Three of Australia’s major general insurers are due to release financial reports next week – Insurance Australia and Suncorp (AAMI) release full year figures while QBE is due to release its half year figures.
Insurance Australia Group has already revealed a loss of $427 million because of a mix of issues including early Covid claims and weather (flooding0 related disaster claims as well (and the carryover of bushfire related payments).
Comments though from all three companies about the situation with Covid-related claims under business interruption policies though will be the big issue for investors and the regulator, Australian Prudential Regulatory Authority (APRA).
And the growing controversy and court cases (as far as the High Court) on business interruption policy claims has dragged general insurance squarely into the regulators spotlight.
That attention will force some regulatory soul searching for Australia’s general insurers which have been told forced to quiz themselves on whether they fully understand the risks in their own portfolios (especially cyber risk) and the possible cost to them and their customers.
Normally its customers that are asked to do a bit of detailed disclosure when taking out policies with insurers such as QBE, IAG, Suncorp and others, but now APRA has reversed the onus for the sector.
Driving this move from APRA is the very real threat to the viability of general insurance from billions of dollars in claims from customers relating to the impact of Covid who thought they had insurance cover via their business interruption (BI) policies.
A win by a customer in a business interruption test case against an insurer for losses incurred during the pandemic, has opened the sector to claims that could total $10 billion.
The threat to general insurance emerged after the industry lost a High Court appeal application in late June from a decision of the NSW Court of Appeal last November.
Lockdowns and other 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.
The resultant legal uncertainty, and significant financial exposure for insurers, has raised concerns about the strength of insurers’ risk management frameworks, according to a statement from APRA in early July.
APRA has written to a number of insurers asking them to undertake a self-assessment of their risk management frameworks in the context of BI, so as to prevent similar problems occurring in the future.
The review will also focus on cyber risk, however APRA expects insurers to ensure their risk frameworks are robust across all product areas and potential exposures.
The trigger is the looming losses on BI insurance claims.
Around 250,000 business owners had taken out business interruption policies that the insurers say were intended to exclude pandemics and instead typically applied to things like blackouts and floods.
However, the exclusion clauses referred to an outdated piece of federal legislation dealing with pandemics. They named the Quarantine Act, which was repealed in 2016 rather than the Biosecurity Act that replaced it.
in late 2020, the NSW Court of Appeal found that insurers cannot deny claims by insured businesses for loss caused by business interruption due to COVID-19 by relying on an exclusion which excludes “diseases declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments”, because that exclusion does not exclude COVID-19.
After that loss, an insurer called HDI Global Speciality, with the backing of the Insurance Council of Australia went to the High Court in late June to ask the court to hear an appeal aimed at overturning the Court of Appeal decision.
Their barrister argued the intention of the policies was clearly to refer to whatever piece of legislation listed pandemics despite the exact words in the contract and said an estimated 250,000 businesses and $10 billion in claims would be affected by the case.
But the High Court rejected the attempt. There wasn’t “sufficient doubt” with the Federal Court’s ruling that the words of the contract meant what they said to warrant a full hearing, Justice Patrick Keane said on June 27.
The decision only affects contracts that have the specific exclusion clause with the outdated wording and the Insurance Council said in a statement on Friday that most payouts would still have to wait for the outcome of another test case before the Federal Court, which was examining other parts of the contracts (ie, the ‘fine print’).
APRA is not waiting for the second test case of the fine print, as the Authority’s Deputy Chair Helen Rowell made clear in its statement:
“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. 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.
“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.
“Where the 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.
APRA said it has published the letter and guidance material that supports the self-assessment exercise so that non-participating insurers can consider whether a similar self-assessment would enhance their own risk management practices.
It sounds boring and not too exciting but APRA’s request and the answers could very well see many leading companies forced to raise more capital from shareholders because the risks in their portfolios are not fully supported by the companies’ current capital base.
IAG raised $750 million in the wake of the NSW Court of Appeal decision last November, but others claim they are well covered. APRA will now force them to tell it just what the situation is and will no doubt ask for ideas about helping cover any problems with more capital.
It could be an expensive way for the sector to end 2021 and start 2022 .
