A world of risk

Pandemic risk has been underestimated for many years but the interconnectedness of global trade has made it all but impossible to successfully prepare for the threat, suggests Filip Frans, director of non-life at Van Dessel Insurance Broker in Belgium, a partner of Risk Frontiers Europe sponsor Brokerslink

“As with other problems, people thought they would stay local problems and would not affect the whole world. The crisis has shown that due to the globalisation of economies and the ease and frequency of global travel, the world is very much connected,” says Filip Frans, director of nonlife at Van Dessel Insurance Broker in Belgium.

“A virus can spread itself very easily across the globe. The fact is that each country affected tries to take its own initiative without considering what other countries are doing. There is no global plan, therefore we can’t expect the world to be prepared for these circumstances,” he adds.

Mr Frans says the world has faced a number of challenges during the last 100 years, including world wars and terrorism, that were fundamentally different from the Covid-19 pandemic.

“Mainly, these problems have been clear and situated in certain regions. The world was unprepared for this pandemic because the enemy was invisible and arose in a very short period. In a couple of weeks, the virus had spread globally without any control mechanism. Unlike other crisis events, which have a defined start/stop date and a period of recovery afterwards, this pandemic event is different. The way the crisis will continue to unfold cannot be known. But alongside the enormous tragic human toll, it is having considerable economic impacts, posing major challenges to the supply chain of certain business sectors such as airlines, travel and leisure,” he says.

Going forward, Mr Frans believes it will be important that systems to identify and track Covid-19 patients are connected to insurers. Without that data, he fears the insurance industry will struggle to support the economy.

“As an example, with no insurance for the stars of film productions, there will be a lack of investment in the film business because of the high financial risk. Insurers are very effective in capturing data. Based on parametrics and models of the spread of a virus, it might be possible for insurers to work toward an insurance solution. However, it will be key that the world has a global plan when a new pandemic starts,” says Mr Frans.

“Governments have the responsibility to mitigate the damage, however I fear it will be very difficult to align all countries, and therefore it will be very difficult for insurers to calculate the risks,” he adds.

So, how has the commercial insurance market responded to the crisis so far? Mr Frans praises insurers in Belgium for deferring premium payments but points out this is obviously not a long-term solution.

“In the short term, this is a good solution, but not one for the long term… The economy will decrease in the next few months and premiums will still have to be paid in the second half of this year when the revenues are lower in most sectors,” he suggests.

Mr Frans also believes that state-funded pools are a good solution to business interruption (BI) risks, but adds that somebody will still have to pay for the protection.

“In the end, the money will always be taken from the same parties – the companies and private individuals. But in the future this could be an option, however the state or insurers will only work on this basis if there are very good prevention and tracing models in place. Companies have already changed their ways of working with home offices, and that implies that in the future the impact of pandemics would be less. However, for some industries it will be difficult to find solutions to live with in the face of a pandemic threat,” he says.

And what about the impact of Covid-19 on BI claims?

“The impact of Covid-19 on business interruption claims will depend in large part on the policy wording. Most standard business interruption policies contain exclusions for viral epidemics. Business interruption policies usually pay out only if physical damage occurs to an organisation’s assets or operations – so coronavirus-related claims may not be covered, but there is potential for future disputes on this issue,” he says.

But he adds that some commercial property policies will include different types of extensions that provide coverage for BI without physical damage to the insured property.

“The most common extensions are for business interruption that results from the closure of the insured property due to an order by a civil authority of ingress/egress – sometimes referred to as denial of access. In most cases, this coverage requires that the cause of the interruption is physical damage to another property,” Mr Frans explains.

“However, some denial of access-type extensions are non-damage related and therefore do not require the occurrence of any physical damage to trigger coverage. In the case of civil authority extensions, the order to restrict access might also need to meet specific requirements to trigger coverage. For example, the order must prohibit access to the workplace. These types of coverage are usually subject to time deductibles and maximum indemnity periods, which will limit the amount of reimbursement in cases where coverage is found,” he continues.

Looking forward to the next renewals, Mr Frans predicts the hardening market will accelerate. “The main characteristics of the hardening for the last two years have been focussed on the premiums, deductibles and limits. I expect that insurers will adapt their wordings in a stricter way and exhaust the coverage for the client,” he warns.

And while everyone has been focused on dealing with Covid-19, there has been some concern that other long term risks, including climate change, may have been forgotten. However, Mr Frans is more optimistic.

“I am not convinced that these risks will be forgotten. On the contrary, as global risks I believe they will gain more traction. Cyber is also a virus that can start in a student’s room and spread around the whole world. Luckily, companies are already trying to mitigate those risks to keep them insurable,” he concludes.