Decease, industrial disability, temporary disability, medical expenses and medical care guarantees weigh down personal insurers considerably in terms of claim burden.
While direct insurers are struggling, reinsurers are relatively spared. With the exception of the death risk, traditional reinsurance is hardly required to come into play, being backed by the pandemic risk [4] exclusion clause, enshrined in the vast majority of treaties.
Pandemic threat and third-party liability insurance
Numerous activities entail interactions between people. It has been scientifically established that frequent contact is likely to trigger the spread of pandemics. Working in unsafe sanitary conditions endangers company personnel. We can therefore expect them to have human resources management plans in case of a crisis; otherwise, they have no choice but to suspend their activities.
Companies that expose their staff members to extravagant risks can be subject to legal action by employees, third parties, authorities and even their own shareholders.
Directors and officers liability insurance
Any company that has not properly planned for the management of the pandemic and having sustained a disproportionate financial impact compared to its competitors, may see its managers sued by the shareholders.
Employers’ liability
Absenteeism reaches record levels during a pandemic. To avoid heavy losses, an employer may require staff to return early to their workplace.
In case employees report back to duty while security measures taken by employers are found to be inadequate compared to those put in place by the competitors, they may be prosecuted for a breach of the duty to exercise due care and diligence towards staff members.
Medical errors
In the event of an epidemic, many hospital beds are needed to deal with emergencies. Unfortunately, in many countries, hospitals, which are already operating at full capacity, cannot afford to add more places. Many sick people therefore have to stay at home, hence the question: on which criteria are doctors making their decision to treat or not to treat a patient? Are these criteria the same in all hospitals? This opportunity to recover denied to a patient may well result in a legal action.
Another legal issue, the Methicillin-resistant Staphylococcus, MRSA crisis (1) has shown that in certain circumstances, the hospitals themselves spread diseases.
(1) MRSA, also known as "Staphylococcus aureus" is an infection caused by antibiotic-resistant staphylococcus.
Read also | Pandemic threat and reinsurance [5]
Pandemic threat and marine insurance
Large cruises aboard giant ships can be a source of virus spread. Asymptomatic passengers, those carrying the virus but showing no symptoms, are likely to spread the disease.
The very act of docking can lead to contamination. In such cases, the person or persons responsible for this harmful situation (travel agency, ship owner, charterer, etc.), may be legally liable.
In addition, cruises are often attracting affluent people who are therefore used to taking out insurance policies. Contamination on board could quickly turn into a major disaster for insurers.
- Late January 2020Due to two suspected COVID-19 cases, 6000 passengers out of the approximately 7000 people on board the cruise ship Costa Victoria, were stranded at the port of Civitavecchia near Rome.
- Early February 2020The Diamond Princess Cruise ship is stuck off the coast of Japan. Out of the 3 711 passengers and crewmembers, 700 people are found to be infected with the coronavirus.
- March 2020In March, COVID-19 was detected in no less than 25 cruise ships.
- Late March 2020Cruise ship Celebrity Apex is stranded at Saint Nazaire (France) with 1463 people confined following the discovery of 29 cases of COVID-19.
Pandemic threat and business interruption insurance
With regard to property damage insurance, there can be no loss of operation without prior material damage.
By means of this cover, the insurer proceeds to the compensation of the costs and charges incurred (wages, fixed costs, etc.) and that the insured is required to bear during the stoppage of his operation following a fire or machine breakdown.
Based on the terms of the contract, the amount of compensation may account for 12 to 18 months and sometimes more than the fixed costs of the insured. An operating loss after fire can only be covered by an insurer if the insured party has previously underwritten two plans:
- a fire-explosion cover,
- business interruption guarantee [6].
These two guarantees may come in two separate contracts or may be joined into a single one.
Fire insurance
It is hard to imagine that a pandemic that does not cause any material damage could be the source of a worsening fire incident. However, in the event of a pandemic, many industrial and commercial companies try to obtain compensation through this means.
In fact, if the pandemic does not cover loss within the framework of business loss, it can, however, contribute to the aggravation of the damage of the insured in the event of a fire.
In this regard, two scenarios are on the table:
- The first pertains to the lack of staff in the ranks of firefighters mobilized to help people affected by a virus. This shortage in staff of firefighting forces can be the cause of a very large fire, with the arrival of the firefighters on site having required a longer time than usual.
- Second possible case and due to confinement, the reduced number of fire prevention and fire-fighting personnel in a factory can lead to a reduction in the number and quality of inspections and overhauls of machines or building surveillance. These failures in preventive measures can be the cause of fires of higher than normal frequency and intensity.
Pandemic threat and event cancellation insurance
Many event cancellation insurance policies rule out communicable diseases.
The organizers of major sporting events, cultural festivals and/or major commercial events are particularly affected by the event cancellation guarantee.
However, event organizers do not all underwrite the same cover. In fact, guarantees and exclusions vary from one contract to another with very often a formal exclusion of any kind of viral epidemic.
Policies for cancellation of major sporting events
Most of policies for cancellation of major sporting events [7] are underwritten on the London market and in particular with Lloyd’s syndicates, a tight market with few players and a capacity of 1 to 1.5 billion USD.
With the COVID-19 crisis, this market is in complete disorder. Indeed, it is estimated that the current pandemic will lead to the withdrawal of 30 to 40% of capacity and a severe increase in premiums.
Swiss reinsurers and Munich Re have already indicated that their accounts for the first quarter of 2020 are strongly affected by COVID-19 and in particular by event cancellations.
For the first quarter of 2020, Swiss Re announces a net loss of 225 million USD [8] while at the same period of 2019 its net profit amounted to 429 million USD.
Pandemic threat and travel insurance
As part of travel insurance, policyholders are entitled to claim reimbursement of their costs if they have to cancel a trip due to their illness or that of their close family. In the event of illness abroad, this insurance scheme covers hotel and medical expenses until the day the policyholder is able to travel.
However, this coverage is very unlikely to be triggered for COVID-19, with the majority of contracts currently on the market ruling out cancellation due to a pandemic.
In fact, it all comes down to the type of underwritten contract. Some insurers may cover this risk. In this case, it is unlikely that the resulting claims would, on their own, cause solvency problems for large insurers.
The situation is different for small insurers who could then sustain heavy losses.
Pandemic threat and credit insurance
A long-term pandemic is likely to cause numerous bankruptcies, thus triggering payments by credit insurers. The latter would then respond, compensating the losses of their policyholders following a client bankruptcy, a default, a contract termination or a non-transfer of currency.
Pandemic threat and motor insurance
The decrease reported in car traffic due to travel restrictions leads to a noticeable drop in the frequency of claims. Improving insurers' claims experience could prompt policyholders to demand lower car rates for future renewals.
Some policyholders go as far as claiming a premium discount for the confinement period.