UPDATE 1-Bank of England warns insurers risk unexpected COVID losses

(Adds more detail)

By Huw Jones

LONDON, Nov 13 (Reuters) - Insurers in Britain risk being
optimistic in estimating losses from COVID-19 related claims and
should stress test their underlying assumptions, the Bank of
England said on Friday.

Insurers in Britain 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.

The Bank of England (BoE) set out in a letter to insurers on
Friday 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.

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 a
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 said.

"You can expect us to seek evidence of the risk function’s
involvement in challenging reserving teams, and ensuring that
the board is suitably well-informed about the uncertainty the
above risks give rise to before it sets the reserves," the BoE
said.

COVID-19 has demonstrated how disputes can arise over
wordings in policies and insurers should consider identifying
and monitoring such risks, the BoE said.

"In the coming months you can expect us to discuss with you
how you have considered each of the points raised in this
letter," the BoE said.

A test case brought by the Financial Conduct Authority
against insurers over business interruption wordings goes to
appeal next week.

The outcome of the case is expected to affect 60 insurers,
370,000 policyholders and billions in claims.
(Reporting by Huw Jones and Carolyn Cohn; Editing by Alison
Williams and Mark Potter)