BI wording fallout: industry's risk governance lapses stoke APRA concerns

The Australian Prudential Regulation Authority (APRA) has voiced concerns over the industry’s risk governance process after a review of 10 insurers revealed varying weaknesses such as lack of accountability, ad hoc and poorly coordinated risk control measures and inadequate attention paid to strong control effectiveness testing.

APRA had ordered the 10 insurers, whose identities are unknown, to undertake a self-assessment against the robustness of their risk frameworks in the context of the business interruption (BI) coverage issues that emerged during the pandemic.

In all cases, the insurers found weaknesses that required remediation.

The 10 insurers have implemented work programs to address the issues after completing the self-assessments in November last year. APRA ordered them to undertake the exercise in July the same year.

APRA has subsequently issued a letter to all general insurers, sharing the review findings and what the industry must do to strengthen its risk management framework going forward.

“A common concern was that risks were either not identified, or were identified and not appropriately quantified, escalated and resolved in a timely manner,” the letter says.

“Risks should be assessed based on their materiality to focus resources and attention. Assessing the materiality of emerging and evolving risks is more challenging than for more familiar and known risks for which there are substantial amounts of experience data.”

APRA says the self-assessment exercise affirmed the regulator’s view that insurers took their “eye off the ball” of sound insurance risk management.

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 letter says.

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

APRA remains concerned that exposure to unintended cover may remain in some policies under a pandemic scenario despite new BI covers having the correct legislative references.

“APRA notes the UK experience in relation to BI where the issue of incorrect legislative references did not arise but insurers were nevertheless found by the courts to be on risk for unintended cover,” the letter says.

“APRA encourages insurers to take a broader view when conducting risk identification and quantification, including being aware of experience within and beyond the Australian market.”

Click here for the letter.