'Near miss': APRA calls out weaknesses after BI wording lapse

The prudential regulator has flagged concerns over poor risk management after a review of general insurers found many “identified significant weaknesses in how they managed their insurance risk exposures”.

Australian Prudential Regulation Authority (APRA) Deputy Chair Helen Rowell says it was “a significant lapse” in risk oversight that led to many in the industry failing to keep the wording of their business interruption (BI) policies up-to-date with changes in legislation.

She says the wordings lapse “created uncertainty for policyholders, at their time of greatest need, over pandemic coverage under BI policies”.

“It also put insurers at risk of legal disputes and significant financial exposure,” Ms Rowell said today in a speech at the Risk Australia conference in Sydney.

“Frankly, this event was a ‘near miss’ for the insurance industry and, with court proceedings still to fully play out, the ultimate impact on insurer reputations and potential balance sheet implications is yet to be finally determined.”

Ms Rowell says the BI saga resulted in a “poor” outcome for many policyholders, who “rightly” expect more clarity and certainty over what is and is not covered under their policies, so that they can better assess the extent and value of their cover in advance.

“Insurers need to provide this clarity in their communication with policyholders and respond quickly to address any complaints or disputes as and when they arise,” she said.

Ms Rowell says APRA will soon publish the key insights from the review, which was launched to ensure the industry learns the lessons from what occurred, understands the root causes, and takes action to avoid a repeat in future.

Participating insurers were required to self-assess the robustness of their risk management frameworks and identify areas of weakness and the steps needed to ensure the frameworks were robust across all their products, she said.

She says the significant weaknesses identified by the insurers “point to risk culture inadequacies”.

Common themes included failure to accurately quantify pandemic risk, misalignment of expectations with reinsurers, insufficient regard for strong risk assessment and escalation, product and system complexity and poor oversight of third-party arrangements such as with brokers and underwriting agents.

“The objective of the review is to ensure that insurers are effectively managing the end-to-end insurance product lifecycle – including product design, pricing, distribution, compliance, and claims management – for the benefit of both policyholders and the insurer,” Ms Rowell said.

She says all insurers who undertook the BI exercise are executing plans to address the identified weaknesses.

“It is imperative that insurers get such basics right if they are to continue providing sustainable insurance cover which policyholders understand and value,” Ms Rowell said.