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Law360, London (September 23, 2020, 12:53 PM BST) -- The Bank of England has warned of a growing "protection gap" as insurers withdraw cover to businesses over concerns of further losses from the COVID-19 pandemic.
Anna Sweeney, executive director for insurance supervision at the central bank, said Tuesday that lack of cover might have a wider effect on the U.K.'s economic recovery.
She said there was a greater need to explore a potential "public-private backstop" similar to that used by state-backed reinsurers Pool Re and Flood Re.
"If a protection gap were to emerge through the reactions of insurers and insured to what they have learned about contract uncertainty, we should worry about the wider impact that that might have on economic recovery," she said in a speech.
Sweeney said it was natural for insurers to look to limit future exposure, through either tighter policy wordings, exclusions or price increases. She said that the bank was aware that premiums for directors' and officers' policies, which guards senior company bosses against lawsuits, had doubled this year.
But she said it should be possible to take action to "transform a seemingly uninsurable peril into a diversifiable, insurable one."
The U.K.'s insurance industry is working on a potential state-backed pandemic reinsurer, along the same lines as terrorism reinsurer Pool Re, which uses private sector funds to pay claims but is backed by a government guarantee.
Former Home Secretary Amber Rudd was appointed in June to one of six working groups established to get the project off the ground.
The government has introduced several insurance backstops, including a £10 billion ($12.7 billion) trade credit guarantee scheme. It has set aside £500 million to act as an insurer directly for film and TV studios unable to get insurance coverage because of the pandemic.
But it has so far remained silent over the possibility of a backstop on business interruption insurance cover.
Sweeney said it was worth exploring the idea of a backstop along similar lines to Pool Re and Flood Re, as "one way of mitigating the risk of a shock to supply of insurance."
"But we should be mindful of the risk of moral hazard and of crowding out private capital," she added.
--Editing by Rebecca Flanagan.
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