Author: VINAY KAMBLE, The New India Assurance Co Ltd – Osaka
World Health Organization declared COVID-19 as a public health emergency of international concern (PHEIC) on January 30, 2020. At that time, 98 cases of coronavirus infection in 18 countries and no deaths outside China was reported. By the time everyone realized the real threat of coronavirus, it had embraced the entire world and there was hardly any country left which was not affected by this pandemic.
Now, after one year has passed, WHO timeline shows that, as on January 30, 2021, there are 101.40 million people affected by this virus with deaths over 2.19 million. This number is increasing on every passing day though the vaccine is rolled out in major countries.
Covid-19 is not only a health problem but more of a socio-economic crisis around the globe. It has upset the cycle of the economy for more than a year. As per the World Bank Report, it is projected that the economic turmoil caused by this pandemic will push the world economy in the deepest recession since World War II. The pandemic might have pushed about 100 million more people into extreme poverty in 2020. The countries are facing unprecedented challenges due to health, social and economic impacts of the pandemic. To contain the virus’s spread almost all the countries have implemented prolonged nationwide lockdowns, ban on international travel and social distancing. These measures resulted in the disruption of global markets and value supply chains. PwC’s Covid-19 Pulse Survey shows that the top three concerns in the wake of covid-19 crisis are reduced consumption, financial impact and reduced workforce productivity. There is a drastic reduction in demand in the market, resulting in the slowdown of business transactions, which has negatively affected the financial growth in all sectors. The GDP of all major countries have contracted during 2020, and this trend is likely to continue in 2021 with a minor recovery.
The coronavirus pandemic has put significant pressure on insurance companies. Basically, the insurance industry is sought to protect a country’s people, assets and businesses. Insurance is the way of transfer of risk. The aim and objective of the insurance service is to protect the owner from financial losses that he suffers for the risks that he has taken. The basis of insurance is sharing of losses of a few amongst many. Insurance provides financial stability and security to both individuals and organizations by this distribution of losses of a few among many by building up a fund over a period of time. The Insurance industry is prepared for catastrophic losses and natural calamities. However, the complex nature of covid-19 pandemic has affected many business lines where there is insurance coverage.
One of the covers available under non-life insurance is Business Interruption (BI) Policy. It is also known as Loss of Profit (LOP) Policy. Generally, this insurance is available under the basic Fire Policy with an extended cover. It covers the loss of revenue in case the business is affected due to any of the risk covered under the primary policy. The main Fire Policy covers the perils such as Fire, Flood, Earthquake, Tsunami or any natural calamities. In case of happening of any of the perils covered, if the revenue of the business is affected, then it is compensated provided the insured has opted for business interruption cover. The standard BI/LOP insurance excludes pandemic risk unless otherwise expressly included.
The pricing of risk for pandemic cover is crucial for insurance companies and reinsurers. The historical data about the catastrophic losses, natural calamities and even for terrorism cover is available for actuarial calculations for pricing of risk. The actuarial data for pricing is not available for pandemic cover, so it is challenging for the insurance companies for pricing the pandemic risk. Secondly, the pandemic risk is much wider than any catastrophic losses. For example, in case of an earthquake or heavy floods or any similar natural calamities, the impact of such incidents is limited to a few countries or one country or one city. Further, this impact remains for a limited period. The impact of catastrophic events cannot be compared with the impact of the pandemic as we are experiencing how COVID-19 has crushed the world economy and businesses at large, including human lives. Therefore, pandemic insurance policies have huge premiums, and many insured do not opt for such policies.
Everyone is aware that, the Wimbledon tournament could not be held in 2020 due to spread of COVID-19. The tournament was cancelled for the first time after World War II. The organizers of the Wimbledon tennis tournament were taking pandemic insurance cover for last 17 years after the outbreak of SARS in 2003. They were paying a premium of about $2 million per year. Now it is reported that the organizers have received a claim of $141 million against a premium of $34 million paid by them over the last 17 years. At least they could able to recover their losses to some extent as the organizers were predictive enough to insure itself against a worldwide pandemic.
In the case of Tokyo Olympics 2020, we all know that it was postponed to 2021 due to outbreak of COVID-19. Now once again the cases are soaring worldwide, and as much of Japan is also under a state of emergency, the possibility of 2021 Tokyo Olympics is in jeopardy. If the games are cancelled, insurers may have to face a loss of about $2~3 billion. The analysts have estimated that the Tokyo Olympics is insured for approximately $2 billion, plus further $600 million for hospitality. According to Reuters, if the Tokyo Olympic games are cancelled, the payouts are likely to be much higher than those made for postponement. Cancellation losses will come from multiple sources such as from the IOC, local organizing committee, broadcasters, sponsors, professional sports teams and many other organizations involved in the game.
We are in the midst of the pandemic. The fight against coronavirus has impacted all the industries to a greater extent and that too at a faster pace than any one of the predicted trends. The world economy is going through a very unprecedented situation. The concentrated efforts by government resources and support from local authorities, including the industries and welfare organizations are needed for the revival of economy and safety of people. Needless to mention that the wholeheartedly support from each individual with scientific temperament is the need of the hour. Together we can overcome this challenging situation. It is said that “Storms won’t last forever, and the sun will always shine again.” We hope things will improve in the coming days and we can lead our normal lives once again.
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References: –
World Health Organization: https://www.who.int
The World Bank Annual Report, 2020
PwC India (June 2020): https://www.pwc.in/assets/pdfs/services/crisis-management/covid-19/covid-19-impact-on-the-indian-insurance-industry.pdf
Forbes Report: https://www.forbes.com/sites/isabeltogoh/2020/04/09/report-wimbledons-organizers-set-for-a-141-million-payout-after-taking-out-pandemic-insurance/?sh=319e067c29f6
Insurance Business UK: https://www.insurancebusinessmag.com/uk/news/breaking-news/insurers-facing-record-loss-if-2021-tokyo-olympics-cancelled-244759.aspx?utm_source=GA&utm_medium=20210128&utm_campaign=IBUKW-MorningBriefing-20210128&utm_content=D2A48403-9408-4E65-87B0-9B8F1ABB5CD9&tu=D2A48403-9408-4E65-87B0-9B8F1ABB5CD9
Insurance Journal: https://www.insurancejournal.com/
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