Australia\u2019s commercial insurers \u201ctook their eye off the ball\u201d in writing business interruption (BI) policies that could have exposed them to heavy losses in Covid-19 lockdowns, according to the country\u2019s regulator. Publishing findings from a risk management review of 10 insurers underwriting BI, the Australian Prudential Regulation Authority (APRA) identified weaknesses in how insurers managed their exposures to BI policies.\r\n\r\nIt added that the Federal Court\u2019s test case decision, largely in favour of insurers, was a \u201cnear miss\u201d for the industry. But it also criticised insurers for creating legal uncertainty for policyholders.\r\n\r\n\u201cThe self-assessment exercise affirmed APRA\u2019s view that insurers took their eye off the ball of sound insurance risk management,\u201d said APRA deputy chair Helen Rowell.\r\n\r\n\u201cThe legal uncertainty about whether cover applied, the significant potential financial exposure for insurers and the impact on consumers was substantial, and revealed weaknesses in how insurers managed their exposures,\u201d she said.\r\n\r\nThe review extended the risk management assessment for BI to other potentially vulnerable lines, in particular cyber insurance. \u201cIn all cases, the insurers found weaknesses that required remediation and have implemented work programmes to address them,\u201d the APRA said.\r\n\r\nAs part of its review, the regulator found BI policy wordings had not been updated to reflect changes in the Quarantine Act, which opened up insurers to legal challenges in the pandemic. Further, it said gaps between reinsurance wordings and direct insurer policy wordings could have left insurers without sufficient reinsurance for BI claims.\r\n\r\nIt also criticised insurers for the \u201cburgeoning of complexity\u201d in policy wordings and a reticence to correct wordings that compromised risk appetites, especially for SMEs.\r\n\r\n\u201cCompetitive pressures overriding sound risk judgments signals weaknesses in risk culture and accountabilities,\u201d the regulator said, adding the industry had not sufficiently adopted a what-if mindset around emerging and evolving risks.\r\n\r\nEarlier this month, the Federal Court denied a special leave of appeal in a test case heard in February, which largely found in favour of insurers, and provided enough certainty to insurers to begin releasing reserves set aside to cover BI losses. Suncorp said it would release the majority of a $179m provision to cover potential losses from Covid-19 BI claims.\r\n\r\n\u201cWhile the legal uncertainty has largely abated in recent weeks, the BI issue was a near miss for insurers and one which cannot afford to be repeated. APRA expects all insurers and reinsurers to review their approach to risk management in light of these findings, and we are determined to ensure the various remediation plans of the 10 insurers involved are fully implemented,\u201d Rowell said.