Disputes over whether pandemic-related claims are covered by business interruption insurance could hurt demand for insurance protection more broadly, according to a U.K. regulator.

Anna Sweeney, executive director of the insurance supervision division at the Prudential Regulation Authority, said in a speech Sept. 22 that the high profile of the claims battles "has done nothing to dent the popular caricature of an industry that is happier to accept premiums than to pay claims." That could hurt demand for insurance if businesses come to believe insurers will not provide the coverage they need for both business interruption and indemnity policies that cover unspecified perils, Sweeney said.

Shrinking demand for insurance may lead to a "drag on real economic activity and productive investment," she added.

There is also a risk that insurers could curtail the supply of cover following their experiences with COVID-19, according to Sweeney. Because of the uncertainty related to the pandemic, insurers will take actions to limit future exposure, including tighter policy wordings, exclusions, withdrawal of capacity or "significant" price rises, reducing the coverage available for nonspecific perils.

As an example, she noted that prices for directors' and officers' liability insurance doubled in 2020. While some of this was caused by "sensible" risk management, Sweeney said that there is also the potential for "excessive risk aversion and an overshoot leading to an aggregate reduction in supply that damages recovery." If a protection gap did emerge because of what insurers learned about the uncertainty in their contracts, that could harm the economic situation.

Sweeney was speaking at Bank of America's European Financials CEO conference. Her comments come a week after the judgment was handed down in the Financial Conduct Authority's business interruption test case, which was intended to help settle some of the coverage disputes about non-damage business interruption stemming from the coronavirus pandemic.