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The coronavirus is crushing business. Could insurance lessen the blow?

The coronavirus is crushing business. Could insurance lessen the blow?

When the coronavirus outbreak started picking up speed in January, multinational corporations were quick to institute employee travel bans and temporarily shutter offices in China, where the outbreak began.

Now, weeks into a global crisis that has sickened over 80,000 people and killed 2,700, companies are looking beyond day-to-day coping mechanisms to protect themselves as the financial toll of the outbreak starts to become apparent.

A big question they’re asking is whether insurance could help them foot the bill for expenses related to the outbreak. The answer, like so many aspects of the coronavirus, isn’t totally clear-cut.

Business, interrupted

Many companies have business interruption insurance, according to Renee McGowan, chief executive officer in Asia for Mercer, the global human resources consulting firm, but “most often it relates to property” and the losses incurred via damage from catastrophic events like tornadoes, earthquakes, and fires—not epidemics.

In fact, historically there has been a “widespread exclusion of infectious diseases” from property and casualty insurance policies—which includes business interruption—by insurers in the U.S. and Europe, said Frank Yuen, senior analyst at Moody’s Investors Service in Hong Kong.

Retail In Tsim Sha Tsui As Hong Kong Economy Heads for First Back-to-Back Annual Decline
A shopper reads a closure sign displayed on a Geox store in Hong Kong on Feb. 18, 2020, as the city saw businesses temporarily shut down amid the coronavirus spread.
Justin Chin/Bloomberg via Getty Images

If policies don’t explicitly exclude epidemics, there’s some wiggle room on whether losses from coronavirus-related interruptions are covered by policies; those determinations are made during the claims process.

Therefore, business interruption claims might increase because of the coronavirus, Yuen said, but the direct financial impact to insurers will be “manageable.”

Allianz Global Corporate & Speciality SE has received “very few claims” relating to the coronavirus so far, said Mark Mitchell, Asia-Pacific CEO. The insurer’s standard policy for business interruption is triggered by physical property damage, Mitchell said, so plant closures caused by the outbreak, for example, would not be covered.

AGCS expects “minor claims exposures,” and it estimates, based on previous outbreaks like SARS and Zika, that its losses will not exceed “a low double-digit million Euro amount.”

Mitchell added that contingency policies generally do not cover event cancellations caused by an outbreak of communicable disease, unless a government authority orders the cancellation.

A spokesperson for another provider, Zurich Insurance Group, said it is “still too early…to discuss any potential claims related to the coronavirus.”

“[The coronavirus] could impact the business interruption component of some property policies,” the Zurich spokesperson said, but like AGCS, Zurich’s policies tend to “require physical property damage to trigger business interruption. Based on what we know today, we don’t expect this to have a significant financial impact to the company.”

Despite the difficulty, it’s easy to see why firms might be looking to offset the cost of the coronavirus outbreak.

SARS, a comparable coronavirus that broke out in China in 2002, hit China’s economy hard in the short term, but it recovered quickly, and the global impact was small. In 2000, China accounted for 1.2% of global trade and 3% of world GDP growth. China now accounts for nearly one-third of world GDP growth and made up 33% of global trade in 2018, the Wall Street Journal reported, using data from the World Bank. Given China’s outsize role in the global economy and consumer marketplace, some firms have already issued warnings about how their financial performance will suffer amid the outbreak.

McGowan said that today’s “global connectivity”—increased cross-border trade, travel, and supply chain reliance—makes the current outbreak “different to what we’ve experienced in the past.”

For businesses and insurers alike, there’s no roadmap.

“Even SARS did not have very long-term disruptions to business, so there are very few studies in terms of how much [an epidemic] leads to business disruption claims.” Yuen said.

An “act of God”

Businesses looking for another source of protection may turn to more obscure “force majeure” clauses that exempt companies from being penalized for neglected contractual obligations due to events outside their control, like wars and natural disasters.

But like business interruption insurance, making the case that force majeure clauses apply to epidemics might be a stretch. It’s uncommon for such clauses in contracts to “expressly list a public health emergency,” according to a report by global risk consulting firm Control Risks.

Instead, the clauses typically apply to “acts of God” like earthquakes, floods, and war. A business could argue that an unexpected disease outbreak falls into this category but would have to make the legal case that the outbreak made it impossible for them to fulfill their contract.

Daily Life In Shanghai Amid Coronavirus Outbreak
A man and a child walk by a closed Apple Inc. store on Feb. 20, 2020 in Shanghai, China. Fearing the virus outbreak, Apple closed all stores in China on Feb. 1; many have since reopened.
Yifan Ding/Getty Images

The government-backed trade agency in China that issues force majeure certificates, which indicate a business cannot fulfill contract agreements because of disruptive events outside its control, issued 3,000 certificates in the first three weeks of February.

The certificates went to domestic Chinese companies and Chinese subsidiaries of multinational like a car parts manufacturer in Zhejiang province and China National Offshore Oil Corp (CNOOC), one of the largest oil companies in China.

But the certificates don’t guarantee a force majeure claim will succeed.

The Control Risks report said companies should be “cautious” invoking it because of the coronavirus, since even with a government-issued certificate, the other party can dispute the claim.

CNOOC, for instance, said the outbreak has hampered its ability to accept contractual shipments from several oil companies. Two of the oil companies, Total SA and Royal Dutch Shell, rejected the claim, meaning they do not accept that the outbreak is preventing CNOOC from fulfilling its agreements. Total and Shell may seek compensation if CNOOC does not ultimately accept the shipments.

World Bank bond

As the coronavirus epidemic nears pandemic status, additional resources could emerge to help countries and businesses alike.

The World Health Organization has issued mixed messages on whether it will ultimately declare the coronavirus a pandemic. The World Bank, meanwhile, has its own set of criteria that will trigger a relatively new tool: its pandemic-catastrophe bonds.

Launched in 2017 in response to the devastating Ebola outbreak of 2014–2016, the bonds trigger when an outbreak passes specific thresholds for size, growth rate, and cross-border spread. They will release funds when deaths from a disease surpass 250 in a first country and 20 in a second. As of Thursday, deaths totaled nearly 2,800 in China, and Iran, the country with the second-highest toll, had reported 19.

The bonds’ payout is designed to “help the world’s poorest countries respond” to a pandemic, according to the World Bank website. Once the bonds’ money is available, eligible countries must submit a request for funds.

China, where the majority of coronavirus cases are occurring, wouldn’t qualify for funds in the event of a payout because the assistance is intended for poorer countries, and China’s gross national income per capita is above the cut-off.

Preparing for a pandemic

The World Bank scheme was set up to help governments in the event of a pandemic, but insurers are starting to look into pandemic insurance policies too, according to the German reinsurer Munich Re, which partnered with the World Bank to launch the bank’s pandemic bond in 2017.

“[T]he insurance industry has tended to keep away from epidemic risks in the past,” Munich Re notes on its website, but since 2016’s Ebola and Zika outbreaks, “it is now looking at ways to develop valuable solutions for this business field[.]”

The growing number of epidemics prompted Munich Re to launch an epidemic risk insurance policy in 2016 and partner with insurance broker Marsh, a sister company of Mercer, to expand into pandemic-specific insurance that covers both pandemics and epidemics.

AGCS, for its part, does not provide risk insurance specifically for epidemics or pandemics, and spokesperson said the company’s policies related to outbreaks do not differentiate between the two.

“Historically, it’s been a type of insurance that is fairly rare,” McGowan said of pandemic insurance. Indeed, pandemics themselves are rare. The most recent one—the only one so far this century—was the swine flu in 2009. If coronavirus goes that route, it could cost the global GDP $1 trillion, according to Oxford Economics.

Despite that estimate, “it’s very hard to really gauge the impact [of pandemics] on a business,” in part because of inadequate historical data, said Yuen. So if insurers sell pandemic coverage, they’re doing so without reliable data, meaning they charge high premiums to account for the unknowns.

The coronavirus outbreak, however, has the potential to change the existing market in that it could provide more data for future policies.

“What might be interesting is the uptick we may see after [the coronavirus outbreak] in companies who are specifically looking for more pandemic insurance coverage,” McGowan said.

At this point in the outbreak, though, companies that do not already have pandemic insurance will find it difficult, if not impossible, to obtain. As McGowan put it, “Effectively you’re trying to insure the house when it’s already burning.”

More must-read stories from Fortune:

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—China’s high smoking rate may be exacerbating the coronavirus outbreak
—In China, oil won’t be the only energy sector battered by the coronavirus
Coronavirus misinformation is fueled by government mistrust in China
—Coronavirus may be the straw that breaks the back of oil fracking

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