Helen Rowell, Deputy Chair at APRA on the superannuation industry

Helen Rowell, Deputy Chair at APRA

APRA questions Insurers’ Risk Management

Self-assessments Required by November

Prudential regulator APRA has questioned the robustness of insurers’ risk management frameworks, following unexpected business interruption claims stemming from the coronavirus pandemic.

The Australian Prudential Regulation Authority (APRA) has questioned the robustness of risk management practices among insurance companies, after they faced higher than expected claims resulting from lockdowns and other pandemic related restrictions.

The main source of claims stems from business interruption (BI) insurance, which APRA said included ‘policy wordings that had not kept up-to-date with changing legislation’.

Insurance companies are now to file a self-assessment of their risk management practices by 30 November.

Court Cases

Several court cases have been filed around the definition of BI insurance and whether these policies cover the disruptions caused by the coronavirus pandemic and subsequent government actions.

It is estimated that the total liability of these policies could be as high as $10 billion in Australia, across a quarter of a million policies.

Insurers have argued that these types of insurances do not cover global events, including pandemics, but this has not been the view of courts.

Last year, the Insurance Council of Australia lost a test case in which it tried to clarify that members’ policies did not cover pandemics.

The court ruled that changes in the Quarantine Act, which has since been replaced with the Biosecurity Act, mean pandemics are considered to be covered under the wording of the Act .

The Council appealed the decision but it was denied by the High Court last month.

“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cover for some COVID-19 claims have yet to be fully resolved, the fact that so many insurers were selling policies with outdated wording exposes clear deficiencies in risk management,” APRA Deputy Chair Helen Rowell said in a letter to insurance companies.

“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,” she said.

Cyber risks have been identified as one particular area of concern as policies often explicitly include or exclude these risks, which makes this another potential area for unexpected claims, APRA said.

Investment Implications

The impact of the pandemic and the heightened claim level from BI insurance have also impacted the investment strategy and performance of insurance companies.

As the full force of the pandemic started to be realised, insurance companies instructed investment teams to liquidate risk assets during the months of March, April and May in an effort to strengthen capital positions.

Since this coincided with falls in equity markets, many insurance companies suffered significant losses.

Global insurance group QBE, which follows a calendar year as its financial year, stated in its 2020 annual report that the ultimate net cost of COVID-19 was estimated to be $785 million pre-tax.

“The onset of COVID-19 in early 2020 triggered widespread dislocation in social, economic and investment market conditions. In response, QBE executed a capital plan to raise … capital, and reduced risk by repositioning the investment portfolio and purchasing additional reinsurance,” the company said in its annual report.

But despite the losses suffered in the beginning of the year, QBE ended the year with a small positive return as investment markets rebounded quickly.

“Investment market volatility heavily impacted investment returns during the first half of 2020. A strong second half recovery contributed to a 2020 investment return of 0.9 per cent, reflecting falling bond yields and the resilience of our real assets (property and infrastructure),” it said.

“The portfolio remains conservatively positioned with only 7 per cent in growth assets, comprising real assets, coupled with a small amount of gold and private equity,” QBE said.

The company ultimately reported a full year statutory loss of $1,517 million, compared with a $550 million profit in 2019.

Overseas Experience

Australia is not the only country where the issue of BI insurance played out.

A similar test case took place in the United Kingdom and in January of this year, the UK Supreme Court handed down a decision that ruled all of the insuring clauses which were in issue were expected to provide cover to policyholders.

The insurers’ appeals have so far been unsuccessful.

British insurance behemoth Lloyd’s of London said in its annual report over the financial year to 31 December 2020 that it suffered an overall loss of £0.9 billion (AUD 1.7bn), caused by £3.4 billion (AUD 6.3bn) of major claims related to the COVID-19 pandemic.

But Lloyd’s investment portfolio was less impacted. “2020 was an overall positive year for investments despite the losses incurred in the first quarter. Most equity markets generated a strong level of return for the calendar year, with large gains coming over the last three quarters of the year,” it said.

Overall, the company’s investments generated a return of 2.9 per cent on invested assets, compared to 4.8 per cent in 2019.


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