Bank of England warns insurers of insolvency risk from COVID-19 claims

June 17, 2020. Print article

The U.K.’s top insurers remain vulnerable to increasing numbers of business interruption claims stemming from the COVID-19 pandemic, and should take steps to mitigate any insolvency risks, the told insurers Wednesday,

Recent stress tests revealed high levels of uncertainty regarding the insurers’ ability to pay out claims made by companies disrupted by widespread lockdowns, the central bank’s Prudential Regulation Authority said in an analysis conducted with the Bermuda Monetary Authority.

The number of business interruption claims is surging in the U.K., the U.S. and elsewhere amid the pandemic, leading to a wave of legal disputes between policyholders and insurers, according to reports. British TV and film producers, for example, are fighting to get payouts for more than 500 claims filed since March, Deadline reported Wednesday.

In a letter sent to insurance executives Wednesday, the central bank’s chief insurance regulators called on the companies to ensure they have enough money to pay out such claims and to patch any liquidity concerns amid fears of a second wave of coronavirus outbreaks.

“To ensure that the sector remain robust in this evolving situation, we expect firms to maintain close monitoring of the additional risks presented by COVID-19, update their risk and capital assessments as the situation evolves and take appropriate management actions where necessary,” said Charlotte Gerken, executive director of Prudential Regulation Authority.

The bank did not disclose individual test results for the 20 largest U.K. insurers, 15 large syndicates and the Lloyd’s of London insurance market that took part in the tests. 

Apart from concerns over business interruption claims, U.K. insurers appeared to be “robust to downside stresses,” the central bank noted in its report.

For life insurers, the bank tested a 50% downgrade of assets by one credit rating level, simulating the shocks of the Great Depression in 1932. 

The test revealed that while most life insurers are sensitive to such drastic downgrades, “It would be manageable, particularly given that firms have a range of management actions available to absorb losses,” the bank said. 

General insurers, who carry lower levels of investment risk, are susceptible to underwriting loss stemming from virus-related claims. 

The bank noted that amid growing numbers of business interruptions, there are differences between how insurers and policyholders interpret the wording of these policies.

“[The test] showed that the sector was in aggregate resilient, but the level of uncertainty is high and some more severe scenarios could have significant impact on the capital positions of a few firms,” said Gerken. 

The , an independent banking regulator in the U.K., is currently working with a court to develop a clearer language to determine whether pandemic-related shutdowns are covered by most policies. The bank said it supports the move.

Gerken’s call to action was echoed earlier this month during a speech by Megan Butler, executive director of investment, wholesale and specialists supervision at the regulatory agency. She urged insurers to act proactively in preparing for future contingencies to avoid a sudden insolvency.

“Acting with speed has been the absolute priority, but as we adapt to the long-term impact of coronavirus, we have already begun to transition from the immediate ‘incident response’ towards focusing on longer-term impacts and our strategy for tackling these,” Butler said.