XBRL News: filing quality scores, COVID-19 requirements and ESG standards

Here is our pick of the 3 most important XBRL news stories this week. 1 Q2 XBRL filing quality score Paying close attention to your company’s XBRL filing quality is essential for your company to control the messaging to the investors, analysts, the public, and the SEC. It’s a bit of a pity that this […]

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Curation of news pieces suggests no easy Cure for COVID Costs

Healthcare cost and availability, and business interruption cover litigation- strange bedfellows with commonality- overarching need within economies for resolution for each multi-hundred billion dollar/euro/rupee/pound issue.  Ironies abound- enormous need for healthcare due to COVID-19 should prompt revenue growth for providers, and closures of businesses due to government dictates due to COVID should prompt a rescuing […]

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Business interruption- cover that’s too big to cover- but needs to be next time

Business interruption insurance

On February 27  Daily Fintech published this article, “Dominoes fall- business disruption and risk management in the COVID 19 environment,” wherein there was a discussion of the indirect effects of the then China-based COVID-19 outbreak, and the estimation of economic damage due to the outbreak being $1 trillion.  We now know the effects of the pandemic will be in the many trillions of dollars, and business enterprises around the globe are realizing that business interruption (BI) financial losses due to the outbreak are generally not covered by their commercial insurance policies.  This is not a surprising finding since BI cover has the policy need of direct physical loss, which a viral pandemic does not produce.  Many implications here regarding coverage gaps and systemic risk, and global application of moral hazard.

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’.

In one month’s time the anticipated BI losses due to COVID-19 increased manifold, became global, and have become difficult to quantify accurately, an apt expression of the unexpected outcome a systemic risk like a pandemic can cause- an uninsurable risk due to those exact criteria.

Business interruption cover is described by Marsh & McClennan as follows:

  1. We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” 
  2. The suspension must be caused by the direct physical loss, damage, or destruction to property.
  3. The loss or damage must be caused by or result from a covered cause of loss.”

The problems with the BI cover regarding COVID-19 effects are…all three points.  Items 2 and 3 are not applicable due to the outbreak being the cause, and a viral and item 1 sets such wide expectations for the insureds as to be impossible to summarize.  Loss of business income? Is that cash flow, ongoing bills, net income reduction (based on what?)

Even in the most direct loss cases, say a fire experienced by a business owner, BI losses are seen differently by the business as compared with the carrier.  Again, what constitutes loss of income, and how is the loss indemnification supported and adjusted?  BI cases are difficult to wrangle and often are simply negotiated.

If that handling were to occur say, in the U.S. for all the COVID-19’s affected insured businesses, the twenty-five million or so claims would need to be adjusted throughout the decade, would result in indemnity amounting to  two to three trillion dollar total severity, would make all commercial carriers insolvent, and result in a consequential insurance catastrophe of loss of the industry.

There is no retrofit that would have the expected effect the insureds would need.  Take for example the intention the New Jersey Assembly has in Assembly Bill 3844.  The NJ Assembly proposes the insurance industry provide BI coverage to NJ businesses with full knowledge that BI cover does not apply and is excluded from cover.  NJ would like carriers to pay the cover through legislated changes to the insurance policies’ contractual intentions, with NJ then reimbursing the carriers in the future for all or part of the payments.  Just that one state’s businesses may have BI claims that exceed $100 billion!  That is not a reasonable nor a legal option (would surely be challenged if enacted) and would challenge the solvency of the state’s carriers.    Ex post legislation is not an answer.

Firms have already initiated legislation in the U.S. for breach of contract, and while most in the industry agree that BI cover is a long shot, the irony is that the claims being made trigger the need for loss and expense reserves, and the initiation of litigation will- absent cases being considered unworthy by courts- require that the respective carriers recognize worst case scenario reserves being placed on their balance sheets- a profitability hit that could be significant due to the volume of potential claims (think asbestos.)

Truly there is not a practical answer to the enormity of the question, so the industry and businesses must be forward looking in anticipation of another like occurrence, whether it’s a viral outbreak, cyber outbreak, or regional natural disaster.  Systemic risk effects will occur again, and mitigative actions need to be considered now.

 

I considered one of many scenarios of systemic risk in the recent article published in InsurTech360, “Rethinking excluded pandemic (and other) risks.  The article discusses just one of many loss occurrences- events and conferences, and considers the many aspects of planning, response, potential cover, admin of the response and potential payments for what is for an indemnity product an excluded peril.  Future cover cannot be full reimbursement as we have discussed- the indemnity factors are troublesome to adjust.  Parametric approaches to shared risk are discussed in the article as is planning and segmentation of the loss layers.

Insurance veteran Mark Geoghegan recently recorded a ‘solo podcast’ on the Voice of Insurance that addressed the topic in depth, and touched on the many issues of BI claims and COVID-19.  The ‘selfie’ podcast, unfair-punishment-and-pandemic-re editorialized on the two-edged sword that BI handling by carriers will produce- 1) carriers cannot reimburse insureds for BI claims in that there is no policy cover, and there are not sufficient resources within the industry to do so, and 2) the carriers will still be left as the parties with record levels of capital that will not be applied to the situation, not a good view for the insured public to consider.  Mr. Geoghegan walked through some efforts that could be put into place going forward, and some collective global actions that would distribute future systemic risk that would have similar effects as COVID-19.  He clearly agrees with the writer that BI indemnity cover remains unreachable, but parametric hybrid products might be a compromise, if there is sufficient global participation by carriers, insureds, and governments.  The industry knows that government subsidized products such as the U.S. NFIP flood program are not the answer.  In fact there are some influential insurance persons who suggest private parametric plans supported by alternate risk sources are the most effective and stable answer, and not government backing as is found in the U.S. Terrorism Risk Insurance Act (see Dr. Marcus Schmalbach’s article, implement-pandemic-perils-into-tria-no-a-free-market-solution-is-needed ).  Dr. Marcus is a knowledgeable proponent of capital markets being a primary force in financing these unique risks.

Mr. Geoghegan suggests that cooperative programs such as might be gained through premium contributions to a global pool of insurance backing for systemic risk response built over years is an option to consider.  The pool would also help fund an important initiative going forward- research into causes of pandemic outbreaks, anticipating new viruses, be prepared to respond with strategic supplies, and with several years of global contributions, a substantial response fund that is not indemnity-based and available to all.  However, what does that mean?  Participation by all countries, carriers, and governments, a daunting task for the best of motivations.  And as Mark reminded the listener- memories are short, and large sums of money are attractive targets for raids by cash-short governments.  The concepts are provocative and if actionable in small part a sure improvement.

The author had a related thought-provoking discussion this week with  Thomas Verduzco-Weisel, Director Central Europe at Symbility – Mobile Claims,  a colleague in Germany who has seen the effects of disappointed customers; the chat focused on any actions that might be taken to respond to customer concerns- now.

We settled nothing categorically but did consider some options carriers can take to mitigate the effects of the constant drum beat in the press coming from businesses that have experienced or anticipate substantial BI losses:

  • Reduce or suspend premiums based on companies’ reduced operations.
  • Coordinate with other carriers in establishing a response fund that can provide direct cash benefits to business customers.
  • Extend coverage for risks that are solely associated with COVID-19 actions, e.g., forward-looking coverage for credit risk, health risk.
  • Partner with government regarding establishing captives- immediately- for mutual sharing of risk within affinity groups
  • Establish help centers for staff to assist in navigating insurance and finance issues
  • Look for coverage within policies that were in force at the inception of the pandemic, e.g., cover for civil authority actions in temp closures.  Don’t wait for a claim to be initiated, create the claim and contact the insureds proactively
  • Know how your product lines will evolve going forward- parametric options, review and retest exclusions, etc. The efforts must be uniform for all like insureds, and reproducible for similar perils.  Not taking any action is going backwards.

Plenty of discussion of a problem that has grown into a multi trillion dollar beast, and a challenge for the industry and its customers, and not to forget, governments. Systemic risk from pandemics can no longer simply be a line in the exclusion section of insurance policies, but by the same token cannot be relegated to macro government response.  For COVID-19 all players have been guilty of the oldest of risk management dodges- moral hazard.  Why bother insuring the outcome if someone else will cover the effects?  Well, that time is now gone.

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Technology helping governments & citizens, one line of code at a time

Screen Shot 2020-03-23 at 17.56.08

Moral hazard issues are endemic in financial crises, as we all know from the most recent GFC triggered from subprime mortgages. As we are witnessing a bazooka round of government aid ready to hit the market, the moral hazards are being revisited.

I will attempt to stay on topic and not comment on social & political issues around the current stimulus policy decisions in each country. I will focus on how technology can be used to make things better in these circumstances.

In America the government, the states, the municipalities, the cities are far from being Digital, let alone having technology that allows them to track flows of the money flows allocated in the economy.

A “stimulus package to the American worker” is underway that practically means a check of $1,000 or $1200 to pay rent, bills or buy groceries. The details of who and how this check can be claimed are going to be announced soon.

Americans will receive by traditional mail, a check and will have to be creative on spending it as bank branches are unable to service these deposit needs. American may countersign the check to their landlord or create a community secondary market of checks that is facilitated by those that have cash from ATMs (good for grocery shopping).

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

 

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Juxtapose this with the Digitization in Singapore. In 2016, Singapore announced the launch of the Government Tech Agency

Here’s how Singapore plans to make its services as easy as Facebook Connect.

A long-term plan to digitize the functions of governance and public life.

I pick the Singaporean example of GovTech led digitalization (there are other well-publicized ones, like Estonia) because in these `never seen before` circumstances they were able swiftly to launch three services

TraceTogether A community-driven contact tracing app to help during the COVID19 spread. Own your data and use Bluetooth P2P communications to share your close contacts. Give permission to the Ministry of Health to quickly reach out to your close contacts if you are a COVID-19 patient. TraceTogether aims to protect families and communities, and stop the spread of COVID-19.

MaskGowhere An app to use your zip code and get info on mask distribution points

FluGowhere An app to facilitate the following: If diagnosed with any respiratory illness (even just a cold) you get full subsidy for medical treatment

Now imagine if America or state by state had built a GovTech ecosystem that would allow to not easily channel each of this one off payments but also to transparently trace that they are used accordingly.

Transparency of money flows would be a blessing in this situation. It would save the government and the citizens from all the moral hazards that were experienced during the GFC. One of the most eye-popping examples were banks that were eligible for favorable loans with subsidies which they subsequently used for share buybacks.

The digitalization of municipalities, states and governments is not only about operational savings but also about Transparency that can allocate capital and manage risks in a fairway.

So much to learn from other Smart nations, states, or cities.

Singapore has two kinds of IDs …

CorpPass, a digital identity to do business efficiently and safely online with the government.

MyInfo simplifies banking transactions by eliminating the need to re-produce documents for verification.

And on and on…

The Technology is available and inexpensive, the people to customize it for each country, state, city, are available, and the Need is screaming. Come on America, Switzerland, United Kingdom, Germany, ….

Come on New York State, Canton de Vaud, England, Bavaria,…

A boom in GovTech initiatives should be one of the positive side effects of this crisis. And since I am a BIG DREAMER, maybe we will finally get a Decentralized Digital Identity so that it can serve as a way to act collectively in similar situations that we all have the same interests and risks.

Image source

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COVID-19 supplants InsurTech – moving lower on Maslow’s Hierarchy of Business Needs

Maslow biz

Staff working from home.

Premium growth or reduction?

Staff being repurposed or subject to RIF.

Claims- virtual handling or on-site assessment?

Innovation efforts underway- suspend or continue?

Customers with reduced access to the firm or agents.

Supplies- how much to stock, if the supplies can be found?

Start ups- traction had been tough, now there is no friction.

VC’s and funding orgs- how can we support any investment?

Coverage determination for pandemic or microbial infestation.

Vendor partners- how to maintain relationships or leverage their skills?

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’.

InsurTech funding efforts produced $6.6 billion globally in 2019, and plans for 2020 suggested a similar level of interest for this year.  That was until a few weeks ago, when coronavirus caused insurance companies to radically shift focus from growth, innovation, partnerships, and lowering performance ratios to a focus on cash conservation, staff support, changes in customer contact protocols, and concerns about pandemic coverage, maintaining policies in force, and stability.

The outbreak is a seismic strategic change event.  Not just issues, but fundamental concerns that suggest fundamental responses by the insurance industry, although I’ll admit there are too many ramifications to fully organize and upon which to comment.

Without question insurance incumbents and startups will feel the effects of Covid-19 on how business has been conducted in the industry during the past several years.  The relationships and collaborations between incumbent/InsurTech will be tested in significant ways, including:

  • Will financial support for innovation contract substantially as carriers move to protect liquid assets?
  • Will personnel investment in carriers’ efforts in effecting change be altered to better focus on customer needs and staffing challenges brought by the simple acts of existing in an uncertain world?
  • Startups that have not yet come close to revenue generation- will they be left to wither on the development vine as VCs reconsider asset allocations and reduced confidence in profitable scale up.
  • Will incumbents temporarily abandon new projects/innovations in order to concentrate on core functions?

It’s clear that in the current economy organizations will be moving down the business version of Maslow’s Hierarchy of Needs, from the optional to the basics, from discretionary spending to conservation of customer base.

These and other strategy thoughts found their way across my feed during the past week (with the author’s observations added):

  • Coverage for effects of pandemics have in general been excluded from cover for personal lines and commercial policies, physical, business interruption and liability covers. Simply too broad of a risk (akin to flood) for carriers to underwrite, and typically not direct physical damage.    Put the effects into a global context that affects almost every business and there will be push back.  Arbitrary actions on the part of carriers to afford coverage where there isn’t any has ramifications in uniform claim handling and fair practices- shouldn’t do for one that you can’t for all.  Unfortunately the insurance industry will be seen as the ‘bad guys’  for avoiding cover.  There will be efforts that are ‘fashionable’ to force coverage, for example the US state of New Jersey is considering suggested legislation that will require carriers in the state to provide coverage for the effects of the crisis.  Not the insurance commissioner, the legislature.  Not amending a condition like California’s commissioner did requiring full replacement payment for contents instead of actual cash value, but altering terms of the insurance contract after the fact, and outside the privity of contract.  No one wants customers to have unexpected costs of risk, but the legislators’ suggestion is fraught with many cascading consequences.  Those broad brush benefits reside within the legislature’s grasp, but not using insurance carriers as the delivery pool.

 

  • John Neal’s Lloyd’s of London office put out a request to its member firms for estimates of potential current and final losses from coronavirus. Certainly, that is good information to know, but it’s due time for Lloyd’s to be able to access those data with a few clicks of a mouse or database query.  Surely the firm’s exposure to probable maximum loss for a peril is a strategic data point to have at arm’s reach, and the unique nature of pandemic cover would suggest PML for any policies in force.  It seems the integration of Blueprint One cannot come soon enough for Lime Street.

 

  • Worldbank’s Pandemic bonds are on the verge of being triggered to benefit the poorest countries in the world. The primary criteria for triggering have been met, with proof of economic growth among the beneficiary countries remaining to be confirmed.  These bonds provide quick response finds for the countries, and have proven to be a successful alternate risk funding vehicle for capital markets.  This bond type and other cat bonds/ILS are a significant future source of risk financing, with reinsurers and bonding companies working in concert.

 

  • How insurers work has been shaken with the almost universal shift to remote work (work from home, WFH). Insurance consultant Alan Walker composed a fine list of questions within an article posted this week, “Covid-19: Implications for Insurers.” :
    • How will we plug the service gaps that will arise if a large proportion of staff falls ill at the same time?
    • How long will remote working be required?
    • Do any of our product wordings need to be changed to deal with the return of Covid-19 in future years, or possible future pandemics? (author’s note- perhaps it’s time for parametric cover to take a leading role in dealing with effects of broad effect perils/covers)
    • Do we need to reduce our reliance on people being co-located… and the degree of “remote working as standard?
  • Rosenblatt Securities published a short analysis of the Implications of COVID-19 and Market Disruption on Private Fintech, and while the report included many important concepts, there was a historic treatment in graphical form of the Correlation of S&P performance and private capital investment in the U.S. that caught the author’s eye:

S&P

This chart from the 2008-10 market recovery period indicates a six-month lag between market recovery and investment level recovery; the current outbreak is of such broad spectrum and probable duration that investment recovery will take longer than that.  Consider the outbreak disruption to last several months and investment confidence to take an even longer period to come back, and strategy decisions made now are even more important than in 2008.

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COVID 19 – indirect effect coverage gap on steroids

COVID-19-Economic-Impact-Public-Domain

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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