The spread of Zika in 2016 has once again
brought to worldwide attention the threat posed by pandemics and infectious
diseases.
The World Bank describes a pandemic as “a
global disease outbreak that represents a top global catastrophic risk.” Outbreaks of infectious disease have occurred
regularly throughout history – Ebola, Avian Flu, SARS are just some recent
examples - and market consensus is that a pandemic is inevitable. According to the World Bank, there is a “high probability that the world will
experience a severe outbreak in the next 10 to 15 years that could destabilize
societies and economies”. Despite
advances in medicine and communication, the interconnectedness of international
trade and travel in today’s globalised world, plus a larger (and more
urbanised) population, means that pandemics spread more quickly and will affect
more people.
From a risk point of view, with their large
impacts and low probability of occurrence, pandemics are catastrophe scenarios
and, given the degree of their disruptive potential, one of the most important
issues for the insurance industry.
In addition to human costs in terms of health
and life, pandemics result in significant financial costs as a result of their
associated economic and societal impact, the secondary impacts including disruption
from security threats and civil commotion. The spread of an infectious disease increases both the cost of
containing it and the social and economic damage sustained, and the timeliness
and effectiveness of the response of international groups and governments is
therefore a crucial variable. According
to the World Bank, the annual global cost of moderately severe to severe
pandemics is around USD 570 billion (0.7 of global GDP), and the cost of a
severe pandemic like the 1918 Spanish flu could be as much as 5% of global GDP
– most of the losses predicted to be those caused by resulting economic factors. Resulting losses from SARS and Ebola went
into billions of dollars in the Asia Pacific region and West Africa respectively,
and Zika is forecast to cost billions to Latin America and the Caribbean alone.
Due to the various impacts of a pandemic,
(re)insurers may face claims across various lines.
As well as travel, health and life policies, (re)insurers
may face exposures under liability policies (including employers’ liability)
for alleged negligent exposure to disease. Whether the cover will respond will depend on the specific situation and
policy wording, and the operations of any exclusions, for example, for Expected
or Intended injuries, Pollution and Bacteria.
An outbreak will also affect a company’s
operations and revenues, for example, if it is required to temporarily cease
operations partially or completely due to pandemic-related issues. During the Ebola outbreak, in addition to the
voluntary evacuation of employees, curfews were imposed in some countries, resulting
in the cessation of operations at some sites, closure of ports and borders and disruption
of global supply chains; (re)insureds particularly affected were those with
business or supply operations in West Africa, particularly in the mining,
energy or travel sectors. Claims may be
brought for business interruption and/or contingent business interruption. BI (and CBI) is one of the most significant
risks faced by a company generally, heightened by the increasing
interconnectivity of global supply chains and the nature of modern production
processes; in the event of a pandemic, the ‘just in time’ model of many
businesses may cause supply shortages thus exacerbating the damage.
However, a standard BI policy would only be triggered
after the policyholder has experienced a direct physical loss or damage to insured
property; it would not automatically be triggered if an organization suffered
loss of income as a result of, for example, Ebola. The general market view is that disease is
unlikely to constitute physical damage to property and therefore BI losses
cannot automatically result. As with any
policy, everything depends on the wording and circumstances of the specific
case, for example: whether contamination is considered a direct physical loss
of the premises; whether BI coverage may extend to temporary closures due to
“dependent properties,” such as a major supplier, or prohibited access by civil
authorities to the insured’s premises due to a direct physical loss of another
property.
BI policy extensions such as Loss of
Attraction, Denial of Access and Suppliers/Customers may respond but are
subject to sublimits and the terms and conditions of the policy in question. Similarly, extensions of cover for Infectious
Diseases, which are sometimes included within a standard BI policy to cover BI
losses attributable to the outbreak of diseases, would again be subject to the
wording and conditions that apply - for example, if the wording is based on
“notifiable human diseases”, cover will not automatically apply as the list of
notifiable diseases of public health bodies will be jurisdiction-specific, and such
cover may also be subject to orders of local civil authorities.
Re(insureds) could therefore face gaps in
coverage for potentially huge costs in situations where there is no physical
damage to property. There may be certain
circumstances in which property may be found to be damaged as a result of
disease, for example if necessary decontamination measures are destructive, or
where more extensive property damage occurs as a result of the secondary impact
of a pandemic, such as strains on the emergency services or shortage of
personnel to carry out the necessary repairs (although exclusions applicable to
secondary impacts, for example for civil commotion, will also need to be
considered). Should a pandemic result in
severe financial losses as predicted, it is likely that there will be increase
in policyholders looking for ‘deep pockets’ and advancing wider interpretations
of policy language.
However, pandemics are just one example of BI
losses triggered by non-physical damage events that businesses are increasingly
facing, and specific cover for pandemic-related BI exposures, or “non-damage”
BI polices, is available.
Pandemics are inevitable. (Re)insurers should assess their potential
exposure and, as always, review their own policy wordings. While it may be that specific exclusions are
written into policies (as was the case for many UK and US insurers in the wake
of Ebola), (re)insurers also have the opportunity to offer bespoke products to
meet the increasing need of companies for non-physical damage BI scenarios and
the other multitude of risks that pandemics present.
Posted by Deepa Sutherland
