Insurers risk being optimistic in estimating losses from Covid-19 related claims and should stress-test their underlying assumptions, the Bank of England has warned.
In a letter to insurers today, the BoE set out its findings from a review across the general insurance sector on reserving, managing exposures and dealing with uncertainty over contracts in light of Covid-19.
Insurers have come under fire for failing to pay out on claims from businesses disrupted by lockdowns to fight the pandemic that tipped the economy into a steep recession.
It said that COVID-19 had added complexity and uncertainty to estimating ultimate losses from policyholder claims.
“Our work has highlighted that a number of firms have not been able to accurately identify and track COVID exposed policies, leading to unexpected COVID losses,” the BoE said in the letter to insurers.
“Firms should ensure that this uncertainty is reflected in the reserve estimates and that, where possible, appropriate procedures are put in place to identify and track exposed policies.”
A number of insurers’ estimates for Covid-19 losses on casualty classes like employer’s liability or professional indemnity may be “optimistic”, it added.
The world’s top 100 most valuable insurance brands could lose as much as $100bn (£81bn) in brand value as a result of the Covid-19 crisis, with the sector set to be one of the most severely affected industries in term of reputational damage, according to a report released in the summer.
The pandemic has wreaked havoc on insurance firms both financially and reputationally, as they face a surge in coronavirus-related claims and risk angering customers if they refuse to pay out.