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Insurers' BI virus problems spark APRA response

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The Australian Prudential Regulation Authority (APRA) will require a number of insurers to review their risk management frameworks following “deficiencies” that led to the use of outdated business interruption (BI) policy wordings.

Lockdowns and restrictions associated with COVID-19 have triggered a spate of potential BI claims, with many insurers exposed through policy wordings that had not kept up-to-date with changing legislation, APRA says.

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

“Insurers are in the business of managing risk, yet the impact of the pandemic has raised clear concerns about how well some insurers are doing this,” APRA Deputy Chairman Helen Rowell said.

“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cover for some COVID-19 claims have yet to be fully resolved, the fact that so many insurers were selling policies with outdated wording exposes clear deficiencies in risk management.”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 has written to a number of insurers asking them to undertake a self-assessment of their frameworks in the context of the business interruption problems to prevent similar future problems.

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

“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,” ARPA says.

Where self-assessments identify material concerns, APRA will consider whether further supervisory action is warranted.

“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,” Mrs Rowell said.

The self-assessments must be submitted to APRA by November 30, with feedback to be provided to the firms early next year.