Despite this, the regulator said that as a whole the industry remains “robust” to the downside risks of Covid-19

The PRA’s latest stress test of the UK insurance industry has found that some insurers could be exposed to “significant” risks from the uncertainty surrounding the Covid-19 crisis.

In a letter to insurance CEOs, the PRA’s executive directors responsible for insurance, Charlotte Gerken and Anna Sweeney, said that “the sector was in aggregate resilient, but the level of uncertainty is high and some more severe scenarios could have a significant impact on the capital positions of a few firms”.

The regulator attributes this uncertainty to the “differences between insurers and policyholders as to the interpretation of some business interruption contract wordings in the context of the Covid-19 pandemic”.

The FCA has already submitted a test case to the High Court on the validity of insurers denying business interruption claims, and the PRA said it would “work with the FCA and firms to understand the potential financial impact of the court case”.

Industry Remains Robust

Despite this uncertainty, the PRA also said that the stress test had found the UK insurance industry as a whole to be “robust” to the downside risks of Covid-19: “Our analysis showed that the sector was robust to downside stresses, with the highest uncertainty centred on certain general insurers’ liabilities – particularly those arising from business interruption claims.

“To ensure that the sector remains 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.”

ABI policy adviser, prudential regulation Robert Warren said the results were welcome news for the industry.

“Policyholders should be reassured that the PRA has completed an up-to-date analysis of the resilience of UK insurers in the current difficult economic circumstances, and concluded that the sector is robust to potential further stresses that might be caused by the Covid-19 pandemic,” he said.

“It is helpful to see the full findings from this stress test exercise, after they were understandably postponed to allow both firms and the PRA to focus on the challenges of the Covid-19 crisis.  There are useful lessons here for the PRA and industry alike.”