January 28, 2020

COVID-19 Insurance: Epidemic or pandemic?

As the reported cases of the coronavirus continue to mount, with more than 106 deaths and almost 3,000 cases confirmed and a further 5,700 suspected cases in China at the present time, it is unsurprising that the label "pandemic" has again been raised.

The unfortunate coincidence of a virulent infection surfacing at the very time when much of the Chinese population is on the move both nationally and internationally due to the Chinese New Year celebrations has led to cases being reported in locations across the world. It is thought to be only a matter of time before the first UK case is identified. Concerns are mounting as experts suggest that the virus is contagious before symptoms manifest themselves, although the precise risk period is unclear (thought to be between 1-14 days). This is reported as a differentiating factor between the coronavirus and SARs as the latter did not spread prior to symptoms. However, more positively coronavirus is stated to be less deadly than SARs, with a good number of cases being a mild strain of the virus.

Global disruption

Whilst earlier last week the World Health Organisation concluded that the virus did not represent a global health emergency, but rather a national health emergency for China, this decision remains under constant review and a party of WHO officials have travelled to China for talks with the government regarding the precautions being taken.

It is well publicised that Wuhan, the centre of the outbreak, has been effectively quarantined. Other cities have had transport links severed, including inter-city travel to and from Beijing. Tourist sites have been closed and domestic and international tours of Beijing have been suspended. Hong Kong too has declared an emergency.

There are always possible insurance consequences from such situations. Firstly foreign travellers to the impacted areas in China are likely to have travel plans disrupted, and with US and French citizens being evacuated from Wuhan, it is possible that travel insurance policies may see a spike in claims as individuals try to leave, as well as potentially large medical expenses bills should they fall ill on their journey home.

Insurance implications for businesses

Further, and potentially more financially significant, business insurance could be impacted in a range of ways. Airlines and airport authorities have a heavy burden to ensure appropriate precautions are being taken prior to and during travel. Potential liability claims can be foreseen if there is a lack of care taken in the devising or implementing of screening plans. The medical profession too are at risk where incorrect diagnosis is made.

As is often the case, should the virus seriously impact a European or American city the financial consequences from an insurance perspective would increase dramatically. For now, closures of Starbucks, KFC and Pizza Hut in Chinese cities may not generate large insurance losses, but the potential for business interruption (particularly non-property damage business interruption) and financial loss (often insured as an additional head on global programmes) is significant if the crisis continues to grow. It is unclear whether local carriers could seek to aggregate all coronavirus related claims into a single event or series of events, which could result in reinsurance losses.

Insurance coverage for closures of entertainment venues (e.g. Disneyland in Shanghai which closed its doors on 24 January 2020) or cancellation of events (e.g. lunar celebrations in Beijing) would likely be replicated across the impacted areas. Coverage issues will need to be examined regarding the true cause of any cancellations or closures, as well as the interrelationship between disinclination to travel and a genuine health risk.

It is unclear how long transport links within China will be suspended but Mongolia has suspended its public schools for more than a month. If the disease continues to cause disruption for that period of time, it is likely that supply chains for a whole range of businesses would begin to be threatened. Given how many of the world's industries rely upon components manufactured in China; this is a real consideration for insurers of manufacturing businesses.

For now the world is watching and waiting to see how the crisis unfolds, insurers would be well advised to review their exposures.