COVID-19 an insurance minefield

By: Steyn McDowall, executive director of business and specialist insurance, Indwe Risk Services.

With reports that more than half of companies around the world do not have effective business continuity plans in place to combat an infectious disease outbreak like COVID-19 and the virus starting to take a stronger foothold in South Africa, businesses must do more to prepare themselves for the repercussions this could have on operations.

Not only is the Coronavirus a massive humanitarian concern, but it presents organisations with significant direct and indirect risks. For example, imports from and exports to China will feel the effect more directly. The country imported goods worth more than R271 billion in 2018 with exports amounting to over R93 billion during the same period. It is especially the latter that will have a knock-on effect from a business interruption point of view.

Given the amount of coal and iron ore exports to China, mining will start feeling the pinch before too long. And chemical imports from that country will impact the agricultural and chemical reliant industries in South Africa as ports are closed or quarantined for a time. Tourism will also take a knock as expectations are that there will be a 20% reduction in travel.

Even insurance and related industries will not be immune to this.

It is too late for companies to try and buy insurance cover for the current outbreak. However, some would have property damage and business interruption policies in place that respond in the event of a loss. But very few of these policies would cover the effect of the business interruption caused by COVID-19.

Policies may include a contingent business interruption cover which would respond should the supplier to the company shut down. Unfortunately, many policies would be caveated by a requirement that the loss must be related to physical loss or damage. In the past, insurance policies provided wider cover, but the historic impact of SARS, Ebola, and other virus outbreaks forced a change in underwriting philosophy.

McKinsey research suggests that COVID-19 will result in a slowdown of global growth this year. In a worse-case scenario, movement restrictions to slow down or stop the progression of the disease will lower economic growth through the second and third quarters this year. This bleak outlook translates into a global pandemic that could spark a recession towards the middle of the year with consumer confidence remaining low well until the end of 2020.

According to McKinsey, companies must understand the exposure their supply chain has to the virus and take actions to address anticipated shortages. To this end, businesses must ensure they have adequate resources in place to restart operations as quickly as possible when the spread of the disease is under control.

Given the financial impact to operations irrespective the outcome of COVID-19, companies should use this as driver to review their policies and understand what they are covered for. They must speak to their broker to get the best advice on how to navigate the risks these uncertain times present.

There are no easy or quick wins out of the situation. Instead, companies should take a considered approach and act now to mitigate their exposure as effectively as possible.