Dominoes have fallen – what insurance learnings have we so far from COVID-19 business disruption?

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When this article was first posted in late February 2020 the COVID-19 outbreak was still focused on China, but its effects were menacing the globe.  At that time the concern was supply chain issues and a less than one hundred coronavirus cases distributed primarily on the east and west coasts.  As this article is reread one can consider what parts were on point, and if on point, was there anything that really could have been done to mitigate the then unimagined scope of what was to come?  Let’s revisit three months ago, think of what might be done next time, and also discuss with insurance agents how the market’s customers have changed in the ensuing time period (if at all.)  Text from the original article will be noted in italics.

 

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’.

February 27- 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?

Disaster or opportunity?  Sun Tzu notes in “Art of War”, “In the midst of chaos there is also opportunity.”  Certainly Sun Tzu’s intent was far from discussion of business and insurance, but the principle still applies- when there’s turmoil purposeful persons leverage opportunities.  My agent colleague, Brett Fulmer of Maxwell Agency Insurance Services in southern California recounted in a recent discussion, “I have been able to develop a broader presence within my connections and local industry through hosting and participating in virtual sessions.”  In essence, Brett capitalized on the new ‘Zoom environment’ to become an influencer, an action that has resulted in some unexpected business referrals.  Would this have happened outside a forced virtual new world? Perhaps, but in contrast to many who may have retracted into a safety zone that agent saw beyond just the next sale.

Bradley Flowers of Portal Insurance in the state of Alabama (and co-host of the Insurance Guys Podcast) advises his agency’s business has held its own so far during the work from home period, and he has been able to find opportunity in that virtual chaos by ‘patching up holes in the business’ since he has some unexpected management freedom by not being collocated with staff.  He didn’t say so, but one might say his staff have grown in their ability to make decisions, their initiative to serve, and through forced learning due to separation from colleagues’ input.  Perhaps the virtual model will be found to be an unexpected boon for the agency.  Ryan and Andy Mathisen founders of Glovebox, a virtual tool for agents’ and customers’ use in organizing insurance information, reiterated Bradley’s point about virtual work- many are wondering about the utility of offices and requirements thereof, not full disappearance of analog offices, but growth of remote work options based on COVID-19 environment experiences.

The 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. What of the cascading effects of supply chain disruption?

This has been proven true in more ways than can be considered.  Access to personal protective equipment is the poster child instance of this actuality- the bulk of the supply chain for PPE is housed in China, and a combination of business shutdowns there, ill-preparedness and slowness to act in most markets caused those products to be of dangerously low supply when most needed.

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.

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?  Or, in this case, an updated version?

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

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.

Hasn’t this been proven to be the COVID-19 economic disaster for every economy?  Business interruption cover was never designed for pandemics, even to the point of minimal reinsurance capacity being present for that risk.  As such a multiple month shutdown in the U.S. has caused unreimbursed trillion dollar ripples across the twenty five million or so small and medium sized businesses, local and state governments, has overwhelmed banks as they work to administer federal response programs, and even has a ripple effect with health care organizations.

Continuing, we still are uncertain of effects that will be produced from:

    • 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
    • Interest rate risk from speculation
    • Inability to travel to affected areas where management oversight is critical
    • Increase of cyber risk due to reduced attention to risk and opportunistic bad players
    • Reduced productivity due to requirements for and inefficiencies of virtual work

There were other items listed in February’s version but if you are purposeful and look back to this article you’ll see we are all too well knowing of those issues’ outcomes.

John Neal of Lloyd’s recently published an estimate of COVID-19’s estimated effects on the global insurance industry across all lines- $200 billion.  Even if the $100 billion or so of investment portfolio losses are set aside from that number the remaining projected underwriting loss of $100 billion remains an unprecedented amount for the industry.  The terrible national catastrophe years of 2017 and 2018 did not reach that level.  The unique nature of the insured losses due to COVID-19 effects will not be fully realized for years as many of the affected covers produce long-tailed claims.  Recognition of the extent of the potential claim costs will prompt significant reserve levels being  marked by carriers, which will be an anchor on profits and constriction on ready capital.

It was just a few months ago that global broking houses were eyeing the hardening commercial markets favorably in terms of rising rates and growth of available products.  Contrast that outlook now with carriers rebating premiums and global brokers pulling P&L guidance.  If a main global firm like Aon acts to reduce staff and executive suite salaries (see PC360 article here ) due to the outbreak, there is clear indication that the pandemic’s effect goes well beyond SMEs’ business interruption cover concerns.

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. 

There is no practical answer for pandemic insurance cover within the indemnity model.  Even a parallel fund such as was established by the U.S. Congress for terrorism effects (TRIA) would potentially fail under the weight of the volume of claim handling, and under the enormous gravity of trillion-dollar severity.  Claim administration of just ten percent of potential SME customers’ claims would potentially consume fifty million man hours of adjuster labor. And, since TRIA backstopping is legislated to cap at $100 billion, extending TRIA claim demands at the level of what is an average Paycheck Protection Program principal of $200,000, times 2.5 million claims and the ask of the fund becomes $500 billion, an amount that would need legislative approval.  Industry capital would be fully consumed addressing the claims, and government reimbursement would be- uncertain at that level.

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. 

The key is that global outbreaks do occur, and while perhaps not as potentially costly as COVID 19, 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.

We are three months and a lot of economic heartache separate from our initial discussion of coronavirus’ potential effects.  Three months from now it would be good to be focusing on the opportunities the industry has found in the COVID-19 chaos.

I appreciate the additional input received in preparation of the article from insurance consultant and innovator extraordinaire, Chris Carney .

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