The Bank of England (BoE) has warned that insurers risk over-reliance on their ability to deal with natural disasters, underestimating the value of “secondary hazards” – storms and fires – and may not be as resilient in a crisis.
The Bank of England’s Prudential Regulation Authority (PRA) stress tested 54 life and other insurance companies and 21 syndicates in the Lloyds insurance markets, asking them to rate their resilience to an imaginary economic crisis, including widespread hurricane damage and massive cyberattacks.
The PRA considered the insurance industry to be resilient but found “gaps” and “limitations” in its response. The industry is good at predicting the likelihood of natural disasters, but worse at estimating the cost of damage.
“Existing practices may lead to misinterpretation of the impact of scenarios on individual insurers,” the letter says to insurance executives.
As a result, they risk excessive losses and may underestimate capital requirements, they warn.
Last year, Hurricane Yan in the US and flooding in Australia helped make 2022 one of the costliest natural disasters on record, Munich Re, one of the world’s largest reinsurers, said. Insured losses from natural disasters were around $120bn (£97bn) last year, in line with 2021 levels.
Lloyd’s of London has pledged £1.1bn to settle claims related to the war in Ukraine.
The PRA warned that there was no consensus on the risks of cyberattacks and warned of the dangers associated with insurance policies.
PRA head Charlotte Gerken said the PRA will work with companies to “improve and better manage” non-catastrophic risks such as cyber and other emerging risks.
The risks associated with climate change will be another key focus, according to PRA. Climate change continues to pose a “growing material risk to business and the financial system,” officials warn.
Regulators stepped up the soundness tests of financial firms after the bond market collapsed after the mini-budget last September, when pension funds struggled to sell government bonds fast enough to meet their collateral requirements, forcing the Bank of England to intervene.
The PRA says companies need to make sure these lessons from previous crises are “finally fully learned.”
“Insurers must adapt to changes that threaten to disrupt business models while maintaining high standards of governance, risk management and sustainability, which means they continue to provide critical insurance services to the real economy.”
British insurers are in talks with ministers over whether the government should bail out state-sponsored hacking attacks, as it does with terrorist attacks, amid growing concern over the number of companies no longer providing insurance coverage against corporate cyberthreats.
Source: I News
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