirmed APRA’s view that insurers took their eye off the ball of sound insurance risk management,” APRA Deputy Chair Helen Rowell said.

“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.”

Most of the insurers involved with the self-assessments say the main reason for the BI issues was their failure to update policy wordings to reflect the change in legislation.

They acknowledged they were aware of the Quarantine Act legislation change in 2016, but for various reasons had not adjusted their wordings by the time the pandemic broke out in March 2020.

However APRA says this area of failure takes a “narrow view and ignores other vulnerabilities in BI wordings to possible pandemic exposure that may continue to exist”.

“APRA urges insurers to be more alert to their susceptibility to risks arising from inadequate attention to policy wording,” the regulator said in its letter to all general insurers.

“The focus on policy wording should be broader than legislative updates and should also be extended to all classes of business.”

It was also found that some insurers also acknowledged that, while they became aware of the problem once covid impacted Australia, the issue was given lower priority than other matters.

“In all cases this reflected a breakdown in sound insurance risk management and culture in areas such as risk acceptance, risk awareness and quantification,” APRA says.

“The risk of writing unintended pandemic cover should have raised concern across all three lines of defence, had visibility at Board level, and led to appropriate risk mitigation in response.”

Another area of concern relates to what APRA says is “first mover disadvantage” attitude among insurers, who are reluctant to put in place more restrictive cover before their competitors out of concerns it would result in loss of business.

“This seemed most prevalent in the SME segment where… broker or agency wordings are often required to be used to gain access to schemes, other bulk placement arrangements or online trading platforms,” APRA says.

“Insurers should take steps to empower key decision-makers to make appropriate risk decisions, consistent with the insurer’s risk appetite, in these circumstances.”

Click here for more from the letter.