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.