Why ins­urance cover rarely extends to epi­de­mics

Many companies are complaining about the cost of the coronavirus crisis. Losses of this nature are usually not insured as the consequences of a pandemic are hard to calculate. Besides, the insurers are already liable through other business lines.

The coronavirus is weighing increasingly on the economy: sports events and trade fairs are being cancelled, airlines and travel operators are lamenting the slump in bookings, companies are reducing and, in some cases, suspending production as they can’t access the parts they need. On top of that, consumer uncertainty is impacting consumption. In response to this extraordinary situation, the federal government has put together an aid package running into the billions to support those companies affected directly by the corona crisis.

Insurers do not normally cover pandemics

Few companies have cover for this type of risk. There are policies covering loss of earnings due to business interruption. Organisers of concerts or trade fairs can also take out cancellation cover for their events. However, in those instances cover normally only extends to fire, theft, storm or other natural hazards. It is possible to widen the scope of the cover – for example to business closures due to infectious diseases specified in the contract. However, that is rarely the case. “Business interruption cover for infectious diseases is few and far between,” says Fabian Konopka, an expert from Funk insurance brokers in Hamburg.

That is partly due to the difficulty involved in calculating the consequences of a virus outbreak. Insurers consider a pandemic – an epidemic spanning several countries or even continents – to be an accumulation risk, i.e. a hazard that could trigger massive losses within a relatively short time and stretch insurers beyond their limits. While other accumulation events, such as hurricanes or earthquakes, are at least confined to a certain area, that is not the case for pandemics. When companies worldwide are all making claims at the same time, the principle of risk diversification no longer applies. “There is a tipping point when insurability reaches its limits – at least as far as traditional insurance products are concerned,” says Gunther Kraut, Head of Epidemic Risk Solutions at Munich Re.

Every epidemic is a potential pandemic

The coronavirus provides a rather shocking reminder of just how quickly pathogens can spread in a globally connected world. The maxim of every epidemic being a potential pandemic applies now more than ever. Sars-CoV-2, as the virus is officially known, was first discovered in Wuhan, a city with a population of several million inhabitants in central China, at the end of December. There are now confirmed cases of infection in almost 100 countries. The virus that causes the lung condition known as Covid-19 has even spread to microstates such as Andorra, Gibraltar and the Vatican.

The WHO identifies in the region of 200 virus outbreaks per year

Epidemics can quickly spread all over the globe and are liable to return at any time. The World Health Organization (WHO) identifies in the region of 200 outbreaks of viral disease every year, mainly in Africa. While in most cases they stem from known viruses, such as Sars, Ebola or dengue fever, there are also invariably some unknown pathogens involved, says Kraut: “It's not unusual for a new virus to transfer from animals to humans.” Epidemiologists have long been warning about the outbreak of a super virus. The worst pandemic the world has seen to date is the Spanish flu; it is estimated to have caused between 50 to 100 million deaths from 1918 to 1920, which equates to somewhere in the region of 3% to 5% of the world’s population at the time.

Insurers already include pandemic risk in life insurance

According to Munich Re’s Kraut, there is another reason why the insurance sector is reluctant to cover financial and business losses triggered by infectious diseases. Insurers are already exposed through their life insurance policies. If a previously healthy person dies, it is immaterial whether it is from cancer or a new infectious disease. The insurer will honour the contract. That’s why the insurance supervisory authorities regularly check when conducting stress tests that insurers can meet their liabilities in the event of a sudden increase in fatalities. “That brings many insurers as far as they can go,” says Kraut.

Insurance provides individual solutions

Specific products for industrial or commercial clients covering financial losses caused by infectious disease are invariably customised solutions. Not only are they more expensive than standard cover, they are also subject to a more rigorous risk assessment. To measure the degree of risk, insurers need an overview of the supply chain including all suppliers, especially for large companies. Moreover, the cover is also contingent: “The cover almost always includes requirements regarding emergency or business continuity management,” says Konopka of Funk brokers. As he explains, insurers want to make sure companies are well prepared for a crisis scenario – just like fire cover is subject to operational fire protection.

There is nothing new about the concept of insuring illness-induced losses. Even during previous epidemics, such as Sars, insurers offered cover through business interruption insurance (excluding property), says Konopka. But one of the reasons why these products didn’t rise beyond niche status was the low take-up by companies. “Demand for such solutions has been very low in the past.” That even applies to event cancellation cover where the premiums for supplementary protection are relatively reasonable.

Demand for insurance is often procyclical

Sars-CoV-2 may end up driving demand for this market segment: Munich Re expert Kraut has identified a growing level of risk awareness, especially among international corporations. “Time will tell how long the interest remains.” Following the volcano eruption in Iceland in 2010, for example, which had a major impact on flights in Europe over a number of days, there was an initial spike in demand for business interruption policies excluding property cover – after many companies had to scale back production due to supply issues. However, interest evaporated as quickly as the ash cloud.

Another key consideration is the insurers’ ability to bear the pandemic accumulation risk. “Risk has to be spread across multiple parties in order for a market to develop,” stresses Kraut. It could be different insurers or institutional investors that assume risk through catastrophe bonds – as they do with hurricanes. For now, the group of providers is small: “There is German and international direct and reinsurers, plus smaller, regional insurers,” says Konopka.

The coronavirus will mainly affect insurers indirectly

The indirect effects of the coronavirus crisis may well weigh heaviest on the insurance sector. If, for example, more companies become insolvent due to sales or liquidity problems, credit insurers will be hit with more defaults. They cover the financial fallout from buyer insolvency, and they are liable when a company becomes unable to pay or overindebted, regardless of the underlying cause.

The same goes for guarantee business that covers travel insurance, for example. The tourism sector is currently hit hardest by the Sars-CoV-2 virus. If the fall in bookings causes business insolvencies, claims are likely to rise as a result.

Reporters: Karsten Röbisch, Christian Siemens

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