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Insurance industry facing only limited coronavirus claims

Life and nonlife insurers will be exposed to claims from the outbreak of the new coronavirus, according to analysts, but there is a sense that claim levels on both sides of the industry could be constrained by low insurance penetration and restrictive policy language.

The outbreak of the virus, referred to by scientists as 2019-nCoV, began in the city of Wuhan in central China, but has since spread to at least 25 countries around the world. The virus has killed 490 people so far in China, and there has been one death each in Hong Kong and the Philippines, the BBC reported. The number of confirmed cases stands at more than 24,000.

Counting claims

Global insurers and reinsurers have some exposure to the outbreak. U.S. life reinsurer Reinsurance Group of America Inc.'s CEO Anna Manning told analysts on a Jan. 29 earnings call that 12% of the company's pandemic exposure is in Asia, and of that, 1% or 2% was in China.

But insurance claims may not reach the levels suggested by the case numbers, even in China, where the bulk of the cases remain concentrated. Taking life and nonlife together, Moody's said Feb. 4 that it expected 2019-nCoV claims overall to be "low" and that so far "there has been limited adverse impact on Chinese insurers."

The rating agency said the Chinese province of Hubei, which includes Wuhan, accounts for around 4% of both life and nonlife premiums in China, with greater insurance penetration typically found in the "affluent coastal cities."

Hannover Re CEO Jean-Jacques Henchoz said Feb. 5 that there would need to be "a significantly bigger scenario" that went "way beyond" the SARS outbreak in 2003 to hit the German reinsurer's mortality business. As a guide, Henchoz noted that a typical influenza season in Germany kills 20,000 people.

Hannover Re executive board member Sven Althoff said coverage for non-damage business interruption resulting from infectious diseases is "mostly excluded" from both property and aviation business, although there are some sub-limits that offer coverage. Although the development of the outbreak remains unclear, Althoff said that as of now, Hannover Re has "no concerns that this will be a very significant loss on the P&C side."

Philip Kett, an equity analyst at stockbroker Jefferies, said in a Feb. 4 research note that because the deaths so far had been in regions and socioeconomic groups where there was a high protection gap, "the life insurance ramifications would appear to be limited." He also said that as "almost all" critical illness policies cover named perils, "it would appear unlikely that this virus is a covered event."

Kett said "it's possible that the virus could be more material for the nonlife sector than life" because of potential claims from travel and business interruption insurance. Event cancellation would be one potential area for claims for international insurers and reinsurers, he added.

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The Ladies Professional Golf Association has canceled its 2020 Blue Bay LPGA event, due to take place March 5-8 on China's Hainan Island. The World Athletics Indoor Championships, which had been due to take place in Nanjing, China, between March 13 and 15, 2020, has been postponed to March 2021.

Kett said "several international events," including April's Chinese Grand Prix in Shanghai, were at risk of cancellation, and he estimated that the Grand Prix could be insured for around $500 million, "most likely" by Lloyd's of London underwriters.

But even on the nonlife side, claims could be restricted. Global loss adjusting group Crawford & Co. said in a Jan. 30 white paper that according to the experience of its forensic accounting services unit, "successful claims under business interruption coverage for infection are not common."

Crawford's report also said that while there are some extensions covering "notifiable diseases" on property all-risks policies for hotels, restaurants, schools and hospitals, policies usually define notifiable disease very narrowly, and most insurers now list the specific diseases covered. As 2019-nCoV is new, it is unlikely to be listed, Crawford said.

Some believe that in general, take-up of business interruption cover beyond that triggered by property damage is low. Speaking Jan. 30 at an event in London, Aviva general insurance CEO Colm Holmes said that although he believed travel risks would be covered, "if you don't have protection against [business interruption] that's not property-related ... these risks aren't covered."

Bond holding

Also potentially at risk from 2019-nCoV is the World Bank's pandemic bond, launched in 2017 as part of the $500 million Pandemic Emergency Financing Facility, or PEF, for emerging markets. The facility also includes a cash portion.

The bond part of the package is triggered when an outbreak reaches certain thresholds, but, so far at least, 2019-nCoV has not triggered the bond.

A World Bank spokesperson told S&P Global Market Intelligence via email: "The activation criteria for the PEF insurance have not yet been met, but if they are the bonds will pay out to support countries."

The outbreak could even benefit the insurance industry. S&P Global Ratings said in a Feb. 4 report that 2019-nCoV could increase the awareness of insurance in China and "may help the longer-term development of the country's life insurance sector."

On the nonlife side, S&P Global Ratings said demand for business interruption, event cancellation and liability-related coverage "could rise as policyholders seek to insulate themselves against man-made and natural calamities."