COVID 19 – indirect effect coverage gap on steroids

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Unlike a typhoon or hurricane, the current catastrophe cannot be seen, just its effects.  The novel coronavirus (COVID 19) is now and will be causing personal, business, and government disruption and economic loss.  You can’t see the virus, has relatively small direct effects (120,000 persons contracting the virus of some hundreds of millions exposed), but it’s secondary impact ripples widely.  It’s economic impact will eclipse that of natural disasters of the past several years.  Analogous to the concept of velocity of money there is a ‘velocity of consumption’ that has economic loss effects that are not subject to indemnification. 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

COVID 19 is on the front risk burner of pretty much everyone on the globe, and as discussed in a prior blog the effects of the outbreak are wide and deep in the business world.  It is becoming clearer how those effects are impacting the global economies, and if the risk exposure has potential insurance recovery:

  • As reported in the Asia Insurance Review, the Russell Group estimates China trade is exposed to an estimated US $122 billion trade risk due to business interruptions and imbalance in supply chains.  This projected risk is not limited to Chinese exports, but to imports as well, e.g., crude oil and circuit boards.  What is not calculated into the $122 billion is the ‘start up lag’, or the materials and labor costs to get production and services to pre-outbreak levels.  And a great unknown- the volume of businesses that simply will not survive the break in business the outbreak has caused.  Probability of insurance recovery- low.
  • Pandemic catastrophe bonds issued by the World Bank have experienced a crash in price in the secondary markets due to expectations that a full draw-down of these higher risk bonds as triggering conditions continue to be met. The bonds serve as a backstop to the Pandemic Emergency Financing Facility.  The details and ramifications of the outbreak on these bonds is well covered by Steve Evans of Artemis, “Pandemic cat bond price plummets on growing coronavirus threat”. Probability of bond holders recovering price- low.
  • Call center operations (often sited in countries other than primary consumption markets) have been affected and the potential for more to be closed is high. In addition as discussed by Mike Daly of 360Globalnet in this advisory, disruption in one facility may be compounded if a firm’s continuity plan includes a back up facility that is also subject to closure.  Absent a plan to work virtually there may be business disruptions that cannot be recovered. Amazon is planning a full organization test of VPN work wherein all employees are being directed to connect to the firm’s operations via remote connection during 3/05/2020- a bench test of organizational resilience.  Probability of recapture of business due to disruption- low.  Probability that business interruption cover applies for a viral outbreak- low.
  • Gig workers in all markets are losing business as outside consumption and movement lessens due the encouragement to the public of limiting exposure outside of one’s dwelling. And, as regions wrestle with the concept of contractor or employee, persons who contract the virus due to exposure during an ordered ‘gig’ may have a case for workers compensation cover (US).  A compounding insurance (or lack of) issue for gig workers is the relative low percentage of gig workers who have health insurance provided to them, a reality that will be costly to the sector.  Inroads are being made to provide gig workers low cost, comprehensive personal insurance by firms like Collective Benefits (UK), and for on demand cover for fares such as what is offered in Singapore by Grab Insure (Grab also has announced COVID 19 cover for drivers.)  Probability of gig workers having health insurance recovery- low.
  • A first line industry that has been significantly impacted by the outbreak is the travel industry. Business interruption cover is generally excluded for health outbreaks, whether it’s inability for staff to man the facilities or reduction in visitors.  Certainly parametric options have become more available and in place, e.g., loss of business for tourist attractions.  Individuals’ travel insurance may not have cover for missed travel due to fears of exposure (some CAFR- Cancel For Any Reason are purchased exceptions to that), but illness while traveling and repatriation may be.  An excellent overview of travel insurance issues is found here in CoveragerProbability of cover for cancelling a trip solely due to concerns about COVID 19- low.
  • Companies that have been on life-support may suffer the fatal blow due to business downturn, e.g., airline Flybe, who have announced a probable collapse of its business due to COVID 19 . The BBC.com article notes that the firm has been on shaky ground, thus supporting the contention that COVID 19 is most apt to affect those who are already compromised, even businesses. Probability of indemnification for lost business- very low.  Passengers- probably on their own.  (Maybe @EUFlightRefund can assist)

There sure are other unexpected influences on business that may benefit firms due to reactions to an economic downturn., e.g., the US Fed’s action to drop US interest rates 50 basis points, the erosion of market capitalization from stock price drops (leverage, pension values), or spot shortages of commodities due to reaction purchases.  A real issue is the non-recoverable gross domestic product that results from drop in production and ensuing drops in consumption.  A double pronged effect- supply and demand effects- will take an absolute half percent off of 2020 global GDP increase, or an almost one half trillion US dollar impact.  The reader surely realizes this impact intuitively or by other sources, but a good overview of COVID 19 global GDP impact can be found here.  One must remember- lost production is seldom fully recovered.

As for now and during the outbreak’s spread, consider the far-reaching economic impacts of COVID 19, have contingency plans as one best can, wash your hands regularly, try to not touch your face, stay home if you feel unwell, and have plans for recovery once the outbreak ebbs.  Oh, and realize there will be another similar occurrence in the future, and have insurance plans to reduce your coverage gap.

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Dominoes fall- business disruption and risk management in the COVID 19 environment

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It’s clear there is much of which to be concerned regarding novel Coronavirus 2019 (aka COVID 19), including  the direct impact of illness and death among those who have contracted the disease, and the indirect effect of closure of travel, quarantine, closures of schools, businesses, and frontiers. 

Who is considering the effect of the virus on local, regional, and global business?  Whether you believe in the extent of virility of the virus or not, one thing is certain- businesses across the globe are showing symptoms from COVID 19.  Is this an insurance disaster or unexpected new market?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Much of the production and retail business world lives with the two-edged sword of global interaction; on one edge a manufacturer in Barcelona can economically design and digitally source machine parts from a ten person shop located in Hubei Province in China, on the other edge is the disruption that may occur to the Spanish manufacturer if the machine shop is inactive or unable to produce a custom part.  Potential tech problems certainly predated the current viral outbreak, e.g., connectivity, ISP issues, in-house tech issues, etc., but having 59 million inhabitants of this province alone in question being exposed to and managed for contagion is a disruptive analog force that may affect business activity for weeks if not months, with figurative ripples being felt around the globe.

If one considers COVID 19’s global reach as of this writing ( WHO situation rep, 2/26/20220 ):

COVID

And the exposed population, cases and deaths in China alone:

COVID population

The magnitude and effect of the outbreak on just that 1.4 billion population becomes graphically clear.

Unless your business was affected by the SARS outbreak in 2004, affected by the more localized (but terrifying) Ebola virus, or mosquito borne diseases like Dengue or Zika, the business effects of outbreaks are typically small- unless you are immersed in the outbreak.  Businesses in Hubei Province in China certainly understand the effects, as millions of SMEs are shuttered due to the quarantine actions currently in place.  But, were you aware that Brazil reported 2.2 million cases of dengue in 2019 alone, with more than 700 deaths due to the outbreak?  Dengue does not have the quarantine requirement of COVID 19 so life goes on, but life is still disrupted as are businesses.  (full disclosure- the author contracted dengue while posted in a tropical environment- not a fun experience, but also not a disease where death is commonplace.)  The point- by degrees disease outbreaks can have far-reaching effects, and businesses must be aware and have risk management plans.  And you who have service industries and consider yourself immune to these issues- it’s a complex business ecosystem where all are affected.

For this article a deep dive into what’s covered by insurance and what’s not will not be taken- that would be too lengthy an effort for a Daily Fintech reader who needs an overview.  I can say that Business Insurance and Marsh and McLennan have a good summary document here, “Liability policies may respond to coronavirus” .  Travel insurers typically do not afford coverage if a traveler simply decides not to travel due to perceived risk (some policies have the ‘cancel for any reason’ option but it’s an exception placement.)  Suffice it to say that effects of outbreaks do no not fit well into insurance cover.

So what’s the point for this article?

Awareness and consideration of how outbreak ‘dominoes’ can affect your business, and are there insurance options that might provide financial protection?

Consider these quotations from the 2/25/2020 Economist:

“IF China is the world’s factory, Yiwu International Trade City is the factory’s showroom. It is the world’s biggest wholesale market, spacious enough to fit 770 football pitches, with stalls selling everything from leather purses to motorcycle mufflers.  Its reopening was delayed by two weeks because of the COVID-19 virus, the crowd was sparse and the dragon dancers, like everyone else, donned white face-masks for protection. “

And,

“The muted restart of the Yiwu market resembles that of the broader Chinese economy. The government has decided that the epidemic is under control to the point that much of the country can go back to work. That is far from simple. More than 100m migrant workers, the people who make the economy tick, are still in their hometowns, and officials are trying hard to transport them to the factories and shops that need them.”

An outlook from a visiting business person:

“Yiwu is testimony to some of the ways in which people far and wide will feel its economic effects. Agnes Taiwo, a businesswoman from Lagos, arrived in China just as it started to implement its strict controls to stop the outbreak. She had hoped to book a large shipment of children’s shoes and get back to Nigeria by early February. But nearly one month on, snarled by all the closures and delays, she has not yet been able to complete her order. And her return to Nigeria has been complicated because EgyptAir, the airline she took on the way over, has cancelled all flights to China. “This is serious,” she says. It is a sentiment that many others around the world are starting to share.”

The Economist states the case for China business concerns well; what of the cascading effects of supply chain disruption?

Let’s consider the potentials for risk management working backwards from end businesses:

  • Most business interruption covers are based on an occurrence of direct physical loss, either on premises or within a supply chain. Unfortunately, disease outbreaks are seldom considered direct losses, and in most cases are excluded causes of loss.

Continuing, how about:

  • Worker’s compensation?
  • Liability from infection from customers being on premises?
  • Directors and Officers cover if business results flag due to alleged poor planning?
  • Supply chain risk- all along the supply and transportation chain? Has just in time become a liability?
  • Loss of suppliers due to failures of businesses in the worst outbreak areas?
  • Actions of governments? Legal ramifications of non-compliance?
  • Employee actions due to extended periods of no work?
  • Loss of key staff due to inability to maintain salaries?
  • Loss or reduction of digital connectivity due to vendor issues caused by the outbreak?
  • Effects of civil unrest?
  • Interest rate risk from speculation?
  • Capital valuation changes due to stock market responses?
  • Inability to travel to affected areas where management oversight is critical?
  • Increase of cyber risk due to reduced attention to risk?
  • Reduced productivity due to requirements for and inefficiencies of virtual work?
  • Consider the effect that reduced business will have on governments and taxing authorities- will there be significant collateral effects for your business’ taxes, or services received from the government?
  • In the case of a significant outbreak in your area, what government services may be curtailed or cut, and how will that affect your key operations?

Attention, planning, and expectation for a worst-case scenarios are prudent courses as Mother Nature has ways to prove governments wrong.  Re-engaging 100 million workers is a huge undertaking for China, but so may be getting your staff back into routine after a week or two of preventive closures by authorities.

  • Dust off the business continuity plans prepared for natural disasters. Don’t look for the disease outbreak section, it probably doesn’t exist.
  • Contact your insurance broker, have the hard discussion and ask for a frank assessment of your business’s insurance. Ask for the specifics on supply chain, outbreaks, indirect losses, liability, D&O, etc.  What you will learn will be better than not learning at all.
  • Be upfront and inclusive with staff. They are smart, and know things you don’t.
  • Trade war activity over the past year has caused you to find alternative sources for products- contact those sources and solidify your position with them.

Going forward there are learnings for the risk management industry, and for any business that might be affected by issues related to outbreaks.  The availability of parametric insurance may become more commonplace, and the practicality of its inclusion in insurance plans will increase.

Consider the example provided by Parametrix, an Israel-based insurer recently awarded the UK Zurich Innovation Challenge (thanks to Mark Budd and Nicola Cannings who have kept me apprised of the contest’s outcome.)

While not an exact match for supply chain issue parametric cover, the company founded by Neta Rozy “creates parametric (claim-free) insurance for SaaS, PaaS and IaaS downtime such as cloud outages, network crashes, and platform failures. Their products help close a protection gap in business interruption insurance, tailored to the tech-reliant SMEs.”

Carry the parametric principle to supply chain interactions, or any business interaction where a disruptive trigger, or index can be identified, and a risk amount can be applied.  Business disruption due to a specific government command, for example, or supplier closure due to a WHO declared outbreak.  There may be many reasons why indemnity covers are unable to be written, but parametric options must be considered as an alternative.

While SMEs are the typical customer for Parametrix, there is basis for larger, more dispersed firms to consider alternate risk methods, almost as cat bonds might provide for natural disasters.  If an outbreak can affect global GDP to an amount of $1 trillion in lost growth, a globally established firm might suffer effects that are similarly material to its P&L and hedging the risk is prudent.

The key is that global outbreaks do occur,  perhaps not as potentially costly as COVID 19, but significant none the less.

Global reach, fragility of supply chain interactions, and business continuity demand different approaches, and provide the insurance industry new opportunities for risk products.

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