Insurance limited for epidemics such as coronavirus
Insurance limited for epidemics such as coronavirus
04 MARCH 2020 8:36 AM

Global epidemics such as coronavirus can only be offset in very limited ways by traditional business insurance, and despite the good intentions of global organizations to change that, hoteliers and others cannot expect such providers to come to the rescue of plummeting occupancy.

GLOBAL REPORT— The spread of the coronavirus (COVID-19) outbreak is leading to significant monetary losses stemming from business interruption.

In the hotel industry, this manifests via hotel closures or partial closures, canceled events and conventions, and fewer guestrooms occupied on weekdays by business travelers and leisure guests choosing alternate destinations or deciding to stop traveling altogether.

Sources from the insurance world said that there is not much hoteliers—be they independent or part of global chains—can do to offset losses via insurance policies.

Tony Gibbs, a director and owner at Reading, England-based chartered insurance broker and financial advisor Macbeth, said if business-interruption coverage can be obtained, its scope would be “very, very limited.”

Gibbs said he thought possible recompense at its maximum end would be approximately £100,000 ($127,711), maybe approximately £250,000 ($319,277).

“What I am telling my clients is that now is a good time to have a review of their policies, but that in any event, coverage is limited,” Gibbs said.

Sources said companies should also be reviewing their procedures such as working from home, business continuity, travel and other business-related aspects.

Gibbs added it is not just loss from canceled or uncertain bookings that hoteliers need to consider, but also implications such as human resources’ issues, workers’ compensation, directors’ coverage and private-practice liability.

For hotels, the scenario is particularly difficult, he said. It is far easier for offices to devise business-continuity plans and consider homeworking, but for a hotel, obviously that is not so easy. Hotel risk is much harder to manage.

“There are insurance policies for hotels (that) provide business-interruption cover for a range of hazard events—fires, floods, death on the premises, illness or disease,” said Gordon Woo, a London-based consultant specializing in mathematical modelling of extreme risk for Risk Management Solutions.

But Woo underlined Gibbs’ point that there are limitations to this.

“For example, two (United Kingdom) confirmed coronavirus cases stayed at the StayCity hotel in York,” Woo said. “All hotel guests were offered the opportunity to check out or cancel their bookings, with refunds being offered. Assuming that the hotel had a policy covering illness on the premises, a claim could have been made to make up for the lost occupancy.”

That is fine for the hotel involved, but Woo said that indirect business interruption would not be covered.

“Nearby hotels in York might have lost customers due to the negative publicity over the two cases at the StayCity hotel,” Woo said.

Hotels or other potential claimants would most likely need to wait before a condition such as coronavirus has been declared a notifiable disease, meaning a disease that is required by law to be reported to government authorities, Gibbs said.

“There would be in that case potential for cover,” he said. “Some insurance policies already go further and state what a notifiable disease is, but if, for example, coronavirus is not on that list, then there would be little a hotelier could do.”

Gibbs said any coverage would no doubt carry a heavy premium and would either be out of a hotel or chain’s budget or, if it is not, still of limited worth.

“Another extension is if there is closure due to the decision of a local authority,” he said. “If there is denial of access, for example, then that might be a little more useful, but again you will find cover will be limited.”

The quarantine restrictions placed on 11 towns and cities in Italy could constitute one example of this, sources said.

“One way of helping a city like York to recover from a downturn in business and a fall in hotel occupancy rates would be if there were a regional business-interruption bond, which would trigger if a disaster happened,” Woo said. “The payout from such a bond would be used to provide compensation to local businesses. Such a bond has been considered for Paris a few years ago and might be considered in the future.

“A future shortfall in Chinese tourism, and lower hotel occupancy in Paris, might be covered by an insurance-linked security,” Woo added.

Little cheer so far
There have been attempts to help cover markets and businesses from losses stemming from global virus outbreaks, but any initiatives come at high expense due to the potentially very high financial exposure, sources said

The World Bank devised two such bonds, but critics have said as they trade on open markets, in the case of coronavirus the bonds’ worth inevitably falls and they become worthless, while in a period where no pandemics exist, it is only investors who benefit.

“Going back a few years, a global broker teamed up with a software company to map where the Zika virus was likely to go and price insurance accordingly, but that was aimed at large tourism concerns and airlines. The premiums were very heavy,” Gibbs said, who added he was not sure the success of that endeavor.

Meanwhile, coronavirus continues to spread around the world.

Jesper Palmqvist, area director, Asia Pacific at Hotel News Now’s parent company STR, said the potential fallout from the coronavirus remains huge.

“It’s very big. China is gone. (There are) thousands of hotels closed, (and) many others run partial floors,” Palmqvist said.

Elsewhere in the region, occupancy in Hong Kong was hovering in the low 20th percentile, Singapore was below 50% for the same metric and in Macau casinos are closed and hotels are empty.

Palmqvist said this virus outbreak is very different from the outbreak of the SARS virus in 2003 and that it would be very hard to compare those two worlds—2003 and 2020—in terms of the global travel and economic landscape.

“The best case is that it’s under control in a few months, and then confidence must come back,” Palmqvist added.

In InterContinental Hotel Groups’ full-year 2019 earnings report on 18 February, CFO Paul Edgecliffe-Johnson said the British firm has seen “a little noise in terms of insurance proceeds, business interruption on profits we’d otherwise, see, but there is no effect on growth.”

He added to offset potential business-interruption losses, savings most likely would be reinvested into the business.

“We’ve not been cutting on costs that need to be reinvested,” he added.

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