Alpha’s current thoughts on the impact of the novel coronavirus or COVID-19
Posted 03/03/2020 – Insights
Global equity markets have fallen significantly, posting the worst weekly performance since the Global Financial Crisis of 2008-09.
This would appear to be the (understandable) reaction of an ‘expensive’ (at least by historical standards) asset class to a synchronised global demand shock (people staying home, not travelling and not spending) and a supply shock (supply chain disruptions particularly centred on China, but increasingly globally). Fiscal (governments’) and monetary policy (central banks) can address demand shocks (albeit the central banks are already operating historically low interest rate policies), but are unable to do very much to stimulate supply. Therefore, risk markets are trying to discount future economic activity on the basis of very little concrete data.
The situation for the (re)insurance market is a little clearer, but since terms and conditions differ from policy to policy (as do the triggers that lead to pay-outs), a definitive assessment of the impact of COVID-19 is not possible at this stage.
That said, the Chairman of Lloyd’s, Bruce Carnegie-Brown, recently told the BBC’s Radio 4 Today programme that “the suspicion is, that it will be a reasonably underinsured event, partly because Asia is less insured than other parts of the world and partly because the virus is new so there is not a lot of insurance in place for it.”
Beazley and Hiscox have both played down the Coronavirus threat to their contingency books. Hiscox has said in a statement “We are a lead market in contingency (event cancellation) at Lloyd’s but we don’t have any significant exposure to this peril on any major events in China or surrounding territories in the next few months.” Beazley has said that an analysis of its underwriting showed only a c. $25mn of exposure due to its reinsurance cover. Beazley’s CEO, Andrew Horton, told the Insurance Insider that “a lot of contingency policies do not cover pandemic, a limited number do and then we have a reinsurance programme that picks up any systemic issue for us.”
After SARS in 2003, swine flu in 2009 and the Zika virus in 2015, cancellation as the result of a communicable disease is a standard exclusion on Lloyd’s contingency contracts, but cover can be purchased for an additional premium. Even if cover is in place, insureds must be able to demonstrate that it was necessary to cancel the event, rather than the cancellation arising from a lack of attendees.
The numbers for cancellation insurance can be large for global sporting events. Beazley estimates that the 2014 FIFA World Cup was covered by $1.25bn of event cancellation insurance and the 2018 World Cup had $1.5bn of cover. Analysts at Jefferies believe the Tokyo Olympics will have about $2bn of cancellation cover, with an extra $600m to cover hospitality and hotel bookings. In addition, the International Olympic Committee has an insurance policy designed to protect its revenues against force majeure, although this has not been tested previously, with previous Olympic Games only cancelled during the World Wars.
Beyond cancellation insurance, standard property insurance policies usually include (i) business interruption coverage for direct losses and (ii) contingent business interruption coverage for indirect losses suffered as a result of supply chain issues. In the large majority of cases, contingent interruption coverage requires the type of damage that has disrupted its suppliers or customers to be included in the insured’s policy.
In most cases, business interruption coverage (and therefore contingent business interruption also) is predicated upon physical damage. Whilst there are a couple of examples of US case law in which ‘dangerous gases or bacteria’ were deemed to constitute non-structural physical damage to property, the industry consensus has been that property policies’ business interruption claims require a physical damage trigger in the common-sense meaning of the term.
Nevertheless, it is possible that some policyholders will be able to reasonably contest that non-physical damage business interruption is a covered peril (following a broadening of policy wordings during the soft market), although examples of this are expected to be limited. Furthermore, some insureds (a typical example being hotel chains) will have explicit coverage for communicable diseases and cancellations, albeit these are ordinarily sub-limited to relatively low individual amounts.
Though the intention of how property policies are designed to respond to COVID-19 type event, we are highly aware that until tested, no certainty can be guaranteed as to the interpretation of courts and governments.
Liability insurance cover, such as D&O and E&O, may be relevant, perhaps, in the case of the treatment of people who were quarantined on cruise ships. Workers’ compensation insurance policies generally only cover occupational diseases and injuries, so would probably be restricted to the impact of the coronavirus on health care workers (albeit national health services may rely upon self-insurance).
It is probably important to point out that we, at Alpha, are not virologists. Whilst we have done significant reading around the subject, including scientific and medical journals, we are not in a position to make predictions as to the eventual outcome of COVID-19 coronavirus infection rates and its impact on the global economy or, therefore, the Lloyd’s insurance market.