Coronavirus Will Cost Businesses Billions: Will Insurance Help?

Two years ago Munich Re, the reinsurance giant, tried to start underwriting a new kind of insurance — one that would make a company whole if its business tanked in an epidemic. For months, there were no takers.

Source: NY Times | Published on March 9, 2020

The phrase Corona virus on a banner with blurred Chinese flag on the background.

Then came the coronavirus outbreak.

“Now, quite honestly, we probably have a six-month backlog in getting quotes out,” said Christian Ryan of the risk advisory firm Marsh, which is brokering the policies in partnership with Munich Re and Metabiota, a data analytics firm.

It’s too late to buy coverage for the current outbreak — “We can’t insure a burning building,” Mr. Ryan said — but the daily drumbeat of news about the havoc wrought by the coronavirus in the highly integrated global economy has many executives focused on how they can protect themselves next time.

On Tuesday, March 3, the Organization for Economic Cooperation and Development laid out just how bad things could get: If the coronavirus continues to spread, it could cut the year’s global growth by half, to 1.5 percent for the year instead of the 2.9 percent that the Paris-based research group had forecast before the epidemic took off.

Global output was $86.5 trillion last year, so that means $1.5 trillion of economic activity could be lost to the disease, said Robert Muir-Wood, chief research officer at RMS, a California company that makes detailed forecasts of the effects of catastrophes like hurricanes, wildfires and earthquakes.

“The only thing we’ve ever had which was bigger than that was the banking crisis,” Mr. Muir-Wood said, referring to the 2008 financial crisis, when the credit markets seized up and governments had to bail out banks and other institutions.

“This is likely a one-in-a-100-year event that we have to live through, and there’s still quite a lot ahead of us,” he said.

Many businesses have insurance policies that are meant to kick in when disaster strikes. But few of those policies will cover losses incurred because of the outbreak.

Companies typically buy a kind of coverage known as business interruption insurance as part of their property policies, which pays cash to make up for lost revenue when a business has to halt operations unexpectedly. A close relative, contingent business interruption insurance, kicks in when the shutdown is at a supplier of the insured company.

At first glance, those might seem perfect for the current epidemic, which has caused quarantines that shut down factories in China, severed links in supply chains and disrupted business activity for hundreds of companies from Microsoft to Marriott. But those policies almost always cite “direct physical loss or damage” as a requirement to get a payment.

Quarantines and travel bans can make it just as impossible for workers to do their jobs as destruction from a fire, flood or earthquake, but do not cause the physical damage to workplaces that is necessary to trigger successful business interruption claims.

That means companies will have to absorb much of the losses themselves, either directly or with the money that very large companies often set aside in special self-insurance reserves.

Business interruption insurance policies were more permissive in the past. But after other viral epidemics — such as SARS in 2003, Ebola in West Africa starting in 2014 and Zika, most recently in 2015 — insurance companies realized that business-interruption claims could become unwieldy if they covered shutdowns tied to outbreaks of disease.

Since then, insurers have taken steps to exclude epidemics — even as companies’ supply chains have become more complicated, and widespread business and recreational travel has greatly increased the potential for contagion to spread around the world.

“The insurance markets are not going to be freaked out” by the epidemic, Mr. Muir-Wood said. “Insurers are not viewing it as being up there with Hurricane Katrina.” That 2005 disaster broke all records for the industry, with damage covered by insurance of more than $40 billion in six states, not counting payouts by the National Flood Insurance Program, which needed a taxpayer bailout to keep going.

With the coronavirus slowing manufacturers that can’t get key components, causing cancellations by airlines and hotels and reducing foot traffic to retailers, the losses from the outbreak will probably be much larger — but less likely to be insured.

Even contingent business interruption insurance, which handles claims for disruptions from a policyholder’s suppliers, probably won’t cover virus-related losses.

For example, after severe flooding in Thailand left whole industrial parks underwater in 2011, contingent business interruption policies paid out to Japanese auto plants that couldn’t get components out of the flood zone. But they could point to the physical damage of the floods.

Some insurers do agree to pay decontamination costs after an outbreak, but they tightly limit the amounts.

“If you have an employee who has the coronavirus, they’ll bring in a special decontamination crew, and there could be a $250,000 to $500,000 payment for this,” said Mr. Ryan, the head of Marsh’s hospitality, sports and gaming business in the United States. “They’ll have a policy stating, ‘We’ll pay up to $500,000,’ not millions and millions of dollars.”

Analysts said they expected a storm of litigation in the coming months, as companies begin to tally their losses and lawyers for insured companies look for ways to get around the limits and exclusions. One possibility: arguing that an infection had worked its way into a building’s ductwork, constituting “physical loss and damage” to the workplace.

Mr. Ryan said the policies his firm designed in partnership with Munich Re were intended to be straightforward and avoid months of wrangling over those kinds of issues.

Companies could pick coverage that would pay when the deaths from an epidemic passed a predetermined threshold, or coverage that would kick in when a government body — anywhere in the world — ordered a shutdown or travel ban. The policies are intended as custom contracts, so the company would choose according to its own risks.

The point would be to trigger the payments quickly, without court battles, Mr. Ryan said. His father was running hotels in Brazil when the Zika virus struck, and Mr. Ryan watched him struggle to stay afloat when tourism dried up. The cash squeeze lasted longer than the outbreak.

“In hospitality,” he said, “your business doesn’t rebound in a day.”