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.

(Update) One must also consider the economic (and societal) effects of event cancellations, as ripples generate widely from such changes in plans.  A recent Quartz article noted a few:

  • Mobile World Congress (attracts global tech and telecommunication companies)
  • Facebook’s Global Marketing Summit
  • Milan Furniture Fair (postponed)
  • Global Fashion Weeks (postponed or attendance reduced)
  • Chinese Grand Prix
  • Six Nations Rugby Match
  • China’s National People’s Congress, among many others- including the potential changes for the Tokyo Olympics.

Organizers and promoters need to consider how parametric options should be considered for these events- the economic fallout can be substantial, and risk planning needs to be made part of the organizing costs.  Similar concepts apply for tourist attractions, regional vacation spots, and other focii that could be affected by under-attendance.  Risk management is changing, and alternate risk vehicles are becoming more readily available.

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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4 comments

  1. […] Thursday Patrick Kelahan @insuranceeleph1, our US based Insurtech expert (a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners who also serves the insurance and Fintech world as the ‘Insurance Elephant’) wrote Dominoes fall- business disruption and risk management in the COVID 19 environment […]

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