FOOLS RUSH IN: COVID-19 AND THE INSURANCE INDUSTRY

At present, international insurers and the Lloyd's market are working very hard to look rather busy issuing general statements and advisories that detail how they are "assembling teams" and "closely monitoring guidance" and "tracking" the contagion's progress, while promising to "assess all claims in accordance …facts …policy wordings" etc., and communicating continuity and disaster response plans for their employees, as any good corporate citizen should.

Understandably, this is the most we could expect or even hope for, and I applaud them.

Each policy is complex collection of insuring agreements, definitions, exclusions and terms and conditions and no responsible, shareholder-driven organization would be fool enough to make sweeping and generalized comments on the applicability of coverage in the midst of panic, uncertainty and crisis.

So, when the world needs a fool, in the immortal words of Wham!.....Baby, I'm your Man.

Below is a quick and filthy survey of common policies and my decidedly reckless and irresponsible observations about the role they may or may not play in the insurance industry's response and fate relative to the COVID-19 outbreak.

LIFE INSURANCE AND CRITICAL ILLNESS

Life insurance policies come in all shapes and sizes, with terms and conditions tailored to target different demographic subsets of the population, and a range of budgets. Suffice it to say that some would cover lots of things and some cover relatively few.

The stark truth of the matter is that the coverage trigger for any benefit is, well, death.

Assuming a certain percentage of policy do not exclude death resulting from epidemic/pandemic outbreak, there are important socioeconomic underpinnings as regards the responsiveness of life insurance and impact on claims to the industry.

For the moment, the regions hit earliest and hardest are not characterized by high levels of insurance purchase, and that which has been purchased is typically not part of an estate planning portfolio that contemplates the replacement of loss of significant income, replenishing trust funds or buying back founder's shares.

That having been said, if a pandemic ensues to the extent that lower Manhattan, Central London or any other major urban metropolis this will obviously increase the incidence of claims and the financial burden borne by life insurers.

Meanwhile critical illness insurance is a named perils policy and the competitive product differentiation spectrum runs the gamut from a handful of 'dread diseases' to a veritable laundry list of ailments naming everything up to Hawaiian Cat Flu.

However, the real devil is in the naming and seeing as though this is a heretofore unknown strain, then it by its very nature, absent a Tardis time machine, could not have been named on any policy.

Which is to say, Critical Illness is highly unlikely to respond to a Coronavirus diagnosis.

COMMERCIAL LIABILITY

Liability Insurance pays third-parties monetary damages for property damage and/or bodily injuring arising out of the negligent acts of the insured policyholder.

Tauntingly, the standard definition of "Bodily Injury is "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time."

However, the intent and practical application of the disease element addresses only the negligent behavior of an entity as regards third party exposure to inherently dangerous things under its control which could be linked to the incidence of disease, such as a manufacturing operation that pollutes a local water supply, or the caterer at my high school cafeteria.

So…psyche!

Since the precedents of SARS, H1N1, Ebola and Zika, insurers have had adequate time to establish that Commercial Liability policies clearly do not respond to the transmission of communicable disease from one person to another, fitting each with a standard issue exclusion something along the lines of the below:

"An illness sickness or disease transmitted intentionally or unintentionally by a covered person to anyone, or any consequence resulting from that illness sickness or disease."

Of course, where there is a buck to made, certain entrepreneurial and litigious spirits will not be dampened.

One might reasonably envision a not too far-fetched scenario in the coming months and years where an opportunistic alphabet house law firm conjures up a class action on behalf of humanity against some agency or institution for not having taken sufficient steps or adequately informing the public about the risks yadda yadda …and we all know how this ends.

Insurers will pay a king's ransom on defense cost, and ten years from now subscribers to the class action who lost a loved one will get a check for $23.31 each, and the law firm will move into shiny new penthouse offices with a skybox at the local stadium.
COMMERCIAL PROPERTY INSURANCE

Property Insurance in its purest form insures first party damage to property and, seeing as though inanimate property cannot – per the last time I consulted the sex robot marketplace - contract disease, it would seem the conversation ends here, and not just because of the awkwardness.

However, an important part of the commercial property insurance world is the contingency market.

These increasingly common lines of coverage deal with things like indirect business interruption and resultant loss of income arising from events and circumstances affecting the customers, suppliers and trade channels of insureds, that have a knock-off effect on policyholders even though did not themselves sustain any direct property loss.

In the vast majority of policies, the triggers for this coverage are intrinsically linked to the primary property coverage of the insured. Any coverage response must first start with what would otherwise have been a covered property loss to the policy holder had it happened to their own property.

So, in an overly simplified example, if you have fire insurance and your supplier suffers a fire, the business interruption element responds in lockstep. Conversely, if you don't have earthquake insurance and your customers can't buy from you because of an earthquake, then the business interruption/loss of income bit remains silent.

Owing to this necessary property damage linkage, the responsiveness and impact of the coronavirus in respect of property insurance will be substantially tempered, albeit nonetheless substantial.

A minority, but nonetheless significant number of more robust and bespoke policies include a comparatively luxe coverage trigger that responds when there has been nothing more than a Declaration of Civil Authority that interrupts business, even without a property loss link.

This is more prevalent among multinational conglomerates and as such will hurt the insurance market as the diseases forces governments to isolate regions by way of quarantines and closures.

EVENT CANCELLATION INSURANCE

Several conferences, trade shows, sporting and cultural events have already been cancelled, and there is no shortage of rumour and speculation as regards the 2020 Summer Olympics in Japan, so this is highly topical and pertinent area of focus. My highly anticipated gold-medal in rhythmic gymnastics is on the line.

Event Cancellation policies are named perils and like other such products, run along a spectrum from basic to comprehensive.

At the basic end, the peril is not listed and may be specifically excluded.

At the more expensive end of things, you might be lucky enough to have purchased a policy featuring a specific clause that reads something along the lines of the following:

Infectious or contagious disease. Your customers inability to use the business premises due to restrictions imposed by a public authority following an occurrence of an infectious or contagious disease:
a. manifested by any person on the business premises; or
b. within a 5-mile radius of the business premises; and
c. which must be notified to the local authority.

All in all, relatively local application of coverage when compared to business interruption cover, but in light of present circumstances, this is the insurance equivalent of a Willy Wonka Golden Ticket to event promoters and hosts staring down staggering loss of revenues and investments.

Good luck trying to get one of those now, Charlie.

TRIP CANCELLATION INSURANCE

There are two types of trip cancellation insurance policies and two types of coverage within each.

The first is Named Perils policies respond with 100% indemnity, sometimes in excess of a modest deductible, up to a declared travel expense limit for cancellation or interruption arising out of a scheduled list of circumstances, modified of course by definitions and exclusions.

The second for is known as Cancel For Any Reason (CFAR) programs.

CFARs provide maximum flexibility to the traveler at increased premium rates, but with reduced indemnity, often maxing-out in the range of 60% of trip costs.

Both policies have travel expense reimbursement components and often, travel medical elements with features such as evacuation to somewhere were medical care can be rendered (not necessarily home on more affordable programs) and/or repatriation (all the way home!) of your mortal remains should things not go so well.

CFAR policies allow the traveler to trigger coverage for 'any reason', and would as such likely respond under the trip cancellation section, and pay a reduced indemnity as a fraction of trip expense. Seeing as though any claim would in most cases suggest cancelled travel, then the travel medical components would be idle and irrelevant.

Under Named Perils, trip cancellation insurers are disinclined to pay claims arising out of a general disinclination to travel, be it for disappointment in the forecast weather conditions, children screaming in the back of the rental car, or out of fear of contracting a potentially deadly disease in the midst of a global pandemic.

Accordingly, such policies include carefully crafted language about what does and not does not trigger coverage.

A common trigger is the "Death, Bodily Injury, Illness or compulsory quarantine" of a traveler, which sounds quite promising.

However, if you are so lucky to have this clause in your policy, you would also have to be so unlucky as to be at some ground zero hotspot before or during travel, so you may want to hold your applause until the end on this one.

You're still not covered for not wanting to go to a scary place.

Some policies address outbreaks quite specifically in the form of a carefully composed epidemic/pandemic exclusion.

Others approach things more generally via a broadly worded "known event" exclusion which precludes the policy from responding to losses arising from events or circumstances that were known or foreseeable at the time of purchase, at the place of departure or as regards the destination.

So just as one can't dial up their broker and procure home insurance while their house is actually on fire, you can't knowingly fly straight into the heart of an epidemic outbreak and expect a claims response from your trip cancellation/interruption cover, nor for the medical element.

The wider the outbreak expands; the more insurers will hang their hat on the known events exclusion as the media coverage is ubiquitous and overwhelming. In such a media storm, and few could legitimately claim ignorance.

LONG TERM OUTLOOK

As we have seen in the past with environmental degradation and cyber risk/data breach, as insurers are afforded the opportunity to compile and analyze a sufficient store of empirical data around a heretofore widely excluded peril, a standalone policy can be developed.

The routine is established, with the offering first introduced to large multinationals, after which it is made available to certain select middle market players, and the finally released to the small business sector.

Ultimately these coverages can even be marketed as an optional add-on to personal homeowner's policies.

Whether this can be applied to highly complex infectious disease epidemic/pandemic risks is remains to be seen.

Now go wash your hands. 

A Time to Listen and Be Told
VRMA Europe 2020 - Lisbon
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