Coronavirus Causes Global Business Upheaval

This post first appeared on Risk Management Magazine. Read the original article.

In Allianz’s Risk Barometer 2020, 17 years
after the SARS outbreak, risk professionals ranked pandemics 17th on their list
of top global risks for the year. Business interruption, including supply chain
disruption, ranked second. By the end of the first quarter, countless companies
found themselves squarely at the intersection of these threats, as the novel
coronavirus COVID-19 spread into a global pandemic, leaving worldwide chaos in
its wake.

COVID-19 has quickly taken a dramatic toll on the global
economy. Around the world, markets have grown extremely volatile, leaving
companies and consumers alike acutely uncertain. In the United States, the
Federal Reserve slashed interest rates in an unexpected emergency cut for the
first time since 2008, attempting to allay some investor concerns, instead
sending stocks and bonds tumbling further amid recognition of the potential
widespread vulnerability. On March 9, the stock market had its single worst day
since the 2008 financial crisis, quickly surpassed by another plunge on March
16, in which the Dow Jones Industrial Average dropped more than 12%—its
third-worst day ever. With factories shuttered, oil consumption also decreased,
and falling demand set off a March price war between Russia and Saudi Arabia.
In a single day, prices fell 25% to the lowest point in over 20 years, showing
no sign of imminent rebound as both countries instead expressed plans to
increase output to remain competitive.

Businesses are increasingly facing existential risks from
volatility in the global economy, and on an individual level, they are
confronting business interruption and disruption up and down the supply chain, demonstrating
the extent of interdependencies in modern business and the risks of
overdependence on key suppliers or regions. Strict quarantines in key
manufacturing hubs began making a significant dent in the global supply chain
in January, particularly hitting the manufacturing, automotive, oil/gas, and
consumer products industries. Many mid-sized companies that are struggling to
resume operations in China, for example, manufacture component parts, causing
an outsized impact on even the largest companies. Companies that do resume
operations face longtail interruption the longer it takes to ramp back up.

Global Supply Chain and Business Interruption

In a Gartner survey in early March, 56% of the 1,500
respondents rated themselves as somewhat prepared for the impact of the
coronavirus, but just 12% said their business was “highly prepared” and 11%
admitted they were either relatively or very unprepared. “Just 2% of
respondents believe their business can continue as normal, highlighting the
huge range of businesses that could be affected by the outbreak,” Gartner
reported. “Twenty-four percent of respondents expect little disruption, while
the majority expect business to continue at a reduced pace (57%), to be
severely restricted (16%) or to be discontinued altogether (1%).”

According to Suki Basi, CEO of risk modeling firm the
Russell Group, “What we are seeing in our analysis is that, for corporates,
‘the ground zero’ of the coronavirus outbreak is supply chain disruption, as
all companies are impacted in one way or another from a slowdown in the Chinese

Even relatively early in the outbreak, companies began
bracing stakeholders for material impacts on business. MarketWatch analysts
found the word “coronavirus” in 38% of transcripts from earnings calls among
the S&P 500 between January 1 and February 13.

Indeed, in the time since, business interruption and lack of
business have begun dramatically impacting companies across a wide swath of
industries. A week before shutdowns began across the United States, the
National Retail Federation reported on March 9 that 40% of their members had
experienced disruptions and 26% expected to see them. While most of its
locations had reopened, Starbucks said in March that January closures in China
alone would cause a notable hit to second-quarter earnings, reducing same-store
sales by 50% and cutting revenue by up to $430 million.

Both supply chains and consumer demand have impacted the
tech and consumer products industries. For example, Apple began warning
shareholders in February that disruption and a slower-than-expected transition
back to business among component manufacturers and producers of consumer goods
could reduce worldwide supply of consumer electronics, including iPhones.

The rapid spread of the pandemic has also ravaged the travel
industry. After passengers on multiple Princess Cruises suffered coronavirus
outbreaks and quarantines, shares in parent company Carnival Corp. plunged
almost 50%, and companies across the cruise industry saw both share prices and
bookings plummet by more than 35%, year over year. In early March, the
International Air Transport Association estimated airline losses could total up
to $113 billion, and that was before President Trump restricted travel between
the U.S. and Europe, which could result in the cancellation of another 7,000
flights, according to flight data company OAG.

In an effort to contain the pandemic, countries enacted
widespread shutdowns and quarantines, and worldwide exposure to claims for
insurers and reinsurers increased as countless events were cancelled and
businesses closed. Fitch Ratings warned that insurance companies will be
especially vulnerable in the coming months both directly via a potential spike
in claims and indirectly due to market vulnerability. Moody’s analysts
similarly noted, “An economic slowdown triggered by the outbreak will crimp
business volumes for insurers and also lead to higher claims for certain types
of insurance, including trade credit and event cancellation insurance.”

Insurance Implications

Few insurers offer commercially available products to
specifically cover pandemic risks. Indeed, Fitch Ratings noted in mid-March
that the nature of insured commercial exposures and restrictive policy language
adopted in the wake of the SARS outbreak would likely help limit the impact of
COVID-19 on U.S. property/casualty insurers. At the time, the firm did not
believe carriers would be exposed to enough claims from the pandemic
itself  to cause material impact on
financial results. As Marsh explained in the report Outbreaks, Epidemics,
and Pandemics: Preparedness and Response Strategies
, “Under standard
property policies, insured physical damage is necessary to trigger a covered
loss. If the novel coronavirus were to manifest at an insured’s premises,
through people becoming ill, insurers could contend that contamination is not
physical damage and also may maintain that possible contamination, proximity to
other contaminated premises, or fear on the part of the public do not amount to
physical damage. Property forms also typically contain ‘contamination’
exclusions that insurers may seek to invoke.”

Some insurers have started to see claims come in, though
with losses still rapidly mounting, many businesses have simply begun issuing
first notice in advance of claims. “Allianz Global Corporate and Specialty
currently has received some initial claims notifications from companies around
the globe,” according to a statement from the insurer, noting approximately 20
claims had been filed as of March 9. “Most of these claims have been notified under
business interruption extensions of property policies. Additionally, we are
seeing first notifications of event contingency claims. Loss investigation has
started; it is currently being examined whether coverage for communicable
disease exists in the respective wordings.” Allianz would not yet estimate any
financial losses, given the continuing and evolving situation.

While many business interruption policies may not cover—or
outright exclude—pandemics, some will likely be triggered by the continuing widespread
supply chain disruption. Additionally, some companies with more manuscripted
policies or with alternative risk transfer programs such as captives may have
secured coverage for business disruption or loss of customers or revenue.
Allianz’s Alternative Risk Transfer team reported a notable increase in
inquiries from corporate clients about such products for pandemic risks.

Other specialized coverage may also kick in. Contract
frustration insurance, for example, may offer some relief for those that have
purchased it. “Countries affected by the spread of infectious disease could see
ancillary economic effects, including employee absences or closures of major
ports. This could increase the risk that businesses in these countries cancel
contracts with or default on payments or deliveries to their foreign
counterparties,” Marsh explained. “Such policies can be designed to cover
nonpayment, non-delivery or contract cancellation for any reason, including the
potential economic effects of an outbreak.”

According to Willis Towers Watson, trade disruption
insurance may offer some relief for companies suffering supply chain
interruptions, such as losses related to government-mandated emergency closure
of ports and transportation centers, quarantine, confiscation or seizure of a
product in transit, or embargo on potentially contaminated product. Unlike
standard business interruption coverage under marine cargo or property forms,
the firm noted trade disruption insurance does not require “direct physical
loss to goods or their conveyances.”

Companies that cannot fulfill contracts as a result of
supply chain disruption should be looking at force majeure, or “act of
God,” provisions, which may trigger some coverage for expenses. According to
Neil Thomas, head of claims for Asia at Willis Towers Watson, “Clauses and
jurisdictions will differ in the consideration and treatment of the situation,
but the China Council for Promotion of International Trade is issuing force
majeure certificates to Chinese companies recognizing the outbreak as a
triggering event, which also appears to be the position of the National
People’s Congress.”

Key Roles for Risk Professionals

Looking ahead, risk professionals may need to consider their
strategies to position corporate risk for renewals, which could prove
especially critical in placing risk amid such volatility. “The longer the
period of outbreak, the more likely a pandemic would be active during an
insurance buyer’s renewal time,” Willis Towers Watson advised. “It is important
to position your risk strategically with underwriters and be aware of changing
market conditions or exclusions that arise as a result of the outbreak.”

“Risk managers should stay aware of the global situation,
monitor health advisories from world health organizations and, most
importantly, maintain a dynamic business continuity model that addresses the
concerns and wellbeing of the organization’s employees as well its physical and
financial assets,” the firm added. “These are powerful weapons against
potentially catastrophic consequences.”

As the pandemic and resulting interruption impact businesses
worldwide, risk professionals’ past work will come under additional review as
crisis response and business continuity plans are put to the test. Risk
professionals can expect scrutiny of their preparation and response, from
providing for their employees and communicating with key stakeholders to having
strong response procedures and enterprise risk programs in place.

For many organizations, one of the key challenges is
determining when to begin implementing these plans, particularly in the face of
such a rapidly evolving risk. “Organizations often have policies in place to deal
with most risks, but they don’t activate them until it’s too late because no
one is owning the risk or taking it seriously until it is fully manifested,”
Gartner reported. “The threshold for a risk to generate executive action is
often too high to enable an effective response.”

Using an impacts-based method can help risk professionals
assess a crisis and determine when response plans are triggered and when to act
to mitigate specific effects. “Also having response plans that react to
specific impacts means it is simpler to communicate the plan to staff, so that
all employees can play a part in managing risk. In fast-moving situations such
as this, the more people who are owning risk, the more likely it is that an
organizational response will be timely,” the firm noted.

“Avoid constructing elaborate ‘what if?’ scenarios and focus
on what is known,” said Matt Shinkman, vice president of Gartner’s risk and
audit practice. “Many organizations likely already have plans in place to deal
with the types of disruption they are facing because of the coronavirus. The
job of risk management is to ensure the right plans exists and make sure they
get used at the appropriate moment.”

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